KENT E. CALDER
DIRECTOR
NITZE SCHOOL FOR ADVANCED INTERNATIONAL STUDIES
JOHNS HOPKINS UNIVERSITY
CHINA’S ENERGY DIPLOMACY AND ITS GEOPOLITICAL IMPLICATIONS
BEFORE THE COMMISSION ON U.S.-CHINA ECONOMIC AND SECURITY
REVIEW
HEARINGS ON CHINA’S ENERGY NEEDS AND STRATEGIES
THURSDAY, OCTOBER 30, 2003
WASHINGTON, D.C.
The critical point of departure in thinking about China’s
future energy diplomacy must be that nation’s substantial and rapidly
increasing dependence on energy imports, fueled by its extraordinary economic
growth. As late as 1990 China had a net oil-trade surplus of over $1
billion/year with Japan alone. Until the fall of 1993 China was a net oil
exporting nation. Yet last year it imported over 1.4 million barrels per day
from the broader world.
And the prospects are strong for substantial future increases in China’s international energy dependency. Economic growth shows strong promise of being both rapid and sustained, due to high rates of capital formation and large prospective future increases in factor productivity. China’s economy shows prospect of growing more, rather than less, energy intensive, particularly in the consumer sphere, as automobile ownership and usage of energy-intensive appliances like air conditioners steadily broadens. Nations at China’s intermediate stage of development typically experience large increases in energy usage, with industrial consumption in such sectors as construction and petrochemicals augmenting increasingly buoyant consumer demand.
China certainly enjoys a wealth of natural energy resources, including coal reserves that rival those of the United States as the largest on earth. Yet environmental and infra-structural problems, compounded by a reluctance to offer foreign investors the incentives necessary to access state-of-the-art drilling technology, prevent China from realizing its domestic energy production potential. The major reserves, of oil in particular, are located in the North and the West, while energy demand is surging most rapidly in the South and the East. And the railways and pipelines needed to transport oil, coal, and natural gas from one part of the country to another remain under-developed, and in a woeful state of dis-repair.
The historical record suggests that China fears energy dependence on the broader world, and that it has some reason to do so. Soviet advisors in the 1950s played a major role in the Chinese oil industry, and their departure following the Sino-Soviet split of 1960 precipitated severe energy shortages in China. It also left China more than 50 percent dependent on the Soviet Union, a new adversary, for over 50 percent of its refined oil product consumption. China has also seen the post-Soviet use of both oil and natural gas as a geo-political lever in Russia’s dealings with neighbors such as the Ukraine over the past decade.
Chinese analysts also appear to see the United States as a
prospective threat to China’s energy security. There is no nation powerful
enough to balance the U.S., and the U.S. Navy dominates the 7000-mile sea-lanes
from Shanghai to the Straits of Hormuz through which well over half of China’s
oil supplies must pass. Economic sanctions have become an important tool of
American policy in the post-Cold War world, and China’s vulnerability to U.S.
economic pressure, and relative lack of allies, could encourage the
consideration of oil sanctions as a prospective option, in the view of some
Chinese observers.
In 1999, after the Kosovo conflict, and again during the recent U.S. military intervention in Afghanistan and Iraq, the potential effect that the vulnerability of strategic shipping lanes could have on China’s energy supplies was repeatedly the subject of security policy debates in China. However strong American capabilities at sea may consistently have been, until “9/11”, the United States had a relatively limited military presence in nations bordering directly on China’s energy sea lanes. Today, in the context of the war on terrorism, that is no longer the case.
China has at least five strategic options that it can pursue to reduce its vulnerability to prospective international pressure in the energy area: (1) Geographical diversification of its energy supplies; (2) Increasing energy efficiency; (3) Diversifying its reliance on oil toward nuclear power, hydro-electric power, and natural gas, the supply of which is less susceptible to sea-lane interdiction; (4) Reducing reliance on international majors, conversely increasing the share of energy imports flowing through Chinese owned or controlled intermediaries; and (5) Developing the military capabilities to independently protect Chinese energy supplies. The evidence is that China is simultaneously pursuing all of these strategies simultaneously, with the strongest emphasis on the first four. In their aggregate, these strategies represent, in their international dimensions, the face of Chinese energy diplomacy.
Economic pressures in China currently gravitate, as they do in virtually all nations, in favor of increasing reliance on the Middle East, at least with respect to oil and liquefied natural gas (LNG) supplies. The well-head production cost in the Middle East is simply so low that its logic cannot be ignored, unless collusive behavior by the OPEC production cartel forces prices high enough to make other sources of supply competitive. For most of the past two decades that has simply not been the case.
Within the Middle East, China has placed substantial
priority on developing energy ties with nations where American geo-political
influence is relatively limited: Iran and, until the recent war, Saddam’s Iraq
in particular. Iran was China’s second largest source of imported oil worldwide in 2002, eclipsed only by global low-cost producer
Saudi Arabia. China took nearly 11 million tons of Iranian crude oil
imports. China was also consistently
Iraq’s third or fourth best export customer in the years immediately prior to
the Iraq War, importing 500,000 tons of Iraqi crude in 2002. This represented
less than one percent of China’s total oil imports, however, suggesting that
Iraq was more dependent on China than vice versa.
Prior to the Iraqi War Chinese firms laid fiber-optic cables enhancing the efficiency of Iraqi air defense systems and reducing their vulnerability to air attack. Chinese firms also were reportedly modernizing the overall communications network of that country, in return for Iraqi oil. By the spring of 2001 at least the Chinese government was telling the U.S. Government that it was pressuring these firms to cease and desist, but how serious or effective this pressure was is unclear.
Iran appears to be a continuing economic and strategic partner for China, although increasing Chinese sensitivity to how this Iranian relationship will play in Washington is clearly evident. During the mid-1990s China reportedly sold Iran C-801 and C-802 anti-ship cruise missiles, posing a threat to oil tanker traffic and US naval vessels in the Persian Gulf.
In 1996 China reportedly began assisting Iran in developing indigenous anti-ship cruise missiles, based on Chinese designs. In August 1996 the two countries also reportedly signed a $3 billion deal that included the sale of Chinese ballistic missiles, missile guidance technology (including sensitive gyroscopes), and missile production equipment. The Chinese government denied these reports, and US State Department officials indicated that they believed Beijing was generally operating within the non-proliferation assurances that it had given Washington. Yet gaps between commitments and implementation were a recurring theme, in the view of many observers.
During 1997-1998 the Chinese government committed to stopping these provocative arms exports. Yet Iran still owes Chinese arms producers substantial debts dating from the Iran-Iraq War of the 1980s. These provide at least one incentive apart from oil for continuing Sino-Iranian arms transactions, as does continuing Chinese irritation at American arms sales to Taiwan.
While Sino-Iranian interaction is a continuing reality, the more striking development is China’s rapid diversification of its energy supplies, which is helping it to limit dependence on the Middle East as a whole. In 2001 China was only dependent on the Middle East for 56 percent of its crude oil imports, compared to 90 percent for Japan and around 75 percent for South Korea. This relatively low proportional figure for Chinese Middle East oil dependence was virtually unchanged from a decade earlier, despite the near ten-fold expansion of overall Chinese oil imports during that period.
Regionally speaking, Africa provides nearly 23 percent of
China’s oil imports—a remarkably substantial share, considering that
continent’s distance from China. Indeed, the Sudan and Angola—both nations
where American geo-political influence is limited—were two of China’s five
largest suppliers of crude oil in 2002. And their contribution is rising.
Chinese oil imports from Angola, for example, nearly tripled, to over six
million tons annually, between mid-2002 and mid-2003.
Energy efficiency has traditionally been extremely low in China. In 1980, for example, China’s energy usage per unit of GDP was roughly three times the global average, and more than four times that in Japan. By 2000 it had risen substantially, to around 90 percent of the global average, but remained only around two thirds of that in Japan, according to World Bank statistics.
Raising China’s energy efficiency still further is very much in the world’s interest, given both the rapid, sustained character of Chinese growth, which is sharply deepening China’s energy dependence on other nations, and the manifest instabilities that could arise from a troubled Chinese energy relationship with the broader world. This is an area where multilateral cooperation is very much in both America’s and China’s national-security interest. Japan, in particular, has been very successful at energy conservation, especially in the industrial sphere, and including it in broader efforts to encourage Chinese energy conservation through its extensive development assistance programs in China is very much in the US national interest.
Diversification away from oil, toward nuclear power and lately toward natural gas, have also been important themes in Chinese energy diplomacy. Nuclear power, of course, has the attraction of requiring only extremely limited raw material imports. Yet the storage and safety problems that have arrested formerly extensive Japanese and Korean nuclear programs are also beginning to concern Chinese authorities. China has built three nuclear power stations so far, all located along the eastern coast, and will have installed nuclear capacity by 2005 of around 8.7 million kilowatts, or about three percent of total national power output.
Yet Beijing has so far been quiet about its plans for
nuclear generation beyond 2005, in stark contrast to the Chinese government’s
explicit call for increases in natural-gas and hydro-electric power production
capacity. One source of disquiet is the high cost and low level of local
technology input associated with most plant-construction proposals. Yet China
will likely boost nuclear power capacity in the long-term to supplement thermal
and hydro-generation, given the huge prospective growth in overall national
power demand.
Natural gas does not suffer from the central drawbacks of nuclear power. It is a safe, efficient, environmentally attractive fuel. And it has the substantial geo-political advantage of being accessible overland—immune from prospective interdiction by a US Navy unassailably dominant, in the short-term, along China’s natural energy sea lanes.
Coal, of course, has been the classical form of energy
consumption in China. To this day China relies on coal for well over 60 percent
of its energy supply. Given that China has the largest proven coal
reserves on earth, it is also likely that China will continue to rely heavy on
coal in future.
Coal causes, however, major environmental damage—not only to China’s own natural environment, but also to that of the broader Northeast Asian region. The acid rain that China’s massive use of coal induces decimates forests in both Korea and Japan. The rapid dissemination of clean-coal technology thus becomes an important precondition to continued use of coal across China, which is clearly advantageous on national economic security grounds.
China clearly suffers from major energy-related
environmental problems, mainly centering on its extensive use of coal.
According to a recent report by the World Health Organization (WHO), seven of
the world’s ten most polluted cities are in China. And China is projected to
experience the largest absolute growth in carbon dioxide emissions between now
and the year 2020. There are thus compelling environmental as well as
geopolitical reasons for diversifying away from the current heavy dependence on
imported oil in China’s overall energy supply.
Central Asia and Russia have considerable precedence in
China’s energy diplomacy—both because they are substantial prospective sources
of natural gas, the most environmentally attractive and energy-efficient fuel,
and because that gas is accessible overland. Russia alone has nearly 31 percent
of the proven natural gas reserves on earth, and they appear to be concentrated heavily in eastern Siberia, in
manageable proximity to China and Korea. Asia is the one of the world’s major
regions without a land-based natural-gas grid, and creating one seems increasingly
likely to become an object of Chinese energy diplomacy, as China’s explosive
economic growth continues. In this endeavor China will have natural allies in
the Korean and Japanese banks, steel producers, and trading companies, as they
begin to recover from the lingering effects of the financial crises of the
1990s.
China has placed
particular priority on deepening energy relations with Kazakhstan—its oil and
gas-rich neighbor to the west. Yet results of this commitment have been mixed.
CNPC, the large Chinese oil exploration firm, has purchased a 60 percent stake
in the Kazakh oil firm Aktobemunaigaz, promising to invest substantially in the
company’s future development over the coming twenty years. Yet it was unable to
secure entry into the major Kashagan oil field in the Chtmian when consortium
partners in that project exercised their rights to block the sale of a 16.7
percent interest in the project to CNOOC. In the late 1990s China and
Kazakhstan also talked of a possible oil pipeline between them, but
construction has not begun.
Some deepening of
China’s energy ties with Kazakhstan may be impending. The Kazakh state oil firm
announced early in October, 2003 that its Chinese counterpart had agreed to
finance a $800 million oil pipeline from western Kazakhstan to northwestern
China, with construction to start in mid-2004. Using the existing pipeline
network Kazakhstan could then practice oil swaps with its northern neighbor
Russia to ensure stable oil supplies to the China-bound route.
A deepening energy
relationship between the giants of Eurasia, China and Russia, is both natural
and virtually inevitable, barring severe geo-political conflict. This prevailed
in the 1960s, 1970s, and 1980s, of course, but the likelihood of an acrimonious
Sino-Soviet split is much less likely in future, due in no small measure to
energy-sector complementarities. China’s growth is driving it to energy
dependence on the world, and nearby Russia is a low-cost supplier, once
infra-structural costs have been amortized, with at least a third of global gas
reserves.
A Sino-Russian gas
grid, starting perhaps with the Irkutsk-Baikal project, would have a long-term
economic logic that could cement a deepening political-economic relationship
between these giants. It would also insulate China much more from American
naval leverage along its sea lanes, and from American political-military
preeminence in the Middle East, than is currently the case. If anything, the
recent war in Iraq has deepened the geo-political logic of an Asian gas grid
for China.
A fourth strategic option for China’s energy diplomacy is increasing the share of Chinese energy imports flowing through Chinese owned or controlled corporate intermediaries. The three largest Chinese oil and gas firms—Sinopec, CNPC, and CNOOC, have all strengthened their financial capacity to expand in international markets by carrying out successful initial public offerings (IPOs) of stock between 2000 and 2002. They have expanded into a diverse range of international ventures, ranging from the Northeast shelf of Queensland in Australia, to the Sudan and Kazakhstan. China has also selectively encouraged energy producers from the developing world, including Middle East oil producers, to become active downstream in China.
China has generally been wary of the international oil majors, but has occasionally teamed up even with them, in keeping with its overall strategy of diversification. Shell, for example, is the lead firm in China’s current “West-to-East Pipeline”, currently under construction, which will convey natural gas from Xinjiang to Shanghai. Gazprom and ExxonMobil have additional stakes. Construction began in July, 2002, with a section of the pipeline scheduled to begin operation in early 2003. This could be the trunkline for a future natural gas pipeline between China and Central Asia.
China’s final strategic option for assuring its energy supplies, of course, is military. China has, as noted earlier, cooperated in military construction and arms transfers with pariah nations in the Middle East such as Iran and Iraq, as noted earlier. Yet it appears so far not to have taken determined steps to expand and modernize the long-range naval and air force capabilities needed to protect its expanding imported energy supplies, contrary to earlier expectations. There is clearly a long-term logic to a Chinese blue-water navy with the capacity to assure smooth energy imports into China, but that navy has not yet clearly begun to materialize.
China’s current sea power remains more potential than
actual, contrary to expectations a decade ago, as China’s energy imports began
to spiral. The PRC retains major shortcomings in the areas of anti-submarine
warfare, anti-air warfare, and electronic warfare. Correcting these
shortcomings will require major capital investments that China is only
gradually gaining the economic capacity to make. Meanwhile, China’s naval
strength lies mainly in its numerical advantage in relation to other regional
actors. The PLAN (People’s Liberation Army Navy) currently has over 50
destroyers and frigates, about 60 diesel and 6 Han and Xia-class submarines,
and nearly 50 landing ships. But the PLAN lags beyond other regional navies,
including that of Taiwan, in most technological areas, especially air defense
and surveillance.
In the final analysis, the course of Chinese energy diplomacy remains to a fateful degree indeterminate. Within a decade China will almost inevitably be one of the largest energy importers in the world, rivaling the United States and Japan. Over 30 percent of China’s energy consumption will in all likelihood be imported. Yet how Beijing will assure the security of the massive imports that it will require, and how it will procure them from the broader world, is still unclear.
Particularly important, yet non-transparent, is the political-military dimension. It is not clear what China will do in terms of blue-water naval development. In the context of the war on terrorism, Japan has been expanding its capabilities in the Indian Ocean and the Arabian Sea. China may well do so as well. Carefully monitoring China’s political-military response to its rising energy dependency on the broader world is a clear imperative for the future.
Historical precedents suggest that it is when the energy security of nations is most precarious and vulnerable that they are most dangerous. Clearly that was true of expansionist Imperial Japan in the days leading up to Pearl Harbor. Japan’s lack of stable energy supplies was a major factor in its decision to strike on December 7, 1941.
Obviously historical parallels are never exact. Yet Japan’s belligerence when it was vulnerable suggest that taking positive steps to support China’s energy security can be in America’s national interest, as long as China is dealing in constructive ways with mature members of the international community. This could mean, for example, rendering technical assistance to expansion of the Chinese oil stockpile, which currently provides only a seven-day supply, compared to 60 days in the United States, and 100 days in Japan. In this context, China might be encouraged to re-deploy some of its massive foreign-exchange reserves, currently totaling upwards of $400 billion, into the energy area in constructive ways.
Much in China’s future course will depend on the receptivity of the United States and the broader international community to China’s deepening integration with the world. Clearly, the world must insist on a more open China in the calculus of economic affairs, and progress in reducing the massive trans-Pacific trade and financial imbalances that have emerged in recent years. Yet if the US continues to support and ensure unbiased freedom of navigation in the global sea- lanes, as has been this country’s longstanding tradition, to that degree China will have reduced incentives to develop an autonomous blue-water naval capability of its own. Conversely, to the extent that China feels vulnerable regarding its energy sea-lane access, it may be encouraged to accelerate its buildup. The changing Chinese energy calculus is generating major new political-economic equations that the world must watch with great care in coming years.