China?s Quest For Oil

China has been very actively recently in the Eurasian region trying to gain new access to oil supplies in order to satisfy the country?s increasing energy hunger and secure supplies. China has become increasingly reliant on imported oil. 1992 the country was a net exporter but became a net importer in 1993. By 2010 it is expected that China will need to purchase around 50 per cent of its oil abroad. Its oil production will growth at 1 - 2 percent a year but the demand will surge to a yearly growth of up to 5 per cent. 60 per cent of the today?s imports are coming from the fragile Middle East countries, giving China a huge incentive to diversify its oil suppliers.

These facts explain why China will become increasingly involved in international issues concerning oil and gas. Although the country imports little oil from Iraq, the potential damage to its economy by rising oil prices makes it highly interested in the developments of the region, as an Iraq war for example could hypothetically have led to cancellations of oil shipments from the Arabian Gulf. Due to higher oil prices, China suffered the first trade deficit last January in its whole foreign trade history. It is estimated that an oil price increase of $10 per barrel will decrease China?s economic growth by 1 percent. The country is also not interested to give the United States, a potential rival, a close grip on a region where most of the Chinese oil supplies stem from.

China that still imports 60 percent of its crude oil form the Middle East has been varying successful recently to decrease its dependency of this politically unstable region. Last March, two Chinese petroleum companies were blocked to acquire a stake in the Kashagan project, one of the most promising exploration ventures in the region.

However, the Chinese have prevailed over the issue whether a Russian pipeline should be built to Japan or the China. At the end of May, Hu Jintao, the new Chinese President and Vladimir Putin jointly announced, that Russia has decided to build a pipeline from Angarsk in Siberia to Daqing in China, covering a distance of 2?400 kilometer and costing an estimated $ 1.9 billion. Under a 25-year deal, the Angarsk-Daqing pipeline will supply China with 400?000 barrels a day, starting in 2005. This would amount to 26 percent of China?s imports.

The country also succeeded in deepening the relations with Kazakhstan. China National Petroleum Corp. and KazMunaiGaz, the Kazakh national petroleum company agreed to revitalize work on an oil pipeline, which should link western Kazakhstan with China. Furthermore, China made a commitment to invest in several, yet unspecified, projects in the Kazakh oil and gas sector.

The last coup was the signing of an agreement with Socar to upgrade and exploit the Pirsagat onshore field in Azerbaijan. It was the first contract a Chinese company won in this country and that only weeks after the Chinese were blocked to acquire a stake in the Kashagan venture.

It is however not quite clear, what role the state oil companies play in the Chinese rush to tap new energy supplies. The biggest three oil companies, Petro China, Sinopec and China Offshore Oil Corp. are undergoing a massive change, still looking for their new role. Should they be responsible for the country?s strategic oil reserves or should they become international giants like Exxon Mobile or BP? They do not receive the same support than western companies receive from their governments. Last time, Beijing interfered in favour of its companies, it proved to be useless. Last month, in the Kashagan case, China was astonished that international oil companies did not react to the threats to be barred from the Chinese market. Probably, the country is more dependent on foreign companies than the other way round.

The Chinese oil majors have a dominant domestic market positions but are internationally very weak positioned. They have to increase their public relation and marketing abilities to successfully compete globally. Until then their main assets will remain in countries which do not appeal to their Western counterparts. Examples are the Sudan, where oil mayors would face great pressures from shareholders or human right activists, or Indonesia which is politically unstable. The new agreement with Russia will provide for oil but will hardly strengthen the Chinese companies as they will only purchase what the Russian side is selling them.

The way in which China will react to these challenges will not only be determined by international events but also by domestic efforts to transform the country?s command economy to a market economic system.

Author: Tatyana Zaharova