China’s Energy Security: “Going Out” and Securing Foreign Oil Resources

By Taylor Land

Introduction: Chinese Energy Demand and the Malacca Dilemma

China’s energy needs are enormous. With the world’s largest population and an economy that has grown rapidly for decades, China overtook the U.S. as the largest consumer of energy in the world in 2011 and is currently the world’s second largest consumer of oil. China produced about 4.6 million barrels per day (b/d) in 2014, making it the fourth largest producer in the world. However, even this high level of production is not enough to satisfy Chinese demand, which requires an additional 7.4 million b/d. Additionally, the shift has been relatively swift: oil import dependency has grown from 30 percent in 2000 to 57 percent in 2014.

Beyond China’s relatively simple market-based concerns over oil, the country is also concerned by the more geopolitical “Malacca dilemma,” which refers to the fact that roughly 80 percent of China’s maritime oil imports travel through the Strait of Malacca. More broadly, there is concern that China is too dependent on maritime imports, which represent 87 percent of total oil imports and is vulnerable to U.S. naval intervention or general disruptions of international maritime trade.

Strait_of_malacca.jpg
Source: Wikimedia Commons

China’s National Oil Companies

China has three major national oil companies (NOCs) – China National Oil Corporation (CNPC), China Petroleum and Chemical Corporation (Sinopec), and China National Offshore Oil Corporation (CNOOC). The Chinese government established each company in the 1980s with differing concentrations, though all three overlap and occasionally venture outside of their designated areas. CNPC is primarily responsible for China’s onshore upstream activity, while Sinopec manages onshore downstream operations (refining, distribution, etc.). Despite these stated goals, both CNPC and Sinopec have made attempts to capture each other’s traditional market claims. Alternatively, CNOOC focuses on offshore oil and gas activity, which naturally translated into a leading role in overseas operations.

There has been considerable debate over the interests and goals of China’s NOCs since their establishment. Some observers insist that the corporations function largely independent of government influence, despite the government’s controlling stake in the ownership of each company. Conversely, others believe China’s NOCs are puppets of the state and are primarily used in an attempt to advance China’s foreign policy goals, such as energy security. The reality is probably more ambiguous than either of the previous options, balancing the goals of both a corporation and government entity and adapting its identity to changing conditions. The Chinese Communist Party exercises control over the NOCs in several ways, including the power to appoint and dismiss individuals for top positions, grant approval for investments, and provide cheap credit. However, despite the government’s considerable power, the NOCs have shown an occasional willingness to challenge the state. Such challenges are more common when the NOCs are performing well and filling the state’s coffers.

Overseas Investment – Securing Against Market Vulnerability

China’s investments in energy projects overseas does little to address the Malacca dilemma, as maritime transport is still necessary to get the resources to China for consumption and, thus, susceptible to naval intervention. However, ownership of overseas resources could be used as a means to protect against broader disruptions in the oil or liquefied natural gas (LNG) markets. There is currently no evidence that the Chinese government requires its NOCs to ship overseas production back to China, rather than allowing it to enter the global market. However, the belief that oil produced overseas by Chinese operators provides more security than purchasing oil on the international market is widely held in Beijing. In fact, Chinese energy officials have argued that global circumstances may lead to a situation in which China has funds to buy oil, but no international market exists due to war or other forms of disorder. In such a case, they argue, the state could order all overseas production to be shipped to China.

China’s overseas investment profile is currently undergoing a significant change. Many of China’s early FDI energy projects were based in high-risk countries. This was due to a number of factors, including China’s unproven record internationally, the high-risk country’s difficulty securing FDI from more attractive parties, and the perception of high potential that could match the risk. However, this strategy had inconsistent results. For example, China began investing in Sudan in 1995, with only brief success following the Darfur crisis. After South Sudan’s independence in 2011, oil transportation was obstructed and production fell from 200,000 b/d to 84,000 b/d. Additionally, China’s production in Iraq – 472,000 b/d – is vulnerable to the current unrest plaguing the country. In Syria, Chinese production has fallen from pre-war levels of 84,000 b/d to nearly nothing in 2014.

Because of the mixed results, and greater receptiveness in the West, China has shifted its FDI focus towards unconventional oil and gas projects in lower-risk countries, such as the U.S. and Australia. These investments have the dual benefits of offering more stability and an opportunity to improve technical skills in hydraulic fracturing and other techniques through cooperation with western firms operating on the same projects. These techniques can then be used domestically and in higher risk environments abroad to increase output and improve China’s energy security position.

Combatting Maritime Dependence – Pipelines and Neighbors

With the U.S.’s active presence in the Asia Pacific, some officials within China’s government are deeply concerned by its dependency on maritime trade for the vast majority of its imports (87 percent). Unfortunately, China’s ability to improve its position in this regard is quite limited. It is making considerable efforts to increase the inward flow of oil and gas from its Central Asian neighbors, such as Kazakhstan and Russia, but geographical and geological challenges will likely limit this strategy. In 2013, China increased the pipeline capacity for Kazakh oil from 200,000 b/d to 400,000 b/d (EIA China Analysis). However, current imports are well below capacity at around 150,000 b/d. Increasing imports from Kazakhstan further will require the development of Kashagan, a highly complex and operationally difficult oil field that has proven to be problematic since its discovery in 2000.

The other option is Russia, which currently pipes about 300,000 b/d of crude to China and is in the process of expanding to 600,000 b/d. Beyond this project, there are no other projects scheduled to increase imports from Russia. This source of oil is significant, but Russia and Kazakhstan combined still fall massively short of the 6.5 million b/d of imports via the sea. Barring a miraculous oil field discovery, China will be highly dependent on maritime trade to meet its massive and growing energy demands for the foreseeable future.

Conclusion

China’s energy demand has increased rapidly over the past several decades. As China has transitioned from an oil exporter into the world’s second largest oil importer, it has utilized NOCs to advance its energy security goals (though they are semi-autonomous). China’s NOCs are profit-seeking, but are also used to purchase and develop strategic oil resources. During normal trade conditions, most of the oil is sold onto the global market rather than being sent directly to Chinese markets. However, Chinese officials have expressed preference towards owning foreign resources so the government can direct the resources to China in the event of a crisis that severely disrupts trade. Another concern is China’s dependence on maritime trade for oil imports. China is making efforts to increase land-based imports via pipelines from Kazakhstan and Russia, but the current size gap between sea-based oil imports and imports from pipelines is still very large and China’s maritime dependence is still very high. This is unlikely to change in the foreseeable future. For this reason, it appears China’s NOCs are more effective for preparing against widespread trade disruptions than they are against potential direct interventions that target maritime trade.


 

TL 3Taylor Land is a Master’s candidate at the Patterson School studying international security and economics. His core interests are geopolitics and macroeconomics, with regional interest in Europe and the Middle East. Taylor can be contacted at taylor.land@uky.edu

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