China’s oil purchase fraught with woes

  • Business
  • Saturday, 20 Aug 2005

WITH oil prices spiralling through the roof, it makes good economic and strategic sense to think ahead. China is already the world's second largest oil importer, after the United States.  

Indeed, energy has been a key concern for China since 1993, when it began importing crude oil for the first time in its economic history. China's total crude oil imports soared 35% last year to 840 million barrels.  

The Energy Information Administration in the US forecasts a strong growth rate of 4% to 5% in China's energy consumption until 2015, though many believe even this rate is too conservative.  

China imports more than 45% of its oil from West Asia. Due to West Asia's political volatility, this supply is subject to the risk of serious disruptions.  

China's oil sector is expanding rapidly to try and meet the country's fast-growing energy needs. - AFPpic

Invariably, China has tried to diversify its energy supply by reaching out to Russia, a rising oil exporter. A stable, close and reasonably priced oil supply from Russia is paramount for China's future development.  

On Sept 8, 2001, three days before the attacks on the Pentagon and World Trade Centre, for instance, China and Russia signed a US$1.7bil feasibility study for a proposed 2,400km pipeline that by 2010 would deliver 30 million tons of Russian oil to Chinese refineries each year.  

Beijing wants the pipeline to reach the north-eastern Chinese city of Daqing, the centre of the country's oil industry. The strategy to import from Russia is, however, not entirely problem-free. In fact, it has taken more than four years for Russia to come to a decision. Yet, the problems remain.  

This is because Tokyo has been lobbying hard for an oil-pipeline route to the Pacific and promised it will invest in developing untapped oilfields in Siberia.  

To back its lobbying, Japan reportedly promised up to US$14bil to fund the pipeline, plus US$8bil in investments in the Sakhalin-1 and Sakhalin-2 oil and gas projects, according to Russian media reports.  

Japan has also said it will give Russia 8.4 billion yen (US$77.6mil) to fund a feasibility study on the Angarsk-Nakhodka route (3,700km).  

Beginning with 2002, scores of Japanese VIPs frequented Moscow and Russia's Far East cities, offering billions of dollars of Japanese credit and other incentives, including offers to renovate entire cities along the proposed Angarsk-Nakhodka pipeline. Prime Minister Junichiro Koizumi even travelled twice to Russia in five months (January and May 2002) to win over Russia.  

A compromise third route proposed by the Russian government in March 2003 was accepted by President Putin earlier this year.  

A branch line will run to China's Daqing from the middle of the Angarsk-Nakhodka line to the Pacific coast. The proposal, however, was rejected by Japan. Beijing is also reluctant to accept this arrangement since east Siberia may not be able to produce enough for the two.  

As things are, the pipeline is now back on the planning board.  

At any rate, China has tried to adopt two other strategies to buttress its position as its energy needs deepen.  

First, there are now plans to build a strategic reserve of 6 million tons of imported oil that will guarantee up to one month's supply.  

The inspiration is the US Strategic Petroleum Reserve (SPR), which protects against any shortage. China is now contemplating the Japanese mode of oil reserve construction, which is composed of government and enterprise oil reserves.  

Japan's government oil reserves mainly handle crude oil imports, while those of enterprises deal with both crude oil and finished oil products.  

China's target is not as ambitious as the SPR or Japan's strategic reserve however, as the latter can hold reserves equivalent to 90 days of imports.  

That said, this plan is now in deep freeze because China has to wait until the price comes to less than US$15 a barrel to make it viable. Given the high price of oil, this will probably never happen.  

Another strategy is to develop China's own indigenous sources. One plan is to build a 4,000-km pipeline to carry oil from western China's sparsely populated Xinjiang region eastward to the prosperous coast.  

But the pipeline will cost nearly US$5bil to build, and construction of the associated infrastructure is expected to cost up to US$13bil more.  

So far, China has succeeded in raising the first US$5bil through partnership with Australian energy firms, with US$500mil thrown in by British Petroleum.  

Since both plans will not be fully operational at least for another decade, China has tried to maintain positive links with West Asia, which has become China's fourth largest trading partner.  

Yet, while China wants to exploit and expand such links, it remains aware that the US remains the key actor in the region. China will not be able to exert its diplomacy to wrest the best concessions.  

In light of this, China has been pushed by circumstances to build viable ties with Libya, Iran, Sudan, Nigeria and Ethiopia, all with the hope of diversifying its energy supply. 

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