Paving The New Silk Road With Oil: China’s Pipelineistan

Via The Asia Times, an in-depth look at the strategic and regional implications of the 1,833-kilometer Central Asia Pipeline from Turkmenistan to China.  As the article notes:

“…For all the rhapsodies on the advent of the New Silk Road, it may have come into effect for good last week, when China and Central Asia got together to open a crucial Pipelineistan node linking Turkmenistan to China’s Xinjiang.

By 2013, Shanghai, Guangzhou and Hong Kong will be cruising to ever more dizzying heights courtesy of gas supplied by the 1,833-kilometer Central Asia Pipeline from Turkmenistan – operating at full capacity. The pipeline will even help China achieve its goals in terms of curbing carbon emissions.

And in a few years China’s big cities will also be cruising courtesy of oil from Iraq.

China needs Iraqi oil. But instead of spending more than US$2 trillion on an illegal war, Chinese companies got some of the oil they needed from Iraq by bidding in a legal Iraqi oil auction. And in the New Great Game in Eurasia, instead of getting bogged down in Afghanistan, they made a direct deal with Turkmenistan, built a pipeline, profited from Turkmenistan’s disagreements with Moscow (Gazprom stopped buying Turkmen gas last April, which cost the Central Asian “stan” $1 billion a month), and will get most of the gas they need.

The running myth is that China is addicted to oil. Coal would be more like it. The No 1 global emitter of greenhouse gases, China still produces more than 70% of its energy from coal. Beijing will inevitably get deeper into biogas or solar energy, but in the short term most of the “factory of the world” runs on coal. Of its verified energy reserves, 96% are coal.

This does not imply that China’s shortage of raw materials such as oil and iron ore does not have the possibility of materializing Beijing’s planners’ worst nightmare – making the country a hostage to foreign raw-material producers (iron ore plays a significant part in China’s strategic relationship with Brazil). But diversifying oil supplies is a matter of extreme national security. When oil reached $150 a barrel in 2008 – before the US-unleashed financial crisis – China’s media accused foreign Big Oil of being “international petroleum crocodiles”, and insinuated that the West’s hidden agenda was ultimately to stop China’s relentless development dead in its tracks.

Have sanctions won’t travel
Twenty-eight percent of the world’s total proven oil reserves are in the Arab world. China badly needs this oil – with its factories churning out everything from sneakers to laptops, its car market booming like there’s no tomorrow (last month alone it produced 1.34 million vehicles), and Beijing constantly increasing its strategic oil reserves.

Few may know that China is actually the world’s fifth-largest oil producer, at 3.7 million barrels per day (bpd), just below Iran and slightly over Mexico. In 1980, China consumed only 3% of the world’s oil. Now it’s already around 10% – the world’s second-largest consumer, overtaking Japan but still way behind the US at 27%.

According to the International Energy Agency (IEA), China will account for more than 40% of the increase in global oil demand up to 2030. And this assumes that China’s gross domestic product will grow at “only” 6%. In 2009, even with the global financial crisis, China’s GDP is expected to have grown 8%.

Saudi Arabia controls 13% of the world’s oil production. It is the only swing producer capable of substantially increasing output. Not by accident, until recently it was China’s main supplier – with 500,000 bpd.

China will get increasingly more oil from Iraq starting from 2013 or 2014. So from now on China National Petroleum Corp (CNPC) will be very well positioned. But it’s the Iranian equation that’s really complex.

Chinese companies committed to investing no less than a staggering $120 billion in Iran’s energy sector over the past five years. Iran is already China’s No 2 oil supplier. Sinopec has just signed another memorandum of understanding with the National Iranian Oil Refining and Distribution Co to invest an additional $6.5 billion to build oil refineries in Iran. Despite sanctions, trade between China and Iran grew 35% in 2009, to $27 billion.

Saudi Arabia – harboring extreme paranoia about the Iranian nuclear program – has offered to supply the Chinese the same amount of oil it currently imports from Iran, at much lower prices. Beijing scotched the deal. Then US President Barack Obama warned President Hu Jintao during his November visit to Beijing that the US would not be able to keep Israel from attacking Iran – as a tactic to persuade Beijing to agree to harsher sanctions.

Arguably nothing will happen in January, when China takes over the presidency of the United Nations Security Council. No matter what’s spun in the US, Russia as well as China won’t agree to more sanctions against Iran. But France takes over in February, and will definitely press the council to be harsher.

So many escape routes
From Beijing’s point of view, both the US vs Iran conflict and the simmering US vs China strategic competition boil down to what could be called “escape from Hormuz and Malacca”.

The Strait of Hormuz – the only entry to the Persian Gulf – at its narrowest is only 36km wide, with Iran to the north and Oman to the south. Roughly 20% of China’s oil imports travel through it. Beijing frets at the sight of US aircraft carriers patrolling nearby.

The Strait of Malacca – very busy and very dangerous – at its narrowest is only 2.8km wide, with Singapore to the north and Indonesia to the south. As much as 80% of China’s oil imports may travel through it.

The “escape” logic explains China’s foray into Africa. China went to Africa because that continent is home to the few oilfields not owned by foreign Big Oil. When Chinese state oil companies buy equity stakes in African oilfields, they are protecting China from increases in oil prices, with the added bonus of no hassle – as happened in 2005 when China National Offshore Oil Corp (CNOOC) tried to buy Unocal in the US.

Hu Jintao goes to Africa every single year. Angola even overtook Saudi Arabia as China’s main oil supplier in 2006. CNPC is extremely active in Sudan, owning equity in a number of oilfields. There are no fewer than 10,000 Chinese workers in Sudan building refineries and pipelines to the Red Sea. Beijing showers Khartoum with loans to build infrastructure. Sudan already is China’s sixth oil supplier, responsible for about 6% of oil imports.

There are problems, of course. China’s refineries deal mainly with low-sulfur sweet crude (predominant in African oilfields) rather than high-sulfur sour crude (predominant in Saudi Arabia). So more Chinese demand at first glance would mean the necessity to import more African oil. But that will change in time. China is building new refineries to process sour crude, some even financed by Saudi Arabia.

The road goes on forever
China’s Central Asia strategy could be summed up as bye-bye Hormuz, bye-bye Malacca, and welcome to the New Silk Road.

Kazakhstan has 3% of the world’s proven oil reserves. Its largest oilfields are not far from the Chinese border. China sees Kazakhstan as a key alternative oil supplier – with Pipelineistan linking Kazakh oilfields to Chinese refineries.

CNPC financed the Kazakh-China pipeline in 2005 (with a capacity of 400,000 bpd) and bought two-thirds of formerly Canadian PetroKazakhstan, which controls the Kumkol fields in the Turgai basin (the other third is owned by the Kazakh government) for $4.18 billion. And China Investment Corp, a sovereign wealth fund, bought 11% of KazMunaiGas Exploration Production (KMG), the oil-production subsidiary of the national energy company, for $1 billion.

China’s first transnational Pipelineistan adventure was the China-Kazakhstan oil link. But this does not detract at all from China-Russia Pipelineistan – in both oil and gas. Russian Prime Minister Vladimir Putin recently sealed more than $5 billion in deals with China, mostly on energy, advancing the agreement on a gas pipeline that will deliver up to 70 billion cubic meters of gas a year from Russia to China, according to Gazprom’s Aleksey Miller.

But the Russia vs China chapter of Pipelineistan may be very tricky. Russia can at times behave as a strategic competitor. For example, the Kazakhstan-China pipeline operates with no hassle only for seven months a year. In winter the crude oil must be mixed with less viscous oils so it won’t freeze. Russia supplies them. But Transneft delayed delivery of these additives in the winter of 2006, arguing that its own pipeline was already operating at the limit. CNPC was forced to transport the additives by rail from another part of Kazakhstan for a lot of money.

Central Asia – via Turkmenistan – will definitely be China’s major supplier of gas, but on the oil front, it’s much more complex. Even if all the “stans” sold China every barrel of oil they currently pump, the total would be less than half of China’s daily needs.

This means that ultimately only the Middle East can placate China’s thirst for oil. According to the International Energy Agency, China’s oil demand will rise to 11.3 million barrels a day by 2015, even with its domestic production peaking. Compare that with what some of China’s alternative suppliers are producing: Angola at 1.4 million bpd, Kazakhstan at 1.4 million as well, and Sudan at 400,000.

On the other hand, Saudi Arabia produces 10.9 million bpd, the United Arab Emirates 3.0 million, Kuwait 2.7 million – and then there’s Iraq, bound to reach 4 million by 2015. But Beijing is still not convinced – not with all those US “forward operating sites” in the UAE, Bahrain, Kuwait, Qatar and Oman, plus a naval battle group in the Persian Gulf.

China may also count on a South Asia option. China spent $200 million on the first phase of construction of the deepwater port of Gwadar in Balochistan. It wanted – and it got from Islamabad – “sovereign guarantees to the port’s facilities”. Gwadar is only 400km from Hormuz. From Gwadar, China can easily monitor traffic in the strait.

But Gwadar is infinitely more crucial as the pivot of the virtual Pipelineistan war between TAPI and IPI. TAPI is the Turkmenistan-Afghanistan-Pakistan-India pipeline, which will never be built as long as a US/NATO foreign occupation is fighting the Taliban in Afghanistan. IPI is the Iran-Pakistan-India pipeline, also known as the “peace pipeline” (TAPI would be the “war pipeline” then?). Iran and Pakistan have already agreed to build it, much to Washington’s distress.

In this case, Gwadar will be a key node. And if India pulls out, China already has made it clear it wants in; China would build another Pipelineistan node from Gwadar across the Karakoram highway toward Xinjiang. That would be a classic case of close energy cooperation among Iran, Pakistan and China – and a major strategic Pentagon defeat in the New Great Game in Eurasia.

An additional complicating factor is that India harbors infinite suspicion about a Chinese “string of pearls” – ports along China’s key oil-supply routes, from Pakistan to Myanmar. Washington still believes that if TAPI is built, India will refrain from breaking the US-enforced embargo on Iran. But for India it would be a much safer – and strategically sounder – deal to align with IPI than with TAPI.

A Maoist drenched in oil
For China there’s also an “escape to South America” option. In the Venezuelan overall strategy it’s essential to sell more oil to China so as to lower its heavy dependence on the US market. According to the existing terms of the China-Venezuela partnership, four tankers and at least two refineries will be built – one in the immensely oil-rich Orinoco Belt in Venezuela and the other in Guangdong. State-owned Petroleos de Venezuela (PDVSA) will be responsible for shipping the oil to China.

The Venezuelan target is to export 500,000bpd in 2009 – already reached – and 1 million by 2012. President Hugo Chavez – who in typical colorful manner described himself as a “Maoist” during his last visit to China – wants Venezuela to be no less than China’s top oil supplier. China’s energy analysts take this partnership extremely seriously; it means that Venezuela could replace Angola. Currently, according to China’s Ministry of Commerce, Angola, Saudi Arabia and Iran are its top three oil suppliers.

Meanwhile, China has retrofitted many of its coal-fired plants in the past few years, and is accelerating moves to bypass high-intensity carbon-emitting technology, rebuilding its steel and cement industries. The country spends $9 billion a month on clean energy. There are plenty of wind farms across the countryside. A Shenzhen company is the world leader in lithium-ion battery technology. The first affordable, global electric car is bound to be made in China.

According to the China Greentech Initiative, the potential green market in China could reach a staggering $1 trillion a year by 2013 – that is, 15% of China’s gross domestic product by then.

But for the moment, Beijing’s strategic priority has been to develop an extremely meticulous energy-supply policy – with sources in Russia, the South China Sea, Central Asia, the East China Sea, the Middle East, Africa and South America.

As masterly as China may be able to play Pipelineistan, it will stride ever more confidently into a green future.”

This entry was posted on Thursday, December 24th, 2009 at 1:11 pm and is filed under Uncategorized.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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