China’s Energy Challenged by the Pipeline Routes Dispute

China’s Energy Challenged by the Pipeline Routes Dispute

Li dingxin, Economic Reference (Jingji cankao bao)

August 12, 2003

In less than one and a half months, Japan has rushed to dispatch its Prime Minister, Foreign Minister and the Director General of its Agency of Natural Resources and Energy to Russia to discuss cooperative actions on energy projects. Japanese officials have promised billions of dollars for developing an eastern Siberian oil field and investing in social and economic projects in the Russian Far East, as they have done in past sensitive situations. For all this, Japan has one thing in mind: oil. The originally settled Sino-Russian joint pipeline project has thus become uncertain. Due to this Japanese intervention, the issue of which route Russia will choose for its oil pipeline extending to the Asian Pacific region once again has been cast into doubt.

The Japanese Intervention Makes Uncertain the Angask-Daqing Pipeline Route

For more than half a year, Russian officials have been mulling over which route it should take to build the pipeline from Angarsk to the Asian Pacific region. Their options were either to build the pipeline from Angarsk, Russia to Daqing, China (Angarsk-Daqing Line), which had been a possibility for nine years and was becoming more and more a realistic and plausible option, or to change this route to instead build it within the Russian border, along the trans-Siberian railway, extending to Nakhodka, near the Japanese coast line (the Angarsk-Nakhodka Line). This had been a hotly debated issue among various media outlets and research institutes in China, Russia and Japan until May 28, 2003 when the oil companies of China and Russia signed an agreement, which suddenly muted all the debates, and caused the international community to believe that such an agreement signaled the imminent beginning of the construction of the Angarsk-Daqing Line in the very near future. The Sino-Russian deal includes the agreement that this pipeline would supply China 700 million tons of oil, worth $150 billion.

However, in the early part of July, senior Japanese and Russian officials in charge of energy met in Moscow to discuss bilateral cooperation on energy projects and announced after the meeting that the two countries had made important and substantial progress in joint planning on energy issues. Before that, the Japanese Prime Minister Junichiro Koizumi and Foreign Minister Yoriko Kawaguchi had visited Russia in early June and late June respectively. They both had focused on the issues of energy cooperation during their visits. The Japanese Foreign Minister stated that Japan planned to invest $7.5 billion in the survey and drilling of oil fields in Russian Siberia, provided that Russia would promise to choose the Angarsk-Nakhodka Line. Although Russia did not directly reply to Japan’s request, it decided nevertheless to postpone the decision of choosing the pipeline route until September, as they were further studying the technical feasibility of the prospect.

Many people believe that Japan lacks natural resources, and has a thirst for oil, making Japan’s stance on this issue understandable. In reality, however, Japan’s current strategic oil reserve has reached close to 600 million barrels, enough to meet Japan’s oil demand for 172 days. Therefore, we can conclude that Japan’s dramatic actions on this issue are not motivated by urgent needs. Instead, this is part of a sophisticated energy strategy of Japan, a country that has enormous demands for energy. Russia’s indecisive position on the pipeline issue is a result of its recent export strategy that emphasizes diversification and a balanced interest in politics, economy and diplomacy. The farsightedness and concerns reflected in these two countries’ energy strategies, and their dogged determination of not letting any opportunity slip by, have caused concern among the drafters of China’s energy strategy.

“Stepping Out” Strategy Is Imperative

In the 1980s, our country’s oil production reached 120 million tons, thus entering the rank of world’s leading oil producing countries. But since 1993, with rapid growth of our economy, China’s oil consumption has been increasing constantly by 4.9% on an average, becoming the fastest increasing rate of all countries. In 1996, we became the nation that was third largest in oil consumption, after the United States and Japan. Also in that year, China moved from an oil-export country to an oil-import country. In 2002, China’s oil import reached nearly 70 million tons. Experts estimate that by 2005, our oil import will reach 100 million tons. The U.S. Department of Energy’s “International Energy Prospect” predicts that within the next 20 years, China’s oil import will reach 7.4 million barrels per day, equivalent to the daily import amount of the entire continent of Europe.

The primary reason for our nation’s increasing dependency on foreign oil import has been the increasing shortage of available crude oil and our oil reserve within our national territory. Major oil fields including Daqing, Shengli, and Liaohe have all become exhausted at various levels, with little potential for growth. The 2002 China Petroleum and Gas Estimate Report states that our nation’s oil resource should be larger than 202.1 billion tons, and our natural gas resource should be 38 trillion cubic meters. However, our land-based proven available oil constitutes only 28%, and proven available gas is only 6%, both are far less than the world’s average proven available amount. In western part of China, the statistics are even worse. In addition, the international oil market has always been able to keep a supply and demand balance, even providing more supply than demand. Renowned economist, Dr. Chen Huai, points out that at the present time the global oil supply does not have a shortage problem, but an over-supply problem, which is the prevailing factor that influences the oil prices.

Under this circumstance, to guarantee our nation’s security of oil supply, we must implement a “Stepping Out” strategy, maximizing our share of global oil resources. As early as 1999, the Central Government of China instructed us that in order to solve our oil problem, China must “step out,” and adopt various ways of developing and utilizing foreign resources, diversify our oil imports, encourage and support Chinese investments in foreign countries, either by state-owned-enterprises or other type of ownership enterprises that have relative competitive advantages, stimulate commodity and labor export, and create a group of strong multinationals and famous brand names.

But “stepping out” has not been easy.

Bumpy Path of the “Stepping Out” Strategy

In a certain sense, the Middle East has become synonymous with oil. However, the Middle East, an area that enjoys world’s largest oil exports, exerts greatest influence, and possesses enormous wealth, is not the ideal place for China to get its oil under China’s energy strategy of oil sources diversification. Although more than half of our country’s oil import comes from the Middle East, this is an area of prolonged instability, which has greatly increased the risk factor and uncertainty of China’s oil supply. In addition, Mr. Han Wenke, the deputy director of the Energy Research Institute under China’s National Development and Reform Commission, believes that security concerns for China’s oil transportation over high seas will also pose major problems.

Therefore, our nation’s three major oil enterprises have been actively seeking businesses in areas other than the Middle East, such as Australia, Southeast Asia, and North Africa. This is in accordance with our government’s global oil purchasing policy embodied in the Tenth Five Year Plan. At present, China and many foreign joint projects have adopted the business model called “oil sharing,” i.e., through China’s participation in the stock sharing or direct investment in the construction of foreign oil fields and facilities, China each year gets a certain share of the oil output from the oil projects concerned. The advantage of this model is that what China will get is oil, thus obviating the impact of oil price fluctuation. For example, the joint project China Petroleum and Gas Group (Zhongguo shiyou tianranqi jituan gongsi) can now produce 19 million tons of oil annually, of which China’s “oil share” is 9 million tons.

According to Mr. Zhang Xin, director of International Operations at the China Petroleum and Gas Group, there have been 28 survey and drilling oil projects overseas that have been approved by the Central Government. All these projects have had foreign partners, with agreements signed. These projects encompass 12 countries on four continents. They have formed the following strategic oil areas: the Middle East and North Africa strategic area centered on the Sino-Sudanese joint oil project; the Central Asia and Russia strategic area centered on China’s oil joint project with Kazakhstan; and the South American strategic area centered on the joint project with Venezuela. The range of business at these projects extends from oil, to gas survey, and drilling, to production and marketing, to refinery, to chemical plants and the marketing and sale of these oil-based chemical products. In 2002, China Ocean Petroleum Corp (zhongguo haiyang shiyou youxian gongsi), purchased three oil and gas fields from Australia and Indonesia for $1.2 billion. Recently, China Petroleum and Chemical Corp., (zhongguo shiyou huagong gufen youxian gongsi) has also indicated that it has been purchasing foreign oil field assets.

But to the newly opened up oil industry in China, the “Stepping Out” path has not been all that smooth. On December 17 2002, China Petroleum and Gas Group was forced to abandon the opportunity to participate in the bidding at the auction for owning the stock share of the eighth largest Russian oil company, the Slavic Inc., This was because at the last minute the Russian Parliament passed a provisional bill prohibiting foreign enterprises from bidding on Russian companies. At the same time, China Petroleum and Gas Group and Russia had spent 9 years repeatedly surveying and studying the feasibility of an oil pipeline stretching from Russia’s Angarsk to China’s Daqing. Yet due to Japan’s unexpected intervention which resulted in a new proposal for a Angarsk-Nakhodka pipeline, the Angarsk-Daqing Line as of this date remains uncertain of its future.

In May 2003, British Gas Co. (BG)’s subsidiary BG International Ltd. officially informed China Ocean Petroleum Corp. that BG had been granted the preemption right to purchase the northern Chtmian oil and gas development projects in Kazakhstan, and BG would sell to others what it had agreed to sell to China Ocean Petroleum Corp.—8.33% interest in the Kashagan oil and gas field, or China Ocean Petroleum Corp.’s entire interest in the northern Chtmian Sea projects. China Ocean Petroleum Corp. had no choice but to comply with BG’s request and ended its transaction agreement. Soon afterwards, China Petroleum and Chemical Corp. also ended its similar mutual agreement with BG.

Broaden Our Horizon and Strengthen Our Energy Diplomacy

When discussing the Chinese oil industry’s failed attempt at penetrating the Chtmian Sea region, experts point out that if similar large companies in China want to “step out,” they should have sufficient research done, should have overall planning, mutual support, and coordinated actions. In addition, they should broaden their horizon to look at a larger area in the Chtmian Sea region: there are enormous potential business opportunities in all the five countries along the coast of the Chtmian Sea. While carrying out this “Stepping Out” strategy, we should pay more attention to diversification of choices. For example, besides the Middle East and Siberia, Central Asia ranks as the third largest oil-rich region, and we have already established good cooperative relations with this region.

[The author is China’s prominent energy reporter working for the state news agency Xinhua. This article first appears in Economic Reference and is reprinted in the website of the Chinese Academy of Social Sciences at http://www.cas.ac.cn/html/Dir/2003/08/12/8975.htm]