October 4, 2012
by John Lee
Back in July, the state-owned China National Offshore Oil Corporation (CNOOC) offered a staggering US$15.1 billion for Nexen Inc., a Canadian energy extraction firm with assets in Alberta, the Gulf of Mexico and the North Sea. The fact that Nexen was roughly valued at only U.S. $6.5 billion by other potential buyers immediately raised suspicions that strategic motivations were the driving factor behind the CNOOC bid, which was undoubtedly pre-approved by various Chinese ministries.
The CNOOC bid is merely one of several made by Chinese national oil companies (NOCs) for oil assets around the world. It is true that China takes a trenchantly "strategic" rather than "economic" view of securing the country's energy security needs – particularly oil – even as its economy remains steadfastly dependent on regional and global commodity markets to meet energy needs. This includes offering financial, political and diplomatic support to national oil companies (NOCs) to secure foreign supplies of oil and refining oil products for domestic use.
Even so, and despite legitimate concern about Beijing's uncompromising "China-first" energy security mindset, the actual capacity for Beijing to deliberately or inadvertently exacerbate the energy insecurity of other countries is limited. Indeed, the main downside of China's energy security strategic mindset is its detrimental or obstructive effects against the efforts of Western governments to improve governance standards, human rights, and economic reform in resource-rich authoritarian states around the world.
Although the term "energy security" has been used in Chinese strategic documents since at least the early 1990s, it was not formally prioritized as a national security issue until early this century. From 2003 onwards, the government of President Hu Jintao and Premier Wen Jiabao cobbled together a 'going global' strategy to address China's domestic oil shortage. This involved NOCs such as China National Petroleum Corporation (CNPC) and Sinopec controlling exploration, production and distribution at home, and CNOOC taking the lead in acquiring overseas assets and companies in order to lock in foreign supplies of oil.
From this century onwards, and backed by cheap or even free credit from the country's state-owned banks, Chinese NOCs began seeking out foreign oil assets. By 2011, these NOCs had operations in over 30 countries and equity production (extracting oil from oil-fields they have bought) in at least 20 countries. Figures for 2010 reveal that 23 percent of China's offshore equity oil production was in Kazakhstan, 15 percent in both Sudan and Venezuela, 14 percent in Angola, 5 percent in Syria, 4 percent in Russia, and 3 percent in Tunisia. Nigeria, Indonesia, Peru, Ecuador, Oman, Columbia, Canada, Yemen, Cameroon, Gabon, Iraq, Azerbaijan and Uzbekistan make up the remaining 20 per cent.
Even though other countries such as India use NOCs to acquire resources and technology in international energy markets, many governments are uniquely wary and distrustful of Chinese intentions for several reasons. The intimate and opaque role of the Chinese Communist Party (CCP) in guiding and shaping the commercial activities of NOCs create suspicion that all state-owned entities can be selectively deployed as instruments of the state for strategic gain. For many, Beijing's attempt to strong-arm Tokyo by halting exports of rare earth metals to Japan, following a 2010 confrontation in disputed waters in the East China Sea, illustrates the blurred line between Chinese resource and strategic policy.
Upstream acquisitions by Chinese NOCs tend to cause the most alarm because their ownership of below-ground assets play into fears that China can lock up oil supplies and distort international oil markets to the detriment of other economies. These fears are exacerbated because Beijing's standard modus operandi is to pursue a political route for its NOCs to gain favored access with host governments, fuelling suspicion that energy security is but one sub-component of broader Chinese geo-strategy.
Note that all these concerns should also be understood in the context of ongoing skepticism that China will emerge as a "responsible stakeholder" in a pre-existing liberal economic order as its power and presence grows.
Chinese NOCs have actually sold a significant proportion of their offshore equity oil on local and international commodity markets. Yet, this has done little to assuage fears that China could still lock up equity oil supplies and potentially disrupt supplies to other markets; or else distort the market price of oil by doing so.
But the capacity for China to create such havoc is actually quite limited. In 2010, Beijing's offshore equity oil production was around 1.37 million barrels per day (bpd), which meets round 28 per cent of its daily importing needs. Production by the next ten largest oil producers (not including China) is around 62.37 million bpd. The global oil export trade is around 64 million bpd. By these estimates, offshore equity controlled by Chinese NOCs makes up just over 2 percent of all oil exports each year.
Even by 2020, the most optimistic estimates place Chinese offshore oil equity production at 2 million bpd. Estimates put the global supply of oil at a plateau of around 70 million bpd, with such production levels stable until 2035. Although these estimates cannot fully account for all factors (such as when peak oil is reached at certain oil fields, unrest in oil producing countries etc.,) the point remains that Beijing's capacity to disrupt global supply or pricing is far less significant than is widely assumed.
What about oil reserves? Of the world's estimated 1.3 trillion barrels of proven oil reserves in the ground, more than half are in the Middle East, with Latin America and North America next in line. Major Middle Eastern oil exporters such as Saudi Arabia, Kuwait and Iraq utilize their own NOCs to protect their country's interests as major producers. For Beijing's locking-in policies to significantly disrupt international markets, Chinese NOCs would have to dominate ownership of oil assets in the largest Middle Eastern producers. But none of these major oil-exporting countries would want the geopolitical eruptions and economic turmoil that could follow from allowing one importer to lock in significant quantities of supply.
The same observation can be made about Chinese loan-for-oil agreements in places such as Iran, Russia, Angola and Venezuela. The volumes involved in these agreements are simply not significant enough to have an impact on global oil supply or markets. Besides, almost all of the countries that have signed loan-for-oil deals with China are projected to suffer significant declines in oil production during the period leading up to 2035. In other words, Beijing's supposed portfolio of compliant states willing to offer China's exclusive access to a proportion of their oil are declining in importance as producer countries.
Finally, Chinese energy policies may not be as troublesome as many fear but are not entirely innocuous. China's capacity to deepen the energy insecurity of other major states is overstated. But the damaging consequence of Beijing's energy security policies is that they do much to thwart attempts by Western states to isolate so-called pariah regimes and countries.
China's energy security mindset and approach of mixing business with politics works best with shunned authoritarian countries such as Iran, Sudan and Venezuela. Beijing is well aware that it has a comparative advantage over Western governments and other liberal democracies in signing deals with regimes in weak, failing or failed states. By offering these states financial aid and diplomatic cover in bodies such as the UN Security Council in return for privileged access to oil assets or supply rights, pariah states are much better placed to resist the pressures placed upon them by Western governments such as economic sanctions and diplomatic isolation.
Indeed, the great tragedy and farce is Beijing's "China-first approach" to energy security neither improves the energy security for China – since it will overwhelmingly rely on commodity markets to meet its oil needs for the foreseeable future – and only serves to further entrench the perception that China is an "irresponsible stakeholder" in the international system.
Beijing's energy policy doesn't improve energy security, but does entrench the "irresponsible stakeholder" perception of China.
John Lee is a Hudson Institute Visiting Fellow and an Adjunct Associate Professor and Michael Hintze Fellow for Energy Security at the Centre for International Security Studies, Sydney University. He is the author of Will China Fail? (CIS, 2008).
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