China’s energy mix is currently changing to include more natural gas and liquefied natural gas (LNG). Combined piped gas and ship-borne LNG currently comprise around 8 percent of China’s energy mix, half of which is imported. Import sources are roughly evenly split three ways between the Central Asian Gas Pipeline crossing from Kazakhstan carrying mostly Turkmenistan gas, the Russian Power of Siberia pipeline gas, and ship-borne LNG, with China having a long-term stake in Russia’s Arctic Yamal LNG project.
China’s geoeconomic policy around natural gas imports has clear potential for politicization, with impacts on both the supply countries and for other buying countries like Japan. China has previously politicized the sell-side of strategic commodities, banning rare earth exports to Japan, and has consistently politicized the buy-side of Australian iron ore under the China Iron and Steel Association cartelization scheme. Creating new buy-side dependencies in LNG and piped gas creates new forms of institutional power through which to exercise foreign policy via strategic price-setting and import volume control.
Imports of gas, though, are already showing signs of greater institutional control and monopolization than in the iron ore trade. China’s gas imports are increasingly coordinated by a single entity, PipeChina. Established in 2019, PipeChina has begun to absorb China’s gas infrastructure from the three existing upstream oil and gas state owned enterprises (SOEs) with the ostensible goal of marketizing the midstream to promote market competition for downstream SOEs, local governments, and private enterprises to lease capacity. PipeChina has already taken over the majority of China’s LNG regasification terminals, with three additional large regasification terminal projects to come under its control upon completion. When Shandong’s Longkou Nanshan LNG facility comes online, PipeChina will control 35.6 Bcm of coastal regasification facilities, more than three times the combined capacity of remaining LNG terminals, as well as the 55 Bcm Central Asia Gas Pipeline and the 38 Bcm Power of Siberia pipeline.
China’s wider hydrocarbon and petrochemical geoeconomic access policies are also more internationalized than previous industrial commodities under the rapid growth era. China’s petrochemical industry is organized into a cartel under the China Petrochemical International Capacity Cooperation Enterprise Alliance – effectively an attempt to cartelize both supply and demand-sides to create a whole value chain approach to achieving strategic access to energy resources through the Belt and Road economies. Coordinating industrial park investment, leveraging policy bank capital, and securing institutionalization of commodity prices can ensure not only stable supply, but political control of offshore industrial production bases and their inputs.
Around half of China’s hydrocarbon imports are from the Middle East, and China’s expanded hydrocarbon investment in the Middle East has acute geoeconomic implications. But China’s political geography concept of the Middle East is different to the United States, Europe, or Japan’s. Although China is the world’s largest importer of oil, with China’s Middle East oil sources becoming increasingly important, there are confused and conflicting geoeconomic policies surrounding Central Asia, the “Arab states,” Turkey, and the Caucasus region, which blur the line between Central Asia and Iran, the Arabian peninsula, and East Africa.
China is also struggling to articulate a “Near Abroad” foreign policy, a Soviet Union international relations term now borrowed and redeployed by China. The four Near Abroads in the Soviet Union were the Baltics, Eastern Europe, the Caucasus, and Central Asia. Both foreign and China analysts use the Near Abroad term in the China context, and although it is not the official policy of either China’s Ministry of Commerce or Ministry of Foreign Affairs, China-Pakistan policy taxonomy often conforms to Near Abroad thinking and much of China’s Belt and Road policymaking in Eurasia, the Middle East, and East Africa corresponds to a Near Abroad foreign policy concept.
Just as understanding domestic energy policy in the Middle East requires a close reading of the domestic policy priorities and access discourses of the United States, European Union, and Japan, China’s domestic policy institutions, political personnel, and policy discourses, as well as its means to achieving and maintaining geoeconomics access, will become crucial through the 2020s. Qatar, the world’s largest LNG exporter, exported 104.8 Bcm in 2018, but with China’s total gas dependency projected to be 550 Bcm per year by 2030, the global dynamic of Qatar as largest exporter and Japan as largest importer is changing. This has clear implications for stable market suppliers such as Qatar, Australia, the United States, Indonesia, Malaysia, and Papua New Guinea, as well as Japan’s energy security as traditionally the largest LNG importer, being now displaced by China.
For exporting nations in the Middle East and Central Asia, as well as Russia, there is as yet no great political risk in developing greater export capacity with China or with allowing Chinese capital to invest in upgrading domestic industrial structures in host economies. Yet the geoeconomics of LNG in particular have long centered on an East Asian import dependency, with the institutionalization of prices through import policies mostly set by Japan. In LNG, China is now mirroring a Japan import dependency energy strategy, meaning a new array of China policies aimed at mitigating dependency will emerge alongside greater buy-side activity in global hydrocarbon markets. This gravity of institutional rule-setting and price-taking behaviors is now shifting from Japan to China in the LNG trade. And China’s strategic import dependency hedging in LNG through PipeChina is perhaps the clearest indicator of future institutions and policies across a wider range of commodities.
For Middle East, Eurasian, and Pacific gas exporting states, a greater engagement is needed with China’s geoeconomic policy and institutionalized strategic hedging in energy commodities. China’s state policymaking apparatus is still developing a nascent Indian Ocean geoeconomic policy and a macroregional integration discourse. However, new forms of geoeconomic theory are needed to conceptualize the problems posed by development of parallel institutional systems within transnational capital industries such as energy and resource commodities.
This article is a synopsis of “The Middle East in China’s Energy Mix – Strategic Imports and Investment on the Belt and Road,” presented to The Institute of Energy Economics, Japan.