The 'Tragedy' of China's Energy Policy
Image Credit: Bert van Dijk (flickr)

The 'Tragedy' of China's Energy Policy


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.

Dr. John Lee is the Michael Hintze fellow and adjunct associate professor at the Centre for International Security Studies at Sydney University, and a non-resident senior scholar at the Hudson Institute. He is the author, most recently, of “China’s Geostrategic Search for Oil,” which appeared in the summer 2012 issue of The Washington Quarterly

October 9, 2012 at 17:40

It's okay if you write articles bashing China, I don't expect praises for China from this site, but spare us drivel like "against the efforts of Western governments to improve governance standards, human rights, and economic reform in resource-rich authoritarian states around the world."
It is embarrassing to read such rubbish. 

October 7, 2012 at 13:50

China Communist Party wants to use CNOOC to buy Nexen, so it could acquire the deep sea drilling technologies for illegal drilling in SCS & ECS. Along with that they could achieve other objectives near the US coast lines in the Gulf of Mexico. 

John Chan
October 6, 2012 at 03:05

@Kimbo Y Laurel,
Does the USA compromise with its neighbours and any country in the world because its reliance on foreign oil? USA uses fleets of carrier battle groups to make sure its right of free navigation is not impeded.
Blackmailing is not a policy for small nations; active cooperation is the policy for all small nations to observe diligently. This is a burden that all small nations must bear.

October 5, 2012 at 18:35

the west would not want to sell their energy companies to China – but that is not the same as selling oil/energy.  Every country should maintain control of their energy companies – but oil should and must be sold on an open market – then everyone has a chance to buy it.  This is the best policy for all developed nations – China and the West.  The US happily sells coal to China – but you cannot let another country own the coal mining companies.
As for the Gulf of Mexico arguement constantly put forth by some in the comments section in virtually every discussion – look at a map – the Gulf  opens right out to the oceans – it is not constrained by chains of islands etc.  It also includes several countries – not just the US – and at no time has the US ever sought to claim the Gulf or interfere with the rights of the other countries on the Gulf.  Russian submarines transit through the Gulf – if China has a sub that can get to the gom – then they can transit through the gulf too – as long as they stay in international waters – and there are foreign non companies drilling for oil in the gulf -
the problem is if a country tries to corral oil only for their own use instead of selling it on the open market to the highest bidder – if a country tries to retain exclusive use of oil then the price goes up for everyone else which is irresponsible behavior.  Free markets are the best way to deal with commodities. 
As for the US presence in the SCS – the US has maintained an Asiatic Fleet since the 1900's – so this isn't something new.  And the US is not the only nation sailing around in the asian pacific – there is a sensationalistic – even warmongering – posture to all this talk about the USN containing China in the SCS – yeah – the two aluminum  hulled littoral vessels are going to contain China.  Foolishness.

October 5, 2012 at 12:35

You can also write an article praising china if that's what you want to read.
The only thing is, will the readers believe you?

October 5, 2012 at 12:02

Nothing to see here folks, just another china bashing article from another KKK fascist.
China should definitely do what is in the best interest of china only.
The bankrupt west can squirm all it wants, it won't change china's policies.
Good on you china!

October 5, 2012 at 06:36

No idea. You can give it a shot. Chances are good that it would do what it did when the Soviets were off the coast. Don't be too surprised if non-military ships harass PLAN vessels though.

October 5, 2012 at 02:14

It depends on Chinas actions.
If the naval vessels intimidate local fishermen, stop and inspect shipping on the premise that they may be sending goods to Japan (Chinas co called arch enemy), play russian roulette with US naval vessels etc, then its likely that they would have a problem.
If Chinese naval vessels simply wish to sail in circles around the gulf so as to gain experience in being able to sail a ship without crashing it, buy Burgers from the locals, etc. Then its likely the US would just keep an eye on them and other wise ignore them.
Now all International Relations Specialists understand that it is the intent that is the issue, not the location of ones toy submarine.
Its likely that you will then write a response about what reason does the USA have in the region of the South China Seas/Western Pacific/ West Philippines Seas (take your pick they all seem to be used now days). My response will be that being in a friendly relationship with many nations in the region, the US Navy acts as the military arm of the US Government following all requests of countries in the region.
The fact that these same nations dont shout this to the world at large is neither here nor there, but I am sure that they appreciate having a friendly naval force in the region who can back them up in the region and they may also benefit from the amount of money that gets spent refueling the US vessels, plus disaster relief etc.
Now if China wants to build up relations with US neighbors then alls good but just a word of advice, maybe the Chinese Naval forces need to be less opaque and also less confrontational with thier actions in the Gulf and also the rest of the world if they want to sail thier toy boats in someone elses bathtubs.
I mean its our bathtub and if we let you in to play with us with our ships in our bathtub then dont be arrogant as friends are allowed to play with friends but wankers just get booted out of the bathtub.
The moral of the lesson is that if the Chinese just crewed all thier naval vessels with hot Chinese female sailors than the US sailors wouldn't kick them out of thier bathtub. Though, thier might be problems with where the submarine went.

October 5, 2012 at 00:17

"against the efforts of Western governments to improve governance standards, human rights, and economic reform in resource-rich authoritarian states around the world."
It is statements like the above that makes the author lose credibility. If you want to write an article that is pro-western and China bashing, at least leave out obvious rubbish and hypocritical remarks.

October 4, 2012 at 23:19

 "against the efforts of Western governments to improve governance standards, human rights, and economic reform in resource-rich authoritarian states around the world."

Kimbo Y. Laurel
October 4, 2012 at 22:52

As the PROC increasing its demand on energy for their growing population, their opponents will use it as weakness through sanctions. If the PROC is going to survive, it have to compromise with its neighbor and must nut act aggressive.

October 4, 2012 at 22:38

"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."
Ha, ha, ha!  Like Shell Petroleum in Nigeria or the West doing dealing with authoritarian monarchies of the Middle East?
"…and only serves to further entrench the perception that China is an “irresponsible stakeholder” in the international system. "
China would be more irreponsible if she didn't take into account the energy needs of her population and industry.
Besides when CNOOC tried to buy Unocal on the open market back in 2005 the US Congress nixed that deal.  So if developed countries don't want to sell oil to China then the latter has to go looking elsewhere.  For the West to criticize China for that is the height of hypocrisy.

October 4, 2012 at 21:47

I hope energy security for China and all of eurasia can be improved after the SCO energy club is established later this year.
China pushes for regional energy club
"Beijing’s energy policy doesn’t improve energy security, but does entrench the “irresponsible stakeholder” perception of China."
How can there be energy security for China when the middle east is loaded with U.S military forces?
Is he concerned about the idea of US hegemony in the Middle East? Could it be a detriment to China, which is excruciatingly dependent on that part of the world for its energy? "If you ask different people in China, you will get different answers," he says. "Personally, I'm concerned about the possibility that these things could be part of a plan to 'contain' China."
If I load the gulf of Mexico where a lot of U.S oil imports pass through with chinese naval forces, will the U.S feel secure or insecure?

Share your thoughts

Your Name
Your Email
required, but not published
Your Comment

Sign up for our weekly newsletter
The Diplomat Brief