China’s Energy Diplomacy

China’s Rise

Third largest economy after US, Japan

Grew 8.7% in 2009

Consumes 17% of world’s energy but owns not enough energy assets & resources

Decade Wise Transition

1950-mid 60’s: Refined oil imports from Soviet Union; Soviet advisors in China oil industry;

Mid 60’s-1980: Daqing reserves found; Oil exporters; Policy of petroleum-led export growth;

1980-1990: Energy security, a rising concern; CNOOC, Sinopec and CNPC established for

investment in overseas oil project;

1990-2000: Local requirements began to outstrip production; Efforts to diversify its energy resources; CNPC, CNOOC began investing abroad; China on exploration and reserve buying spree, undergone

major deals with Iraq, Angola, Kazakhstan, Sudan, Venezuela and many other countries;

2000-till date: Started providing military and economic support; Effort to secure Energy assets & transit routes Planned diplomatic strategies to gain access to world oil

reserves; Using its financial muscle, underwent major loan-for-oil

deals with Russia, Kazakh, Venezuela and Brazil.

Decade Wise Transition

Current Status

Proven Crude Oil reserves (2009) – 16 billion barrels , Saudi Arabia has 266.71

Proven Natural Gas reserves (2009) – 80 trillion cubic feet, Russia has 1680

Consumption was 7.8 million barrels a day, out of which 4.1 were imported

China’s increasing demands

Chinese oil reserves

China’s Crude Imports:

Saudi Arabia; 21%

Iran; 15%

Angola; 13%

Russia; 8%

Oman; 8%

Sudan; 6%

Kuwait; 5%

Congo; 3%

Kazakhastan; 3%

Libya; 3%Others; 16%

China's Crude Oil Imports (2009)

Saudi ArabiaIranAngolaRussiaOmanSudanKuwaitCongoKazakhastanLibyaOthers

Energy Diplomacy

In order to pursue Energy Diplomacy, China uses tools that are Diplomatic

Diplomatic support (like using the Veto) to a stranded state, examples are Iran, Myanmar & Sudan;

Military Export or exchange of military hardware & training in

exchange of rights over energy assets , examples are Myanmar, Africa;

Economic Giving massive economic aid & dangling the carrot

of investments.

China’s presence:

Middle East Africa America Rest of Asia Australia

GCC GCC has 6 countries: Saudi Arabia, United Arab

Emirate, Kuwait, Oman, Qatar and Bahrain China is trying to sign FTA with GCC since 2004 FTA is based on synergizing Chinese expertise

and technology and Gulf capital to establish major companies in China

The companies will then help Gulf projects involving infrastructure, power generation, transport, railways and electricity generation

In return GCC nations will freely flow their oil reserves in China

Kuwait

Post 1991 war Kuwait bought $186 million of 155mm howitzers from China rather than Britain or the United States.

China forced Kuwait to engage in the $300 million purchase, in return to its support at the UN for extending trade sanctions against Iraq.

It was just a pass to enter another energy rich nation.

Iraq Politically Unstable nation Second largest oil-reserves in world Anti American View

Military Support:

Supplied arms during the first gulf war. PRC helped develop Iraq's fibre optic

cables beneficial for modernizing Iraq's air defence system

Political Support: UN post sanctioned on Iraq after the war, which were

relaxed in late 1990’s, on China’s pursuance Beijing reopened its embassy in Baghdad on July 9,

2004, that had been closed after the U.S.led attack on Saddam's regime in March 2003

Economic Support: China was first one to enter Iraq via signing a contract

with Iraq to develop the Al-Ahdab oil field and began negotiating for the Halfayah field in 1998

China pledged US$25 million of humanitarian assistance to Iraq in 2003

Chinese Zhongxing Telecom Company signed a contract with Iraq’s Interim Ministry of Communication to supply telecommunications equipment with total value over US$5 million in 2004

Iran Has 136 bb of proven Oil reserves & 991 tcf of

Natural Gas reserves

Geographically closer to China

Currently, third largest supplier of Oil to China & supplies 12% of China’s annual consumption

In 2004, China’s CNPC signed a 25 year contract to supply 110 million metric tons of Gas

Sinopec signed another deal worth $100 billion to supply an extra 250 million tons of LNG to China

Several deals have been signed since then which include the rights to develop the South Pars oil field & projects to develop oil refineries in Iran

Already China is in talks for inclusion in the IPI pipeline

Energy Diplomacy - Iran

Diplomatic China has vetoed successive attempts at UNSC to

slap sanctions Been among the few diplomatic backers of Iran at a

time when its stranded in no man’s land.

Military China has provided Iran with an array of military

hardware ranging from small arms, assault rifles to main battle tanks, frontline fighter aircraft and sophisticated missile technology

Provided blueprints of Uranium enrichment plant & exported Uranium to Iran

Economic China has become Iran’s top trading

partner after an earlier round of sanctions

China has invested hugely in Iran, building refineries & other infrastructure

IPI- Gas Pipeline China, like India, relies on ocean shipments of

Qatar LNG for the bulk of its natural gas needs for sound economic reasons. 

China is particularly keen on securing energy supplies which can be shipped over land routes, since supplies shipped over water are much easier for the US to interrupt

While Western attention was focused on Saudi Arabia's possible provision of energy guarantees to China in return for a "yes" vote on Iran sanctions, Iran was working to leverage its natural gas reserves into economic alliances with China, India and Pakistan. 

The IPI project was conceived in 1995 and after almost 13 years India finally decided to quit the project in 2008.

India had not proceeded with the 2,775 km trilateral pipeline on issues pertaining to security and hefty transit fee asked by Pakistan.

Pressure from Washington to suspend ties with Iran is also cited as a reason

With the departure of India from the IPI consortium and the imposition of relentless US pressure, both Iran and Pakistan are feeling the lack of a partner with international financial and diplomatic muscle. Unsurprisingly, there is interest in China replacing India in the project

China has reportedly said that it will join Pakistan and Iran in a proposed natural gas pipeline project if India bows out

China has the wherewithal as well as the political will to “replace” India in the IPI pipeline.

Pakistan has presented a proposal to China asking it to join the $7.5-billion Iran-Pakistan- India (IPI) gas pipeline project if New Delhi pulls out of the venture, to which Iran has no objection

Myanmar

Myanmar is rich in oil & has SE Asia’s largest gas reserves (estimated at around 90 tcf) that are world’s tenth largest

Myanmar gives China access to the Indian Ocean, for imports of oil and gas and exports from landlocked South-western Chinese provinces

Strategically important since it can allow China to bypass the vulnerable Malacca Straits

Efforts are underway to build a 480 mile oil pipeline & later a gas pipeline through Myanmar

There are also plans for a 1,400-mile oil and gas pipeline that connects China's landlocked Yunnan Province to Myanmar's Indian Ocean coast

China has also taken a keen interest in the recent Gas discoveries in the Bay of Bengal

Energy Diplomacy - Myanmar Follows the Iran Model Diplomatic

One of Myanmar’s few diplomatic backers since West imposed sanctions against the military regime in 1988 following a crackdown on pro-democracy demonstrators.

Provided protection at the UN, vetoed resolutions backed by the US

Military China is the most important supplier of

military aid and maintains extensive strategic and military cooperation including training

Has delivered billions of dollars worth of military equipment to Myanmar which has facilitated the growth in the strength of the military regime

Energy Diplomacy - Myanmar

Economic Beijing has invested heavily in Myanmar,

financing roads, railways, airports and ports

China is officially Myanmar’s third-largest trading partner

Largest foreign investor Gives huge economic aid & soft loans to

Myanmar - $180 million in 1998 when Myanmar faced a debt crisis, $200 million in 2003 & another $200 million in 2006

Energy Diplomacy - Myanmar

String of Pearls

Attempt to have a presence along the SLOCs that connect it to the Middle East

80% of China’s oil passes through the Malacca Straits

Aggressively moving to secure its energy routes

Building blue water navy Financing & building ports in Pakistan,

Myanmar, Bangladesh & Sri Lanka Involves deep water ports capable of hosting

nuclear submarines

Shanghai Cooperation Organization Founded in 2001 when Uzbekistan joined the erstwhile

‘Shanghai Five’ consisting of China, Kazakhstan, Kyrgyzstan, Russia and Tajikistan

Cooperation over security, economic & energy matters Provides a framework for China to engage these Central

Asian states In its 2007 summit, member states agreed to establish a

"unified energy market" for oil and gas exports, while also promoting regional development through preferential energy agreements.

Although, it has been said that if Iran joins the SCO, it will essentially be “an OPEC with bombs”, SCO has failed to live up to such expectations & China energy diplomacy has largely followed a bilateral course.

Russia

Used to import refined oil from Soviet since 1950’s, but later started exporting in mid 60’s till 1993;

In 1994, Russian oil firms YUKOS, lead by Mikhail Khodorovsky proposed

an oil pipeline from Siberia to China's northeastern regions; At the same time YUKOS also planning a merger with Sibneft; Putin viewed such a big independent company as a political

threat; 2003,

Before Khodorkovsky could get his project under way Putin struck and he was under arrest. YUKOS was forced to bankruptcy;

China and Japan took advantage of uncertainty and started lobbying around for most favored market status for Siberian oil.

2004, then-prime minister Mikhail Fradkov came down on the

side of Japan and Transneft was given the go-ahead for construction of the Taishet-Nakhodka pipeline;

Beijing did not give up. It invested heavily in improving relations with Moscow.

2008 Oil prices tumbling towards $50 a barrel posed problem for

the massive Siberian infrastructure project; Financial meltdown squeezed Russia's state-owned energy

sector which was facing under-investment; Chinese Economic support:

Feb 2009, China signed loan-for-oil deal in which China would offer Russian firms 25 billion U.S. dollars of long-term loans while Russia would supply 300 million tonnes of crude to China from 2011 to 2030.

Kazakhstan

Seventh best explored hydrocarbon reserves; Estimated proven and probable oil reserves stood at approx

29 billion barrels and about 70 trillion cubic feet of proven gas reserves. 

In June 2005 PetroKazakhstan announced its a possible takeover or merger;

PetroKazakhstan accounted for about 12 percent of the Kazakhstan's oil production and owned the best (Shymkent refinery) of only three oil refineries in Kazakhstan;

India’s ONGC offered around $3.9 billion against China National Petroleum Corporation's (CNPC) $3.6 billion;

Diplomacy Economic: CNPC revised the bid to US $4.18 billion; Offered 5 billion-dollar loan to Kazmunai which would help pay for

the MangistauMunaiGas deal and construction of Kazakh-China gas pipeline;

$5 billion to the state-owned Development Bank of Kazakhstan.

Bought 2 marginal fields in 1997; Venezuela depends too heavily on its oil industry and most of

its oil exports are to U.S. by late 90’s; Apr 2002 failed Venezuelan coup attempt on president

Chavez acidified Venezuelan esp. Chavez’s relationship with U.S.;

Chavez wanted to reduce dependence on U.S. and China wanted oil security;

Energy Diplomacy tools: Diplomatic support: China against US in 2006, supported Venezuela’s

bid for U.N. security council; Economic:

Offered investments in Venezuelan agriculture, infrastructure, mining, and energy production;

China also offered support in drilling oil from reserves; Increased oil imports from Venezuela from 68,800 bpd in 2005 to over

300,000 bpd. In 2009, China offered 16-billion-dollar loan to drill oil in the resource-rich

Orinoco basin.

Venezuela

CANADIAN OIL SANDS•Oil sands are gritty deposits of tar-like bitumen, and Canada's deposits are now recognized as the biggest source of crude oil outside Saudi Arabia.

•Oil sands may represent as much as two-thirds of the world's total petroleum resource, with at least 1.7 trillion barrels in the Canadian Athabasca oil Sands

• Alberta's huge oil sands deposits make up the vast bulk of Canada's total proven crude reserves. It has established oil sands reserves of 178 billion barrels. However, oil sands production techniques are expensive for now, and need a high market price environment to make any investment worthwhile

•Extracting and processing sticky bitumen is much more expensive than producing and refining conventional crude, but global supply concerns have pushed western crude benchmarks to about $70 a barrel and made bitumen projects more economically viable

World's largest deposits occur in two countries: Canada and Venezuela each of which has oil sand reserves approximately equal to the world's total reserves of conventional crude oil

Production methods include sophisticated mining and extraction approaches

Canada has become the largest supplier of oil and refined products to the United States, ahead of Saudi Arabia and Mexico.

Canada, faced with growing political pressure over the extraction of oil from its highly polluting tar sands, has begun courting China and other Asian countries to exploit the resource.

With oil prices setting new highs in 2007, tax incentives were no longer necessary to encourage oil sands projects in Canada. In July of that year Royal Dutch Shell released its 2006 annual report and announced that its Canadian oil sands unit made an after tax profit of $21.75 per barrel, nearly double its worldwide profit of $12.41 per barrel on conventional crude oil.

The move comes as American firms are turning away from tar sands because of its heavy carbon footprint and damage to the landscape. With their expansionist plans continuing to be met with determined political opposition in the US, Chinese oil companies have turned their attention towards access to the lucrative Canadian energy market.

The combination of the current administration's professed commitment to open trade and the slump in Canada's inward foreign direct investment caused by the financial crisis have broken down Canada's resistance to direct Chinese investment.

PetroChina officially acquired 60% stake in Canada based Oil Sands company Athabasca Oil Sands Corp.'s (AOSC) MacKay River and Dover oil sands projects for $1.8bn , with plans to produce up to 35,000 barrels a day by 2014, and eventually up to 500,000 a day.

China's other two state-owned oil giants, Sinopec and China National Petroleum Corp, have also taken interests in oil sands projects in Canada.

Chinese Approach for African Oil Two-pronged strategy

First, it has pursued exploration and production deals in smaller, low-visibility countries such as Gabon, Equatorial Guinea, and the Republic of Congo. Chinese oil companies supported by government citing reason of being late comer in Oil field.

Second, it has gone after the largest oil producers by offering integrated packages of aid.

Strategy of committing large amounts of funding and labor for exploration and development rights in resource-rich countries.

In 2000, Beijing established the China-Africa Cooperation Forum (CACF) to promote trade and investment with 44 African countries.

Strategy of joint-ventures with national governments, state-controlled energy companies or individual enterprises in order to establish a long-term local presence.

They always outbid or try different means to win contracts awarded by African governments because their concerns are not in short-term returns but rather in strategic positioning for the future.

In Sudan it had an investment of $4 billion.

The China National Petroleum Corp. (CNPC) has a 40 percent controlling stake in Greater Nile Petroleum that dominates Sudan's oilfields.

(CNOOC) bought a 45 percent stake in a Nigerian oil-and-gas field for $2.27 billion and also purchased 35 percent of an exploration license in the Niger Delta for $60 million

Chinese Loans to Angola ( $2 billion with low interest rates, long maturities and no questions on how the money is used). no-strings-attached investment and infrastructure

Economic support: Chinese oil investments in Sudan by turning a blind-eye to the Darfur

crisis. China is the biggest investor in Sudan

Military Support: Sold T-59 Main Battle tanks & F-7 fighter aircraft China has assisted Sudan in developing factories producing small

arms China oil company entered in 1995 exploiting Sudan’s north south

civil war and U.S sanctions

Political Support: Beijing repeatedly vetoed the efforts of UNSC for slapping economic

sanctions over Darfur crisis & prevented the arrest of President Omar Al-Bashir as proposed in the ICC (Intl. Criminal Court)

Energy Diplomacy - Sudan

Sino-Australian relations

China is Australia’s largest trading partner

Australia supported US on carbon credits.

Ensures China for steady supply of ‘clean fuel’ for 20 years

On August 19,2009 PetroChina signed a AU$50 bn deal with ExxonMobil to purchase LNG from the Gorgon field in Western Australia Biggest single construction project creating 6000

jobs; The deal represents a bigger investment in Australia

than the government’s last economic stimulus package;

20 year agreement to supply CPI(China Power International) with 30mn tonnes of coal a year; Australia’s biggest ever export contract

70% stake in Australia's Uranium Metals Ltd by  A$83.6 million cash offer from China Guangdong Nuclear Power Holding Co.

Conclusion

China wants to ensure energy security through: Financial muscle; Veto power.

Reducing dependence on Middle-east;

Want to spread the dependency for energy;

May be China wants to break the US supremacy as far as energy resources are concerned.

Thank You…