Source: International Energy Agency, 2009
About 15% of China’s total oil comes from the shallow off-shore fields. In fact, off-shore production is the only major contributor to China’s indigenous production as the country’s present on-shore production is more or less stabilized. The oldest off-shore oil zone in China (exploration was initiated in 1958) is Bohai offshore oil and gas area. Bohai oil and gas field covers 58.327 thousand sq. km and is ranked the second largest among the oil production areas in China.16 The South China Sea (SCS) is rich in natural gas and also believed to be rich in oil.
Currently, CNOOC has been conducting deep-water exploration the region (IEA, 2012d).
However, the existing territorial disputes between the countries surrounding the SCS impede greater investment in exploration. It is anticipated that with the Chinese Navy acquiring greater capabilities to monitor and control the SCS, oil and natural gas exploration will increase both in
15 For an extensive analysis of China’s on-shore oil fields, visit http://www.oilchina.com/eng/Service-Center/oilfields.htm.
16 For an extensive review of China’s off-shore sites, visit http://www.oilchina.com/eng/Service-Center/oilfileds/bohai.htm.
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number and extent. Also, joint production with littoral countries may boost the volume of energy extracted from the area.
Figure 7: China's Oil Supply Balance
Source: KPMG, 2005
China’s growing energy consumption and declining production-consumption ratio has obliged the country to seek out energy resources (oil and natural gas) overseas. The Broader Middle East region looms large in this picture. Indeed, according to estimates, 64% of world’s proven oil reserves are located in the Middle East (Eldin, 2006). In 2007, the Greater Middle East (Middle East and North Africa) region accounted for over 70% of China’s total crude import, Saudi Arabia, Iran, Sudan and the GCC being major suppliers. In 2010, China imported 4.7 mb/d of crude oil which accounted for around 53.8% of the country’s total demand. By country, Saudi Arabia was the biggest import source of crude oil in 2011 with 20% of the total, followed by Angola (12%), Iran (11%), Oman (7%), Russia (7%), Sudan (5%) and Iraq (5%) (IEA, 2012). It is estimated that, by 2015, the share of ME oil will reach over 80% of China’s total import (IAGS, 2011). Consequently, as Figure 8 demonstrates, China’s oil supply balance is going to remain in the red in the following decades since neither domestic nor regional production would be able to satisfy China’s ever increasing demand for hydrocarbon resources (KPMG, 2005).
It is expected that Chinese oil consumption will continue to rise, despite temporary declines due to international economic shocks. The road and air transport sector will contribute
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the most to the growth in consumption. Urbanization and the expansion of infrastructure will also create more demand. The petrochemical industry will use more oil to meet the increasing demand for its products. The shift to service economy will increase oil demand in the
commercial sector even if the transition will not reduce significantly the amount of energy consumed by the agricultural sector. Also, the military, with its growing advanced air, land and naval fleets (destroyers, stealth fighters, diesel-powered aircraft carriers and submarines, and various other platforms, tanks and other armored vehicles), will consume more oil as the PLA’s qualitative edge improves (Leung, 2010: 942-943). Overall, China’s rate of consumption will increase considerably as the economic growth continues and the middle class achieves greater financial prosperity.
National Oil Companies (NOCs)
China is frequently criticized for not allowing market instruments to run the energy business; rather, attempting to single-handedly manage the entire sector. The structure of China’s oil companies is offered as an indicator of such state-led approach. China’s oil industry remains dominated by its state owned oil companies; namely, China National Petroleum Corporation (CNPC or PetroChina), China Petroleum and Chemical Corporation (Sinopec), and China National Offshore Oil Corporation (CNOOC). Although listed on international exchanges, these three national oil companies (NOCs) are under the control of the state holding companies.
The central government has recently embarked on restructuring to ensure that the NOCs would be more profit-driven. Yet, they continue to be accountable to the central government and conform to its national energy strategy (Ernst& Young, 2011: 2). There is no sign suggesting that China would drastically revise and fully marketize its energy sector.
In the late 1990s, China’s NOCs went through a comprehensive restructuring. The restructuring was due to three primary reasons: First, to have the functions of government and oil corporations separated and to end monopolies over upstream and downstream production by injecting multi-enterprise competition into the system; second, to introduce market
principles into the NOCs to streamline operations and increase competition; third, to create globally competitive energy enterprises that are on par with their international competitors. As a result of this comprehensive reform and reorganization, government control on the
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management of the NOCs was reduced and a certain level of autonomy was given to each enterprise. Consequently, the pre-1998 government-led NOCs system was brought to an end and the mixing of government and corporate functions was abolished. Under the new system, direct participation in the management of the NOCs through government instruments became impossible as each company gained management autonomy (Gou, 2007: 4).
Table 3: China’s Main National Oil Companies
Source: Energy Information Administration, 2012d
Chinese NOCs hold considerable influence on the country’s oil sector. Although the three large oil firms (CNPC, Sinopec and CNOOC) were established in the early and mid-80s, only after the oil dependency became a reality, Beijing reorganized the energy sector into two vertically-integrated companies, namely, CNPC and Sinopec. These two NOCs account for 60%
and 80% of China total oil and natural gas output, respectively. Currently, CNPC, already dominating the upstream sector, works to capture more downstream market share while Sinopec, as a player traditionally focused on downstream activities such as refining and distribution, attempts to capture more upstream market share. A third major actor is China National Offshore Oil Corporation (CNOOC) which focuses on offshore oil exploration and production, and competes with CNPC and Sinopec especially with its activities in the South China Sea (EIA, 2012d; KPMG, 2004).
Like any other profit-driven entity, the Chinese NOCs primary concern is admittedly long-term development and global competitiveness. The management finds going out as a
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viable strategy especially given that China is obliged to open its domestic market to foreign competition under the WTO and promotion largely hinges on corporate performance. Through equity oil, the NOCs can reap greater benefits than they would if they bought oil from the market. In some cases, producing oil overseas is even cheaper than producing and carrying domestic oil through pipelines. Also, going abroad help the NOCs to learn and operate in a foreign environment, and compete the established MOCs.
Also, “the coincident common interests between the government and the NOCs have brought about China’s vigorous oil diplomacy” run through state-owned companies. Among others, both sides agree that going abroad is more secure, leads to greater capability to
compete and provide stable sources of energy. Accordingly, the state support NOCs in different ways: Policy support such as such as “imposing import bans, changing refunding taxes on exported products, and adjusting oil prices,” enables NOCs to gain greater leverage. Diplomatic support comes in three ways: “First, securing energy resources abroad and diversifying import sources have de facto been incorporated into China’s foreign strategy” Second, “the national leaders’ personal involvement in facilitating energy deals with foreign countries” and third “the Chinese government’s innovation of market strategy. Its tremendous energy market has been a tool which China employs to achieve its political and economic objectives.” Another form of support is the financial support which may come “in the form of directly bankrolling [the NOCs]
foreign investments or acquisitions, extension of credit lines to the NOCs, or financing foreign infrastructure construction” (Chen, 2008: 93-94).
Nevertheless, contrary to the popular perception, Chinese NOCs are state-invested, rather than state-run. In another word, although owned by the central government, they are not run by the state but enjoy a certain degree of autonomy. These companies are not mere puppets of the central government (Downs, 2010). In fact, they hold considerable power over the government in their energy dealings. In this sense, like any other energy company, China’s NOCs “are driven by profit motives and competitive pressure rather than by energy security considerations or resources acquisition. Overseas energy investment decisions are generally initiated by the companies themselves rather than the government, though to some extent the government supports their investing overseas” (Hongtu, 2009). The energy firms are
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accountable to the State Assets Supervision and Administration Commission (SASAC), which is
“charged with supervis[ing] and manag[ing] the state-owned enterprises and enhance[ing] the management of the state-owned assets that fall under 123 large SOEs” (Jiang and Sinton, 2011:
27).
Nevertheless, the government not only guides each company to increase competition and profitability, but also regulates the leadership in these enterprises through administrative means. In their exploration and development activities Beijing is highly responsive to the demands of the NOCs—more than in any other sector. Since the late 90s, the government is also actively engaged in the overseas activities of the national oil companies. This active resource diplomacy has greatly helped the three NOCs to acquire overseas oil field rights.
Among those activities, joint equity is probably one of the most controversial in the West.
Therefore, industrialized countries urge China to join the international energy market rather than signing bilateral equity oil deals; however, the Chinese find that international energy markets are “fully under Western control” (Olimat, 2008: 313-314).
Beijing has identified certain policy objectives to be carried out through its national energy industry. Among those national priorities are maximizing domestic resource potential (exploration and development of indigenous fields), promoting overseas merger and acquisition activities to have greater access to equity oil and production off-take rights, strengthening long-term gas supply contracting, increasing strategic petroleum reserve (SPR) capacity, and
expanding the NOCs’ regional trading activities in order to better respond to domestic demand
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fluctuations. Furthermore, the government also runs programs to improve China’s energy efficiency standards and cut down on wasteful energy consumption of which the NOC’s are an integral part (Ernst & Young, 2011: 4-5). China’s NOCs have recently accelerated their
participation in global energy exploration, production and transportation activities, including the Middle Eastern market.
According to CNPC’s 2012 Annual Report, the company has joint oil investments in Iraq, Iran, Oman, Syria, and Qatar. Furthermore, ranked 4th among China Top 100 Multinational Companies, CNOOC has been active in Saudi Arabia, Iraq, Qatar, the United Arab Emirates, Oman and Iran. Among those, energy cooperation with Saudi Arabia, Iran and Sudan is
noteworthy because of their relevance to the study at hand. Having established a strategic oil partnership with Saudi Arabia in 1999, Sinopec signed a number of upstream and downstream energy agreements with the Kingdom. Since 2002, Saudi Arabia has remained China’s top supplier of oil. In 2001, Saudi Aramco inked a deal with Sinopec for the expansion of a refinery in Fujian province for a 25% stake. In January 2012, the two countries' state-run energy
companies inked another huge oil agreement. The project involves the construction of another refinery on the Yanbu site in the Red Sea which will be operational by 2014.
Chinese NOCs’ energy transactions with their Iranian counterparts are the most
controversial. Among the noteworthy deals since 2008 were a $2billion agreement that Sinopec inked to develop the Yadavaran field, the preliminary agreement to develop Phase 11 of South Pars field in June 2009 (CNPC owning 40% stake), and the signing of MOU in August 2009 for to develop South Azadegan field in which CNPC has 70% stake. Each at different stages, these projects have thus far achieved only incremental progress largely due to the unwelcoming international environment surrounding Iran’s nuclear energy program which impedes the country’s international deal-making capacity.
Strategic Petroleum Reserves (SPR) and Energy Efficiency
As part of its energy security strategy, China developed comprehensive strategic petroleum reserves (SPR) plan to guard the domestic industry and consumer against global price shocks and disruptions to the regular flow of petroleum products. The discussion to build
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a national SPR commenced in 1999. In 2001, China’s Tenth Five-Year Plan called for the establishment of a national strategic oil stockholding system to improve the nation’s energy security. In 2003, government announced the construction of four stockpiling facilities (National Oil Reserve (NOR) bases) in the first phase of its SPR plan. However, construction of the first phase did not begin until 2004. Completed and became fully functional in 2009, the Phase 1 oil reserves held 103 million barrels of oil, meaning two weeks’ worth of supply. Thanks to the global financial downturn, at the time of the purchase of oil to fill up the tanks, the cost of oil to the Chinese government was as low as $58 per barrel, much lower than the global average.
The construction of the second phase started in 2009 with a planned holding capacity of 169 million barrels. However, China upped the stockpile capacity by 45% to 245 million barrels, which delayed the completion year until 2015. The third and final phase of SPR is projected to be completed by 2020, increasing China’s overall reserve capacity to 500 million barrels an equivalent to 60 days of net crude oil import. Also, in addition to crude reserves, China is planning to include refined products as part of its SPR in order to protect consumers against short-term supply disruptions (Singh, 2012).
Compared to the United States and Europe, China began building its SPR quite late17 largely because of the country’s lack of bad memories of the 1973 oil crisis (as well the lack of expertise on part of the Chinese oil companies to undertake such a project) that essentially mobilized the US and Europe to build indigenous emergency supply capacity. Only after the high oil prices began a major concern for the central government from 2004 to 2007 (which led to huge losses for Chinese NOCs whereas the US and Japan survived unscathed thanks to their national emergency reserves), Beijing went along with its SPR projects. Accordingly, in the Twelfth Five Year Plan, China stressed “increase[ing] oil refining capability appropriately” as one of the priorities of energy construction.
According to China Energy Efficiency Report, China’s total energy consumption grew 2.3% between 1990 and 2002. Since 2002, annual consumption increased at a rate of over 10%.
17 For a comparison, the United States started building its petroleum reserve in 1975 after oil supplies were cut off during the 1973-74 Arab oil embargo to mitigate future temporary supply disruptions. Currently, the US SPR is the largest emergency supply in the world with the capacity to hold up to 727 million barrels. For more information, visit http://energy.gov/fe/services/petroleum-reserves/strategic-petroleum-reserve/spr-quick-facts-and-faqs.
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Energy consumption in the industrial sector accounted for most of the growth in energy use.
Similarly, “total energy intensity decreased at a very rapid rate of 4.6 percent/year between 1990 and 2009. That rapid trend, which is among the top 10 performances at world level, has to be related to the high energy intensity that prevailed in the 1990s. Since 2000, Chinese total energy intensity has decreased slowly (1.3 percent/year)” (ABB, 2011: 3). Also, in March 2013, Chinese government began to impose stringent fuel economy standards for vehicles.
The White Paper on China’s Energy Policies 2012 released by China’s Information Office of the State Council on October 24, 2012 summarizes the current status of energy development in China and puts forward the policies and objectives for the energy industry. On the issue of energy security, the report emphasizes three areas of significant improvement since the introduction of economic reform and opening-up policy: First, enhanced capability of energy supply (primarily coal, crude and refined oil, and natural gas); second “conspicuous
achievements” in energy saving (from 2006 to 2011, the energy consumption per RMB10.000 of GDP dropped by 20.7%); third, rapid development in non-fossil energy (specifically, hydro and nuclear power). Additional basic contents of China’s energy policy are: Giving priority to energy-saving, relying on domestic resources, facilitating diverse development, protecting the
environment, promoting scientific and technological innovation, deepening reform, expanding international cooperation, and improving people’s livelihood. Accordingly, the report projects that by 2015, non-fossil energy will account for 11.4% of China’s primary energy consumption, with energy consumption per unit of GDP decreasing by 16% from that of 2010. Additionally, CO2 emissions per unit of GDP will see a 17% decrease, compared with that of 2010.18
China’s Overland Energy Routes: Pipelines
China has actively sought to construct international oil and natural gas pipelines with neighboring countries in order to reinforce nation’s energy security via resource and route diversification19 (Figure 9). China’s first international pipelines went online in May 2006 and
18 See the report here: http://www.china-briefing.com/news/2012/10/31/china-issues-white-paper-on-energy-policy.html#more-18481.
19 According to Yergin (2006) diversification is “the fundamental starting principle of energy security for both oil and gas.” China is motivated to diversify its oil away from the Middle East for a number of country-specific reasons
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China began to receive crude oil from Russia and Kazakhstan through the pipeline originating in Kazakhstan. According to CNPC, “Kazakhstan-China Oil Pipeline Project starts from the Kenkiyak in Kazakhstan, going across Alashankou, and ends at Dushanzi Area of China, 2558km in length, which is the first cross-border import crude oil pipeline in China.” The daily capacity of the pipeline is 200.000 b/d, which is projected to be doubled by 2014 (IEA, 2012d).
The 6,000-mile China-Central Asia gas pipeline (also known as the Turkmenistan–China gas pipeline), which opened in 2009, connects one of the world’s largest gas fields, Galkynysh in Turkmenistan, to China’s Xinjiang. The framework agreement on the pipeline construction and long-term gas supply was signed between China and Turkmenistan in April 2006. Next year in April, Uzbekistan and China signed a separate agreement on the construction and exploitation of the pipeline's Uzbekistan section. In July 2007, Turkmenistan announced it would formally join the project and in August, the building of Turkmen section of the pipeline began.
Construction works of the Uzbek section started in June 2008 and the Kazakh section started in July 2008. The first of two parallel lines were completed early November 2009. The second line was completed by the end of 2010. The construction of the third line began in 2012 and it is estimated that gas supply will commence from 2014, and reach the designed throughput in December 2015 (Chow, 2010). According to CNPC, the main partner in the project, “natural gas from Turkmenistan would not only help meet China’s burgeoning energy demand, but also improve its energy consumption structure. It is estimated that with the pipeline in use, the percentage of natural gas in China’s total energy consumption will increase by nearly 2%” (CSC, 2008). In 2010, the pipeline transported 4.38 billion cubic meters (bcm) of natural gas from fields in Turkmenistan, Uzbekistan and Kazakhstan to China's gas transportation network.
The third international pipeline that carries Russian crude oil to China is Eastern Siberia-Pacific Ocean Pipeline (ESPO), the China branch of which brought 15 million tonnes of oil to China in 2012. At present, China is the second biggest customer of ESPO and it is estimated that of the 36 million tonnes of oil that will be transported via this pipeline in 2013, China will
The third international pipeline that carries Russian crude oil to China is Eastern Siberia-Pacific Ocean Pipeline (ESPO), the China branch of which brought 15 million tonnes of oil to China in 2012. At present, China is the second biggest customer of ESPO and it is estimated that of the 36 million tonnes of oil that will be transported via this pipeline in 2013, China will