(12/3) China's Thirst For Oil Is Reshaping World Market
(From THE ASIAN WALL STREET JOURNAL)
By Peter Wonacott In Beijing, Jeanne Whalen In Moscow and Bhushan Bahree In
Paris
With its factories working overtime, and its consumers on course to buy
almost two million cars this year, China is developing a world-class thirst for
oil. And its hunt for steady supplies is reshaping the global energy scene.
China -- which this year surpassed Japan as the No. 2 petroleum user after
the U.S. -- is increasing its oil purchases even faster than it is pumping up
its brawny economy. Imports for the first 10 months of 2003 were up 30% from
year-earlier levels. The International Energy Agency expects imports to double
to some four million barrels a day by 2010. By 2030, China is expected to be
importing about 10 million barrels a day, roughly what the U.S. does now.
Domestic oil output, meanwhile, is flat.
From Houston to London to Moscow, oil companies are looking to secure market
share in China, as China roams the world looking for oil fields to develop. And
strategists are struggling to predict what China's rise as a super-buyer will
mean for the oil market, the environment -- and world politics. Some fear that
China, which doesn't have large strategic reserves of fuel, might grow so
desperate for oil that it would battle the U.S. for influence in the Middle
East or even trade weapons technology to alleged terrorist states. Others are
more optimistic, and think China will realize it has a vital interest in
keeping the region stable.
"China is having an incredible influence on energy flows, not just in Asia
but on a world-wide basis," Peter Davies, chief economist at BP PLC, told
reporters on a recent trip to Russia, from where BP hopes to supply China with
Siberian gas. "The whole center of gravity of the world energy market is
changing."
So far, the most obvious impact has been on prices. In recent years, China
has drawn fire in the U.S. and Japan for exporting deflation, as its factories
pump out cut-price T-shirts, sneakers, radios and other goods. In the $1
trillion-a-year market for oil, the opposite is happening. This year and next,
China is expected to account for about a third of the increase in global oil
demand. China's purchases are an important reason the Organization of Petroleum
Exporting Countries, whose members regulate output to prop up oil prices, has
been able to keep the cost of a barrel of oil at or above $30 a barrel for much
of this year.
Chinese demand is also making geopolitical waves in the U.S. Last month, the
U.S.-China Economic and Security Review Commission, a committee of
congressional appointees, debated how China's thirst for oil would affect U.S.
access to energy supplies. Last year, the Pentagon reviewed a report on what it
would mean for U.S. national security if the Chinese and Saudis grew closer.
Saudi Arabia, the world's largest exporter, is negotiating to build a huge
refinery in China with Exxon Mobil Corp. The desert kingdom even has begun
giving Chinese-language lessons to its oil officials.
Meanwhile, China's mushrooming fleet of cars is adding to worries about the
nation's impact on the environment. In the next decade, the number of cars on
Chinese roads is expected grow fivefold to 100 million, approaching half the
U.S. total, according to the Development Research Center, a Chinese government
think tank. China is set to tighten its emission standards by 2005, and in 2008
it plans to introduce standards that could be even tougher than those in the
U.S.
"If all our bicycles turn into our cars, that's a horrible figure," says Zhai
Guangming, retired director of oil exploration at state-run China National
Petroleum Corp. "It would scare the world."
The flip side of growing Chinese oil imports is increasing vulnerability.
Used to having leverage over foreign multinationals seeking access to its
market, China finds the shoe on the other foot as it is forced to compete with
Japan and other buyers for oil. Chinese oil companies -- starting decades
behind U.S. and European giants -- are struggling with limited success to win
huge oil concessions overseas.
China is particularly exposed in the Middle East, the source of half its
imports, pointing up a little-noted twist: China's energy lifeline is
increasingly dependent on the U.S. fleets that guard the world's shipping
lanes. Like Washington, Beijing will increasingly need stability in the Middle
East to ensure reliable oil supplies at moderate prices. In the long run, this
confluence of interests might tug Beijing closer to the U.S. But several
analysts warn that China's thirst could lead to Beijing's emergence as a
competitor for influence in the Middle East.
"Saudi Arabia could possibly begin looking to the Chinese for those economic,
security and political needs it now garners from the U.S.," last year's
Pentagon study noted.
Energy security has been gripping Chinese economic planners for years.
Government economists long warned about the danger of importing growing amounts
of oil because of the foreign exchange it sucked out of the country, and
because of the dependence it created on volatile overseas markets. Importing
oil stabbed at the heart of Communist Party notions of self-sufficiency.
In the past decade, technocrats concluded China couldn't go it alone.
Domestic oil output peaked as demand soared.
China's factories were gobbling up huge amounts of oil. The fuel is the key
feed stock for petrochemicals, which the factories use to crank out plastics,
mobile phones, toys and computer parts.
At the same time, the Asian financial crisis of the late 1990s brought about
vast economic changes that led to increased demand for oil. Like smaller Asian
countries, China was overly dependent on exports for growth and exposed to
sudden slowdowns abroad. To stimulate the economy, Beijing began investing
billions in infrastructure, encouraging bank lending and relaxing curbs on home
purchases and auto production to get people spending. The moves sparked
explosive sales in apartments and cars -- growth that filtered through the rest
of the economy and led to quantum leaps in oil use.
"The only force that could help the economy grow at 8% is consumption," says
Ma Xiaoye, a former economic official and now director of Academy for World
Watch, a think tank in Shanghai. "We had no choice."
The challenges of fueling that growth are clear outside the capital in the
shadows of Cat Ear Mountain, the site of the Beijing Yanshan Petrochemical Co.
refinery. It was established in 1968 at the height of the Cultural Revolution,
when self-sufficiency was China's watchword. The refinery became an island of
industrial stability, expanding output even as political chaos enveloped the
nation. Movie theaters, shops, schools and eventually a town sprang up aroundit. Trucks and later a pipeline solidified a supply link with the huge Daqing
field to the northeast, the refinery's lone supplier.
These days, output from the Daqing fields is declining. "They are reducing
crude-oil production every year," says Chang Jiang, a senior engineer at
Beijing Yanshan. "So we are turning to Russia."
In July, the refinery, a unit of China Petroleum & Chemical Corp., or
Sinopec, processed its first shipment of oil from Russia, the world's No. 2
exporter. In May, the Chinese and Russian presidents endorsed the idea of
building a pipeline to supply Siberian crude to Daqing, which could then be fed
to Yanshan. OAO Yukos, Russia's largest oil company, and CNPC, a Chinese oil
giant, signed supply pacts promising to send 400,000 barrels of Russian oil a
day via the pipeline, slated to be built by 2005. In eastern Siberia, Yukos has
stepped up its search for new oil reserves, setting up a camp for surveyors in
the tundra.
But Russia may be an unreliable lifeline. Yukos's main shareholder, Mikhail
Khodorkovsky, has been jailed amid a political battle with the Kremlin, casting
doubt on the company's ability to keep pushing the China pipeline ahead. The
Kremlin, meanwhile, has put the China project on hold while President Vladimir
Putin mulls an alternate pipeline to the Pacific port of Nakhodka, which has
the advantage of being able to supply not only China, but also Japan and other
Asian consumers. Japanese Prime Minister Junichiro Koizumi is lobbying hard for
Nakhodka, pledging billions of dollars to help finance the pipeline. He even
brought a judo master to a St. Petersburg summit in January to amuse Mr. Putin,
himself a black belt in the sport.
The Chinese are scurrying for other deals. They are pressing for access to
reserves in Iran, the second-largest exporter in OPEC after Saudi Arabia. In
Iraq, CNPC is hoping the new government will stick by a deal inked in 1997
under which the oil company will develop Iraq's Al-Ahdab oil field. Beijing is
pushing forward plans for a multibillion-dollar pipeline from oil-rich
Kazakhstan, even amid doubts about the feasibility of the project. During a
visit to Kazakhstan in June, Chinese President Hu Jintao signed an agreement to
revive a long-delayed pipeline project that would pump oil across the Chinese
border.
China's insecurity is making global oil czars nervous. Top on their list of
worries: China, unlike other major industrial powers, lacks a large strategic
reserve of oil to buffer the country during supply shocks. That gap alarmed the
industrial world's energy watchdog early this year. As the U.S. and Britain
prepared to invade oil-rich Iraq, officials at the International Energy Agency
say they opened a dialogue with Chinese officials. The aim: to preclude panic
buying of petroleum by China, which might roil an already-jittery world oil
market.
Chinese officials are loath to discuss the politically charged topic of
energy security. Oil czar Zhang Guobao -- the 59-year-old vice minister of a
super-agency whose purview includes autos, high-tech and energy -- has turned
down requests for an interview.
But pieces of a strategy are starting to emerge. The State Energy
Administration, which Mr. Zhang also heads, plans to create a strategic oil
reserve, but officials won't say how the agency will finance and build the
stockpile. By 2005, China plans to store 50 to 55 days' worth of oil imports
and 68 to 70 days' worth by 2010, according to Wu Kang, energy analyst at the
East West Center in Hawaii.
In Washington, national-security strategists are sorting through a welter of
possible consequences of Beijing's oil thirst. The study reviewed by the
Pentagon last year, "Sino-Saudi Energy Rapprochement: Implications for U.S.
National Security," concluded that the world oil market will be able to
accommodate China. The study also predicted that Beijing is coming to share
America's interest in ensuring the Middle East remains a reliable supplier of
oil.
"We have common strategic needs," says Amy Jaffe, senior energy analyst at
Rice University's Baker Institute for Public Policy and one of the authors of
the study.
Still, many analysts are wary of a Beijing that could begin to feel boxed in
by its energy needs. The study noted that China might emerge as a major arms
supplier to the Saudis. Other analysts fear that China might be tempted to
trade weapons technology for access to oil in countries like Libya and Iran.
More than 50 years ago, another emerging Asian power felt squeezed on energy:
Japan. The U.S. responded to Japanese aggression in East Asia by imposing a
natural-resources embargo on Tokyo, which hit back by attacking Pearl Harbor.
Kent E. Calder of Johns Hopkins University's School of Advanced International
Studies says those events point a way forward for China and the U.S. as they
seek to head off future conflict.
"Obviously, historical parallels are never exact," Mr. Calder told the
Congressional commission last month. "Yet Japan's belligerence when it was
vulnerable suggests that taking positive steps to support China's energy
security can be in America's national interest." |
