Chapter 5: China’s Energy Security
5.2 Addressing China’s Energy Security Challenges
leaders have agreed with this latter view; then-President Hu Jintao declared in 2003 that new strategies would be needed in order for China to overcome the “Malacca Dilemma.”255
Nor are threats to Chinese transport necessarily state-directed. The Strait of Malacca is only 1.5 miles wide at its narrowest point, making it a natural bottleneck.256 The sheer volume of ships that transit through the Strait increases the possibility of accidents that could lead to closure and force ships to take longer routes to their destinations; such a rerouting would force ships to travel an additional 994 miles, straining already-tight shipping
capacity.257 There are also concerns that terrorism or piracy could either close the Strait, or simply raise shipping costs, both of which would lead to increased oil prices.258
Pipelines are one method by which China hopes to bypass the Strait of Malacca.
Chinese energy analysts have argued that pipeline oil is “less vulnerable to disruption by the United States than oil arriving by tanker.”259 During the Twelfth Five-Year Plan (2011-2015), China planned to nearly double the total length of its oil and gas pipelines from fifty thousand kilometers to ninety thousand kilometers.260 While the actual effectiveness of oil pipelines is a contentious topic261, China views pipelines as preferable to maritime shipping.262
5.2 Addressing China’s Energy Security Challenges
255 "Nengyuan Anquan Zaoyu "Maliuji Kunju" Zhong Ri Han Nengfou Xieshou? (能源安全遭遇“馬六甲困 局”中日韓能否攜手？)," People's Daily, http://www.people.com.cn/GB/guoji/14549/2570978.html; ibid.
256 U.S. Energy Information Administration, "World Oil Transit Chokepoints".
257 Kong, "An Anatomy of China's Energy Insecurity and Its Strategies," 20.
258 Ibid., 18.
259 Downs, "The Chinese Energy Security Debate," 36.
260 Andrew S. Erickson and Gabriel Collins, "China's Oil Security Pipe Dream," Naval War College Review 63, no. 2 (2010): 90.
261 A number of scholars make the case that should the United States ever seek to cut off China’s oil imports, destroying China’s oil pipelines would not be significantly more difficult than blockading the Strait of Malacca (see Downs, 2004; Erickson, 2010; Leung, 2010)
262 Guy Leung argues that the cost of diverting maritime shipping is negligible when compared to the greater per barrel cost of pipeline oil. Guy C.K. Leung, "China's Energy Security: Perception and Reality," Energy Policy, no. 39 (2010): 1334.
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What can China do to address its energy security challenges? Kent Calder proposes five strategic options:
1. Geographical diversification of its energy supplies;
2. Increasing energy efficiency;
3. Diversifying its reliance on oil toward nuclear power, hydroelectric power, and natural gas, the supply of which is less susceptible to sea-lane interdiction;
4. Reducing reliance on international majors, while conversely increasing the share of energy imports flowing through Chinese owned or controlled intermediaries; and
5. Developing the military capability to independently protect Chinese energy supplies.263
Calder develops this list based on the observation that “China is simultaneously pursuing all of these strategies simultaneously [sic],” but does not actually draw on official documents.
China began formulating strategies for its petroleum security in late 2002 and 2003.
The State Economic and Trade Commission (SETC) and the State Development Planning Commission (later the NDRC) crafted a joint proposal of six strategies: the creation of a state petroleum fund, the reinstitution of the State Energy Commission, the development of a domestic oil tanker fleet and blue water navy, the development of a petroleum conservation plan, the creation of three flagship oil companies, and the restructuring of China’s energy consumption system.264 The NDRC also drafted its own recommendations, adding an additional five strategies: the conducting of petroleum diplomacy, the development of renewable energy sources, the adoption of futures contracts to hedge against price volatility, the improvement of petroleum efficiency, and the strengthening of the petrochemical
industry.265
Kong references four official documents since 2000 that he sees as clearly “point[ing]
to a clear contour and parameter” of China’s petroleum policy, noting that there is not a
263 Kent E Calder, "Coping with Energy Insecurity: China's Response in Global Perspective," East Asia 23, no.
3 (2006): 54.
264 Kong, China's International Petroleum Policy, 56-57.
265 Ibid., 57.
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singular document covering this topic.266 From these documents he identifies six strategies as being the “six pillars of China’s international petroleum policy”:
1. To implement the going-out strategy, 2. To carry out the diversification strategy,
3. To build globally competitive flagship oil companies, 4. To conduct petroleum diplomacy,
5. To build a domestic oil tanker fleet and expand the Chinese Air Force and the Chinese Navy, and
6. To set up a national petroleum investment fund.267
I will modify this list by replacing the national petroleum investment fund with the creation of a strategic petroleum reserve (SPR).268 In the following sections, I will explain how some of these strategies align with China’s identified energy security concerns.
Much has been said in this paper about the going-out strategy, the diversification strategy, petroleum diplomacy, and the growth of China’s NOCs as globally competitive oil companies. The growth of China’s NOCs has gone hand-in-hand with the implementation of the going-out strategy. 269 Meanwhile, the pursuit of overseas expansion at the heart of the going-out strategy has promoted the ongoing diversification of China’s oil supply.270
The need for reliability of transport extends to the next strategy that Kong identifies,
“building a domestic oil tanker fleet and expanding China’s blue water navy.”271 An oft-cited
266 The four documents are the Tenth Five-Year Plan (2000), the Special Energy Plan for the Tenth Five-Year Plan, the NDRC and the SETC’s joint proposal for China’s petroleum strategies (2002), and the NDRC’s Nine-Point Strategy (2003). Ibid.
267 Ibid., 57-58.
268 Although Kong includes the petroleum investment fund as a strategy, he neglects to explain why he considers it important, whereas China’s need for a strategic petroleum reserve appears frequently in the academic literature, which is why I consider it a more important strategy.
269 There is scholarly debate about the actual effectiveness of equity oil with regards to Chinese energy security.
Erica Downs argues that not only do Chinese oil companies “have a history of overpaying for equity positions,”
equity oil does not protect against price volatility. Downs, "The Chinese Energy Security Debate," 35.
270 Shaofeng Chen notes that as China has diversified, it has begun to rely on countries threatened by domestic unrest or in disputes with the United States, which presents additional challenges to China’s energy security. Bo Kong writes that in the aftermath of the American invasion of Iraq in 2003, Chinese analysts worried about the impact that the invasion would have on China’s efforts to import Iraqi oil. Shaofeng Chen, "Has China's Foreign Energy Quest Enhanced Its Energy Security?," ibid., no. 207 (2011): 624. Kong, China's International
Petroleum Policy, 53-55.
271 China's International Petroleum Policy, 61.
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figure is that foreign tankers carry roughly 90% of China’s maritime oil imports.272 Back in 2007, Chinese government planners announced an effort to build more than 90
“supertankers”, with a target for 50% of oil imports to be carried on Chinese-owned tankers.273 Yang Baohe, the principal naval architect at the Marine Design & Research Institute of China, said that the planned construction “is all about national energy security…[we] have to be able to use our own ships to transport oil.”274 This stands in contrast to the prevailing view that “if you can pay the price, you will get the ship and the oil.”275 As with equity oil, China’s insistence on owning the tankers used to import oil
reflects a deep-seated suspicion of the global market, and a fear that it could lose access to oil or tankers on the open market.276
China is similarly suspicious that the United States could close the Strait of Malacca, which in part motivates its desire to modernize and expand the reach of its navy and air force.
The idea is that if China has a modern air force and navy that is capable of projecting force out past its coastal waters, it will be able to protect the SLOCs and thus its oil imports.277 The continued pursuit of this can be seen in China’s 2015 Defense White Paper China’s Military Strategy, which states that the People’s Liberation Army Navy (PLAN) will “gradually shift its focus from ‘offshore waters defense’ to the combination of ‘offshore waters defense’ with
272 Energy Economics: Modeling and Empirical Analysis in China, 222.; China's International Petroleum Policy, 56.; Bernard D. Cole, Sea Lanes and Pipelines: Energy Security in Asia (Praeger Security International, 2008), 81.
273 David Lague, "China Begins Expanding Its Supertanker Fleet," The New York Times,
http://www.nytimes.com/2007/05/16/business/worldbusiness/16iht-tanker.4.5739529.html?pagewanted=all.
274 Ibid.
275 Sam Bateman, maritime security expert at Nanyang Technical University in Singapore, as quoted in ibid.
276 Alvin Yao identifies China’s energy security policy since the mid-1990s as being “more ‘mercantilist’ than
‘liberal’ in that it emphasizes self-sufficiency, exploration, transportation security, trade protectionism, and state directives and assistance.” Yuanming Alvin Yao, "China's Oil Strategy and Its Implications for U.S.-China Relations," Issues & Studies 42, no. 3 (2006): 177.
277 Kong, China's International Petroleum Policy, 56.
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‘open seas protection’, and build a combined, multi-functional and efficient marine combat force structure.”278
The last strategy in China’s petroleum policy is the creation of a strategic petroleum reserve (SPR). China has recognized the need for an SPR since the mid-1990s, after studying the U.S. strategic petroleum reserve.279 The first serious proposals for an SPR appeared in the joint SDPC-SETC oil security strategy, as well as in the Tenth Five-Year Plan.280 Erica Downs goes so far as to call it “the most effective way to prevent the political use of oil as a weapon and to minimize the impact of supply disruption.”281 Having an SPR makes a country less vulnerable to major short-term disruptions in the oil market, and can be considered an
“insurance policy” against such disruptions.”282 In the event of a major disruption, oil stores can be released from the SPR to moderate the shock of a sharp decline in supply. While an SPR cannot be used indefinitely, it can at least ensure the short-term affordability of oil in the domestic market.
When China’s SPR was first proposed, there was debate about whether or not an SPR should be established, due to concerns about the affordability of an SPR, and questions about where the money would come from.283 Ultimately, the central government agreed to provide both the $1.6 billion needed for construction costs as well as funding for the oil to fill it, although the NOCs also agreed to contribute equity oil as well.284 The SPR was originally placed under the control of the State Strategic Petroleum Reserves Office in 2003285, but is
278 Philip Andrews-Speed and Christopher Len, "The Future of the Us Security Umbrella for Sea Lines of Communication (Slocs) between the Middle East and Southeast Asia, and the Future Role of China," (Singapore:
National University of Singapore, 2016), 8.
279 Meidan, The Structure of China's Oil Industry, 40.
280 Downs, "The Chinese Energy Security Debate," 25.
281 Ibid., 33.
282 Yergin, "Energy Security and Markets," 76.
283 Downs, "The Chinese Energy Security Debate," 33-34.
284 Meidan, The Structure of China's Oil Industry, 41.
285 Kong, "An Anatomy of China's Energy Insecurity and Its Strategies," 43.
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now administered by the National Petroleum Reserve Center.286 Construction of the SPR has proceeded in three phases: the construction of Phase I lasted from 2004 until 2008, and the facilities constructed have a total capacity of 103 million barrels.287 Phase II was originally intended to be completed by 2012/2013 with a capacity of 169 million barrels.288 According to the 13th Five-Year Plan, China now expects to complete Phase II and start work on Phase III by 2020.289 Some analysts believe that China has taken advantage of low oil prices since early 2015 to accelerate the filling of its existing SPR capacity, and that these purchases are behind the recent spike in China’s oil imports.290 China’s goal appears to be an SPR capable of holding at least 90 days’ worth of net oil imports by 2020,291 which would put it in compliance with the International Energy Agency’s requirement that its member-states maintain oil stocks equivalent to at least 90 days of net oil imports.292 Given that China imported roughly 9.2 million barrels per day in March 2017, the combined capacity of the facilities completed under Phase I and Phase II of China’s SPR account for roughly 30 days’
worth of net oil import volume.293
286 Wu, Energy Economy in China, 203.
287 Ibid.
288 Ibid.
289 Central Committee of the Communist Party of China, "The 13th Five-Year Plan for Economic and Social Development of the People's Republic of China (2016-2020)," Chapter 30, Section 3.
290 Jing Yang and Dan Murtaugh, "Oil Bulls Beware Because China's Almost Done Amassing Crude,"
Bloomberg, https://www.bloomberg.com/news/articles/2016-06-30/oil-bulls-beware-because-china-s-almost-done-amassing-crude.
291 U.S. Energy Information Administration, "China".
292 International Energy Agency (IEA) 2010a, IEA Response System for Oil Supply Emergencies 2010, International Energy Agency, Paris, http://www.iea.org/publications/free_new_ Desc.asp?PUBS_ID=1912 in Andrew B. Kennedy, "China's Petroleum Predicament: Challenges and Opportunities in Beijing's Search for Energy Security," in Rising China: Global Challenges and Opportunities, ed. Jane Golley and Ligang Song (ANU Press, 2011), 130.
293 If we believe that China’s recent spike in oil imports is in fact part of an effort to fill its SPR, then China most likely has greater than 30 days worth of net oil imports stored in its SPR. Aizhu Chen and Meng Meng,
"Update 2-China Crude Oil Imports Shatter Record, Top U.S. Intake," Reuters, http://www.reuters.com/article/china-economy-trade-crude-idUSL3N1HK1DG.
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