Rapid economic expansion and growth of internal consumption have increased the demand for oil products, turning China from a great producer into a great consumer country. Although the per capita consumption in China is only one-thirteenth of consumption in the United States, demand for electrical energy continues to grow. After a drop in 1998 (3 percent), it recovered and continued to grow in 1999 (6 percent) and in 2000 (10 percent).
Energy sources such as coal and nuclear power are or will soon be scarcely usable. Coal, the main source of energy in China, is highly polluting and this has forced the government to reduce its use for energy purposes. About 33,000 small mines have been closed since 1998 as the central government decided to focus its attention on the control of the large mines, while local governments are implementing plans for energy conversion from coal to natural gas in order to reduce pollution (in Beijing thousands of industrial boilers have been converted into gas engines in order to ameliorate the air quality so as to gain the assignment of the Olympic Games of 2008).
As for the nuclear alternative, China has the technology to build small plants, while for larger plants with higher production capacity it must turn to international collaborations (companies from Canada, Russia and France are building some plants in China), and the handing over of such know-how is strongly opposed by the US for fear that, through breeder reactors, China will be able to produce plutonium for military purposes.
Oil and gas as energy sources in China When the People's Republic of China was born in 1949, on its soil there were only three oilfields producing 120,000 tons of crude oil. During the first five-year plan (1953-57), oil production grew annually by 27.5 percent and reached 1.46 million tons, while the extraction of natural gas was about 70 million cubic meters. During the second five-year plan (1958-62), new oilfields were found in some basins in the northeast, north and northwest regions. With the exploitation of these new fields, China obtained in 1963 the extraction of 6.48 million tons of crude oil and attained energy self-sufficiency. Since 1964, new basins of oil and gas have been discovered.
In 1978, China reached the extraction target of 100 million tons of oil yearly, and in 1995 it reached 140 million tons. Thereafter, average oil production grew by a scant 1.9 percent annually between 1996 and 2000 (ninth five-year plan), while demand rose by over 5.3 percent each year. The three new oilfields - Tarim, Junggar and Turpan-Hami - produced 20 million tons of oil during this last ninth five-year plan. There are expectations that by 2010 they can reach 50 million tons of yearly production, in order to substitute the nearly exhausted basins. Oil extraction is expensive and challenging in Tarim basin, as in other Chinese oilfields (most of the currently producing fields rely on outdated technology and distorted incentives), but the need for energy resources make the use of this basin a high priority.
About 90 percent of China's oil production is located onshore, but China has also promoted the attraction of foreign capital to exploit offshore basins. Offshore activity primarily involves three areas off the east coast: Bohai Bay in the northeast, the East China Sea northeast of Taiwan, and the South China Sea-Pearl River Delta basin off Hong Kong. The Yinggehi basin between Hainan Island and Vietnam contains the Yacheng gas field. On August 24, 2001, the China National Offshore Oil Corp (CNOOC) and Taiwan's Chinese Petroleum Corp announced the draft of a deal to conduct joint exploration of the southern Taiwan Strait, in the Chaoshan Trough and Tainan Basin. The two companies had already made geological surveys of the same areas some years ago to discover oil-bearing geological structures, but in 1999, because of the deterioration of relations between the two regions, they did not reach an exploring deal. The amount of involved investment shared by the two companies is not disclosed. This is undoubtedly a product of the recent improvement of economic cooperation between China and Taiwan (with massive Taiwanese investments in mainland China) and of the dire need of oil for both areas (Taiwan's imported oil accounts for 90 percent of the oil consumption on the island).
In 1993 China began to import oil for the very first time, and now depends on imported oil more than at any time in its modern history. Imports of crude oil surpassed 60 million tons in 2000 (for a value of US$14.9 billion), compared with domestic production of about 165 million tons. Some Western analysts criticize China because before importing from other countries, it should carry out some internal structural reforms. The two giants China Petrochemical Corp (Sinopec) and China National Petroleum Corp (CNPC) - with its operative arm PetroChina - should restructure to become efficient, eliminating those structures typical of a planned economy (obsolete technologies and excess workers), similar to Russia's Gazprom.
Natural gas has not been a major resource, since only 3 percent of it is used for consumption. Among the most important gas-producing regions are Sichuan, Daqing, Changqing, Liahoe and Tuha. Trying to revive the internal oil and gas sector, recently China signed agreements with foreign companies for the exploration and exploitation of basins up to 150,000 square kilometers and with foreign investment totaling $1.5 billion. PetroChina has also planned to offer 11 onshore concessions, including Tarim and Ordos basins. The overall target for the government would be to increase gas consumption from the current 3 percent to 6 percent in the next 10 years and to implement a gas-for-oil strategy whereby gas (present in large quantity in China) will help to solve the national oil shortage.
In 1998 China reformed the energy industry in order to separate regulatory and administrative functions from ownership and operation. Some of its larger organizations launched initial public offerings to allow public participation. Four companies previously controlled the industry: China National Petroleum Corp (CNPC), which operated in the north and east, China Petrochemical Corp (Sinopec), which worked in the south and east, China National Star Petroleum Corp (CNSPC), which was created to introduce competition, and China National Offshore Oil Corp (CNOOC), which is involved in the country's offshore oil and gas operations. Since last year, Sinopec has taken over CNSPC and it now has opportunities in areas traditionally dominated by CNPC, such as gas exploration in the Sichuan and Ordos basins and the west Tarim basins.
CNPC underwent a massive restructuring, with all domestic upstream and downstream, oil and gas assets transferred to the PetroChina holding company, which now controls more than two-thirds of oil and gas production in China, as well as pipelines. CNOOC still controls offshore operations.
The country's two major oil and gas companies, CNPC and Sinopec, have taken measures to improve their efficiency, but they continue to work in a distorted market and employ redundant workers. Beside this, extraction is hindered by obsolete technology. Nevertheless, multinational oil and gas companies and international investors are putting money in these two enterprises. CNPC and Sinopec collected $6 billion in a public investment offer during the first half of 2000 on the New York and Hong Kong stock exchanges. PetroChina alone, a subsidiary of CNPC, collected $3 billion in April 2000. Again, in October 2000, Sinopec collected $3.4 billion from multinational oil companies. They will soon ask for more influence in the management of the country's oil and gas market.
Moreover, China's accession to the World Trade Organization (WTO) will have a strong impact on the sector. Crude and processed oil sectors will be opened to private traders through gradual liberalization. The state monopoly on oil trade will be reduced and private companies will be allowed to trade 4 million tons of oil products and 10 percent of crude oil imports. Three years after accession to the WTO, retail oil distribution will open and foreign firms will be allowed a minimum of 30 wholly owned gasoline stations each. Moreover, foreign firms will be allowed to build new gas stations in joint ventures with oil majors. After five years, the wholesale market will open: China will give up its virtual monopoly on the oil sector and then will allow private traders to import oil products.
Pipelines Industrial economic development in China has historically favored the east coast regions, causing a geographical inequality in development and in wealth distribution. Fear of social disorder in the interior provinces has pressed the central government to give priority to regional investments, above all in western China. To this end, Beijing is pursuing a policy called "Develop the West".
Beside this, while some northern and eastern regions have a surplus of supply of electricity, other regions, such as Guangdong (which has a 20 percent yearly growth in demand for electric supply), are unable to satisfy their needs. The largest gas and oil reserves of China are in the west. Since currently there are no means of transportation from the west to the east of China, the authorities are planning to build a pipeline to transport natural gas from the field of Tarim (in Xinjiang) to Shanghai (4,200 kilometers away) with a transport capacity of about 30 billion cubic meters of gas every year (initially 12 billion cubic meters), with construction costs between $12 billion and $18 billion. A total of $5 billion has already been invested in the building of this gas pipeline.
In late 2000, PetroChina and Sinopec announced that they had discovered 10 large and medium-scale gas fields in the Tarim basin, including Kela-2, estimated to have 250.6 billion cubic meters of gas, Yngmai-7, Yangtake, Ynan-Tuziluoke, Dabei and Yudong-2, with reliable resource guarantees for the pipeline project. Another major gas discovery by PetroChina at Sulige in Ordos basin, adjacent to Changqing oil field, could add another significant source of supply along the pipeline route.
The Tarim-Shanghai pipeline should, if the plans of the Chinese leaders are realized, spur investment in the country's underdeveloped interior and is a cornerstone of the "Develop the West" (commonly called "Go West") policy. The pipelone should be start to supply gas to Shanghai in the second half of next year. PetroChina and Sinopec were supposed to finalize a joint venture with a foreign consortium before the end of September 2001, but they have not disclosed the news yet. After the resignation of BP24 (in a consortium with Mitsubishi, Itochu and Nisso Iwai of Japan and Petronas of Malaysia) in the partner selection program, among the likely winners is Exxon Mobil (with China Light and Power - an electric company based in Hong Kong - and Royal Dutch/Shell). Another four companies that had showed interest in this project, Consortium Energomachxport Russia, OAO Gazprov, the the Hong Kong & China Gas Co Ltd and Houston Inspection International Inc, could participate in the tender in the case of the withdrawal of Exxon Mobil. It is the first time that China has opened all parts of the project (exploitation, transport, etc) of a basin to bidders, since in the past China used to grant foreigners only the exploration part.
PetroChina has also recently announced a 1,400-kilometer gas pipeline project linking the basin of Shan-Gan-Ning (one of the largest gas discoveries) to Shandong province in eastern China via Beijing, which will be one of the biggest buyers of gas - 4 billion cubic meters - from the pipeline, to Hebei province in the north. This pipeline should be completed before 2004 and would be the second-longest after the Tarim-Shanghai. Other gas pipelines managed by PetroChina will be the Se-Ning-Lan pipeline from Sebei in northwestern province of Qinghai to Lanzhou in Gansu province with an annual capacity of 2 billion cubic meters of gas supply (it has been completed and started operations in October) and the Zhong-Wu pipeline from Zhongxian in Sichuan province and Wuhu in Hubei province with 3 billion cubic meters of gas annual supply (now under construction).
Another ambitious project entails the building of a gas pipeline from eastern Turkmenistan to the Pacific port of Lianyoungang, where it could be liquefied or transported for export. The building of such a pipeline (which would be the longest in the world at 6,000 kilometers) involves a consortium including Esso China (Exxon Mobil), Mitsubishi (Japan) and CNPC. Moreover, China is planning the building of various terminals to import liquefied gas to Guangdong and along the coast between Shenzen and Shanghai, even though this kind of gas is very expensive because of the need for liquefaction and gasification plants and refrigerated boats.
China has bought the rights to exploit various Kazakh gas basins. This gas could be sold to countries such as Japan and Korea. China also shares the Kovykta project with Russia to import gas from Siberia and eventually re-export it to South Korea. The feasibility study was expected to be ready by mid-2002, but the project is already facing a disagreement over prices: Russia is asking higher prices (competitive with its exports to the west) than those expected by China. Foreign companies are exploring China in the search of new basins, also of methane (whose supply is estimated to reach 10 billion cubic meters before 2010). In fact, China has greater methane reserves than appraised in the past, above all in the west and offshore.
Despite all the efforts to increase the use of gas, the consumption growth of electricity has pressed the political leadership to seek new routes to import oil. Internal oil production increased yearly by 1.9 percent between 1995 and 2000, and annual demand for crude oil has grown by 5.3 percent in the same period. Besides the import of crude oil, China has shown an interest in exploiting oil and gas basins in other countries (Russia, the Middle East, Africa - particularly Sudan - Southeast Asia, Latin America and above all Central Asia) through various forms of cooperation (investments, export of technologies and services, participation in the management, and so on).
During a six-day visit to Russia at the beginning of September 2001, the Chinese and Russian prime ministers, Zhu Rongji and Mikhail Kasyanov, agreed to build a 2,400km oil pipeline by 2005 from Siberia (Irkustk) to Daling in northeastern China. This pipeline should carry 30 millions tons of oil per year and should involve Russian Transneft and Yukos and Chinese Sinopec and CNPC.
To secure a good investment, in 1997 Chinese parliamentary chairman Li Peng signed an agreement to exploit the second-biggest oilfield in Kazakhstan where the Chinese share of the joint company Aktobemunaigaz amounts to 60 percent (the Kazakh share is 25 percent) and the construction of a line to transport its crude oil to eastern China and Kazakhstan. The high cost of the project has until now delayed the start of plant construction. There are doubts on the feasibility of the project as it is too expensive. The strong will to secure the exploitation of the basin could have pressed the Chinese government to promise the construction of the pipeline to Kazakh authorities. Beside the high cost, there is a technical problem concerning the refinement of crude oil from Kazakhstan and from the Middle East, which is high in sulfur. Chinese technology to process this kind of heavy crude oil is limited, even if efforts to raise the quantity of this oil are being made by the government: the Ministry of Economy has announced investment to increase to 75 million tons of heavy oil per year to be processed in China in old refurbished plants and new ones.
The former Soviet republics of Central Asia are calling for Chinese investment in the energy sector, while China, on its part, prefers the option of importing from this area rather than from others. China currently ships half of its oil imports from the Middle East through the Malacca Straits, which could be easily blocked by an enemy (potentially the US). China does not want to become energy-dependent on an area under the influence of the US (such as the Middle East) and considers the ex-Soviet republics strategically located.
Xinjiang Almost all these pipelines should originate from or cross the Chinese region of Xinjiang that borders three former Soviet Union republics: Kazakhstan, Tajikistan and Kyrgyzstan. Xinjiang is itself a vital region for China because it contains 75 percent of the mineral resources of the country (especially oil, giving it the status of a sort of a "Chinese Texas"). A third of the coal resources and a quarter of the oil sources lie in Xinjiang. By 2005 this region will become the second major center of oil production and the major center of gas extraction in China. CNPC and Sinopec have both indicated that Xinjiang has priority in investment allocation.
People from this region are 60 percent Sunni Muslims, and most of these are Uighurs. Uighurs are of Turkic origin, as are other Central Asia peoples, with whom they share common linguistic and religious origins. Uighurs are more closely linked to Central Asian people than to the Han, who are the official national majority in China. The Han have in the second half of the 20th century migrated to Xinjiang in order to counterbalance a similar migration into Central Asia from Russia. Some evaluations say that Han people in Xinjiang in 1990 were 38 percent of the total population, while in 1949 they were only 5 percent. While the Russian population in Central Asia is currently declining, Han settlement in Xinjiang continues to rise. From 1860 until 1949, Turkic speakers living in Xinjiang revolted against Chinese rule and eventually succeeded three times in establishing independent states in parts of the region. The last, the eastern Turkestan Republic (with headquarters in Yining) existed from 1944 until the communists came to power in 1949.
Today, ethnic conflicts are bringing Uighurs toward more secessionist positions against the central government as they resent the policy of encouraging massive Han settlement in the region over the past 50 years. According to the Uighurs, Han control all the most powerful Communist Party positions in the region, benefit more from economic development in the area in the form of the central government, and control the region's mineral wealth. In 1992 the Chinese central government granted larger economic autonomy, similar to the autonomy granted to other provinces such as Guangdong, but this did not prevent a separatist movement in Xinjiang from starting terrorist actions.
Uighurs are also becoming involved in armed Islamic movements abroad, from Afghanistan (where they fought on the front lines in the war of the Taliban against the Northern Alliance). This is a source of concern for the Chinese leaders. If these Uighur fighters, trained to handle weapons and fight, return to Xinjiang with their contacts in international radical Islamic movements, they could pose a real challenge to China's security forces.
Pipelines could become an easy target of separatist terrorism and an instrument of blackmail against Beijing. Moreover, a separatist war and an eventual secession of Xinjiang would be catastrophic for the energy destiny, and thus for the economic development of China. In a demonstration of the concern among the Chinese, some Chinese scholars in the recent past have even contended that a nationalist separatist movement in Xinjiang could lead to intervention by the US, such as in Kosovo in 1999, where North Atlantic Treaty Organization (NATO) forces came to the aid of a Muslim minority. Having this clearly in mind, Chinese authorities have always reacted strongly to whatever separatist issue: at the beginning of August 2001, for example, China's army flexed its muscles by carrying out military maneuvers in Xinjiang province.
In the post-September 11 era, China is relying on Western governments to remain silent about China's harsh tactics in Xinjiang in exchange for Chinese support. Beijing is now looking for the same support as that received by Russia in its dealing with Chechen separatists.
Last October, China gave indirect support for the US air strikes against Afghanistan, issuing a statement that changed radically its customary opposition to US interventions abroad. Shortly after, Beijing announced plans to intensify the suppression of Muslim separatists on its Central Asian frontier. A government news agency reported that police in Xinjiang's capital, Urumqi, have been ordered to make terrorists their main target. And the US Federal Bureau of Investigation wants to set up an office in Beijing, reportedly to investigate organizations and follow money trails that may be involved in terrorism.
Since Chinese Uighurs are helped logistically (supply of weapons through the Chinese border) by Uighurs living in the former Soviet Central Asian republics, China is urging those countries not to encourage or tolerate such groups in their territories. To date, the Central Asian republics appear to have agreed to collaborate to stop separatist movements in Xinjiang. The Shanghai Agreement signed in 1996 with Russia, Kyrgyzstan, Tajikistan, Kazakhstan and now Uzbekistan aimed at maintaining stability in the area and at providing an instrument of penetration of the Chinese and Russian economies in Central Asia.
On June 15, 2001, cooperation became more institutionalized with the announcement of the birth of the International Shanghai Cooperation Organization, but the diplomatic realignment resulted by the terrorist attacks of September 11 left the Shanghai Cooperation Organization as a spectator, even if its stated aim is the fight against terrorism. In fact, since then Russian President Vladimir Putin has veered sharply to the West, aligning Russia squarely with the US in the war against terrorism. At repeated and urgent Chinese insistence, the members of the Shanghai Cooperation Organization finally held a meeting on October 11 in Bishkek and produced a statement that did not mention the terrorist attacks against the US, and mostly repeated previous pledges to cooperate against terrorism. Plans to set up a permanent office in Bishkek to coordinate intelligence sharing and joint police operations among member states of the Shanghai Cooperation Organization have yet to be developed after two years of discussion. It should open some time late this year.
As mentioned above, the Chinese central government launched in March 2000 an ambitious national campaign to develop the western provinces of China. The goal in Xinjiang (and also in Tibet) is for economic development to improve ethnic harmony and erase opposition to Chinese rule, particularly through a network of new highways, railways and airports. A large portion of the projects to be financed are located in the southern part of Xinjiang, where there are 19 of the 25 poorest counties of the region and where the vast majority of Uighurs and other ethnic minorities live. Projects cover airports, agriculture, telecommunications and factory refurbishments. The improvements of the infrastructures are aimed to reduce the isolation of Xinjiang's oasis communities and to strengthen its links with the Chinese interior. Besides, fresh waves of Han Chinese coming to work on development projects will probably settle permanently and this could further dilute the Uighur and other ethnic minority populations.
Since the dissolution of the Soviet Union, China has, along with Russia, returned as an influential actor in Central Asia. China is trying to build a new interregional Silk Road of railways and oil and gas pipelines. The latter are a necessity for Chinese industrial development. Economic growth in China marks the demise of the old energy plan based on self-sufficiency and the opening of foreign supply markets, particularly those of Central Asia through Xinjiang region. The terrorist attacks against the US have ushered in a fresh economic and political influence of the US in Central Asia, together with Russia and China. Before and after the attacks, the US had been encouraging Russian and Chinese political influences in the area because the US government has not perceived Central Asia as a zero-sum game, attaching high value to the positive effect of political engagement by other actors.
On the economic front, before September 11, the US had warned of a possible disengagement from the area, but now, as the Americans feel the need to review their economic and energetic partnerships in the Persian Gulf (where states such as Saudi Arabia have failed to show immediate and concrete support against radical Islamic terrorism), they are looking forward to consolidating existing economic investments in Central Asia and improving them. China will have to compete with US oil and gas companies in the race to secure energy sources in Central Asia. At the same time it should benefit from the US efforts to improve security in the region and decontaminate it from terrorist groups with links to the separatist movement in Xinjiang: the vital region for the energy destiny of China.
((c) Heartland. This version has been edited by Asia Times Online.) To subscribe to Heartland, please e-mail cassanpress@sina.com
Rapid economic expansion and growth of internal consumption have increased the demand for oil products, turning China from a great producer into a great consumer country. Although the per capita consumption in China is only one-thirteenth of consumption in the United States, demand for electrical energy continues to grow. After a drop in 1998 (3 percent), it recovered and continued to grow in 1999 (6 percent) and in 2000 (10 percent).
