Chapter 4 Energy and Economy Involvement
4.1.1 Oil and Natural Gas
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Chapter 4 Energy and Economy Involvement
After discussing the military and security aspect regarding China and the US involvement in the Middle East, in this chapter I will examine the energy interests of these two countries in the region, as well as their economic relations, including volumes of trade and investments in the energy and other sectors. As in the previous chapter, I will also relate to how involvement of China and the US in economy and energy is perceived among the Middle Eastern countries.
4.1 China
4.1.1 Oil and Natural Gas
In 2014, a major change in global energy has occurred: as part of its continuing fast pace growth, China overtook the US as the world’s largest oil importing country.
China’s seaborne crude imports increased by 6.8 percent from the previous year, reaching 7.7 million barrels per day (mb/d).1 While China’s crude oil imports are still growing annually in a pace of five percent a year, the US’s crude oil imports are decreasing by almost ten percent per year. As a result, while the US is becoming less dependent on external factors for its oil consumption, China’s independence on energy resources abroad is only expanding.2
The Middle East contains 60 percent of the world’s proven oil reserves and thus plays a critical role in the international energy market.3 Hence, the Middle East also plays an important role in China’s energy policy. From 1990 to 2000, crude oil from the Middle East accounted for about 45 to 50 percent of China’s crude oil imports. In 2011, China imported 130 million tons of oil from the Middle East, and the volume continued to increase in the past several years, climbing to amount of 2.8 mb/d in 2013.
In average, China’s oil imports from the Middle East grew in an impressive pace of over 12 percent each year in the last decade.4
12014. “Review of Maritime Transport 2014”. UN Report: Geneva: United Nations Conference on Trade and Development, p. 13. Accessed June 14, 2015,
http://unctad.org/en/PublicationsLibrary/rmt2014_en.pdf
2 Feng, Embracing Interdependence: The Dynamics of China and the Middle East, p. 1.
3 Qian, “’The One Belt, One Road’ Strategy and China’s Energy Policy in the Middle East”.
4 Ibid.
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Out of China’s total foreign crude oil imports, Middle Eastern countries account for more than half5, and five out of China’s top ten oil suppliers are located in the Persian Gulf: Saudi Arabia, China’s largest source of oil imports since 2002 which accounted for almost twenty percent China’s total crude oil imports in 2014,6 followed by Iran and Iraq that accounted for about nine percent each, and smaller amounts by Kuwait and the UAE.7
Figure 6: China’s Oil Imports by Country, 2013.8
Source: Statista
China perceives price fluctuation of oil as an obstacle to securing energy resources.
Thus, China leads a policy of purchasing equity ownership in oil fields in the Middle East.The core of this policy is Chinese direct investments in oil fields, in the form of whole ownership or equity investments in return for guaranteed supplies below market prices.9 While this equity policy is perceived by China as a necessity, the West
5 Kāzemi, Abbās and Chen, "China and the Middle East: More than Oil".
6 Naser al-Tamimi, “Why Arabs Should Embrace China’s Silk Road”, Al Arabiya News, December 9, 2014, accessed June 14, 2015,
http://english.alarabiya.net/en/views/business/economy/2014/12/09/Why-Arabs-should-embrace-China-s-silk-road.html
7 Feng, Embracing Interdependence: The Dynamics of China and the Middle East, p. 1.
8 “Breakdown of China's Crude Oil Imports in 2013, by Source Country”, Statista, 2013, accessed July 1, 2015, http://www.statista.com/statistics/221765/chenese-oil-imports-by-country/
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perceives this practice as a scheme by China to place Western oil consumers in a less favourable position.10
This policy is widely used in Iraq. In 2013, the biggest addition to China’s imports form the Middle East was due to its direct investment in Iraqi oil wells. In 2007, Iraq passed the Private Investment in Crude Oil Refining Law, making it the first and only country in the region to completely open up to foreign investments in the energy extraction sector.11 China took advantage of this unprecedented opportunity and dived in Iraq’s oil market. As a result, China surpassed even the US as the single largest foreign investor in Iraq. Naturally most investments are funneled to the oil industry.
Consequently, China’s import of Iraqi crude oil jumped by almost 50 percent in 2013, reaching an annual amount of 165 million barrels.12
China’s investments in Iraqi oil field are remarkable considering stability concerns caused by ISIL expansion. China’s Sinopec13 operates in Iraqi Kurdistan, while China National Petroleum Corp (CNPC)14 has interests in the Rumaila field near Basra in Southern Iraq and in Iraqi Maysan province near the Iranian border. CNPC is actually already affected by insurgency in the Middle East as it lost access to oil fields it operated in Syria15 estimated at about $2 billion.16 Moreover, other Chinese state-owned companies suffered heavy losses of about $20 billion in Libya in 2011.17
Besides Iraq, China is currently the largest importer of Iranian oil, buying about half of the country’s one million barrel per day output.18 China remained Iran’s main destination for oil exports even under the UNSC sanctions on the Iranian energy industry which China had to abide to, even though it was rather reluctant to do so. While China did cut its import of crude oil from Iran, as the sanctions demanded, it used a
10 Olimat, China and the Middle East from Silk Road to Arab Spring, p.p. 46-47.
11 Feng, Embracing Interdependence: The Dynamics of China and the Middle East, p. 7.
12 Ibid, p. 2.
13 Sinopec, China Petroleum & Chemical Corporation (中国石油化工股份有限公司) is a Chinese state-owned oil and gas company.
14 China National Petroleum Corporation (CNPC 中國石油天然氣集團公司) is a Chinese state-owned oil and gas corporation and the largest integrated energy company in China.
15 Bozorgmehr and Hornby, “China Offers to Help Iraq Defeat Sunni Extremists”.
16 Feng, Embracing Interdependence: The Dynamics of China and the Middle East, p. 1.
17 Yuwen Wu, “China's Oil Fears over South Sudan Fighting”, BBC, January 8, 2014, accessed June 14, 2015, http://www.bbc.com/news/world-africa-25654155
18 Nicolas Torres, “Iran Eyes Oil Sales, Investment Boosts during China Talks”, Petro Global News, April 7, 2015, accessed June 14, 2015, http://petroglobalnews.com/2015/04/iran-eyes-oil-sales-investment-boosts-during-china-talks/
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loophole in the sanctions resolution that allowed it to keep importing fuel oil, instead of crude oil, from Iran. Therefore, China significantly increased its fuel oil imports from the country, up a 29 percent from the beginning of 2014 to the end of the year, alleviating its economic isolation.19 When sanctions on Iran were partially lifted as a result of successful negotiations with the P5+1, China doubled its quote of investment in Iranian infrastructure for 2015 from $25 billion to $52 billion, mainly destined for the oil and gas industries.20
As mentioned above, since 2002, Saudi Arabia is China’s largest oil supplier, and it seems like the pace of oil imports keeps on growing quickly. China’s imports from the Kingdom jumped by 37 percent from 2013 to 2014.21 Yet, Chinese investment in the Saudi energy sector is relatively small as Saudi Arabia does not allow foreign companies to invest in its upstream oil sector (exploration and production).22
Another country I would like to mention in this section, even though it was far from being one of the major oil exporters to China, is Yemen. In the past decade China did not import a large amount of oil from Yemen, until the turmoil of 2015. China’s oil imports from Yemen in January to February 2015 amounted to 4.5 million barrels, a jump of no less than 315 percent from the same period in 2014. This datum does not only reflect a sudden boom of relations between Yemen and China. These 4.5 million barrels of oil are three quarters of the country’s total crude oil exports. The meaning is that China was able to cut a deal to export most of the oil from Yemen while at the same time as the Arab coalition led by Saudi Arabia initiated its military campaign against the Houthi rebels.23
China was not afraid to step on any Saudi or American toes in the conflict in Yemen revolving around the Houthi uprising. In January 2015, only four days before Yemen’s president was forced to step down, government representatives from China met with
19 Kan, "China and Proliferation of Weapons of Mass Destruction and Missiles: Policy Issues", p. 9.
20 Feng, Embracing Interdependence: The Dynamics of China and the Middle East, p. 6.
21 “Saudi Oil Supply Outpaces Rivals in Grab for Record China Demand”, Bloomberg Business, May 22, 2015, accessed June 14, 2015, http://www.bloomberg.com/news/articles/2015-05-22/saudi-oil-supply-outpaces-rivals-in-grab-for-record-china-demand
22 Al-Tamimi, China - Saudi Arabia Relations, p. 157.
23 David Sheppard, “Amid Yemen Chaos, China Keeps Oil Shipments Flowing”, Reuters, May 30, 2015, accessed June 14, 2015, http://www.reuters.com/article/2015/03/30/us-yemen-security-oilchina-idUSKBN0MQ0XW20150330
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Houthi leaders to discuss economic cooperation. Probably, this unofficial back channel between China and the Houthi leaders is what made it possible for China to purchase most of the oil produced by Yemen in 2015 and ship it out of the bombarded country, while most countries had to halt their imports from the country.24
Natural gas might not be as important for China’s energy hungry economy as oil, but as the Chinese government is attempting to change its power mix policy and diversify its energy resources, natural gas gains more importance in the Chinese energy market. China’s consumption of natural gas grew at a rapid pace of 16 percent between 2003 and 2012, as it became the world’s fourth largest gas consumer, just behind the US. In 2012. Nevertheless, natural gas is still constituting about five percent of China’s energy mix, compared with almost 20 percent of oil.25
24 Erin Banco and Alessandria Masi, “Houthis, Yemen's New Masters, Look For New Economic Partners; Russia And China Respond”, International Business Times, February 7, 2015, accessed, June 14, 2015, http://www.ibtimes.com/houthis-yemens-new-masters-look-new-economic-partners-russia-china-respond-1808530
25 Tingting Tang. 2014. “China’s Natural Gas Imports and Prospects”. Duke University. April.
Accessed June 14, 2015.
http://dukespace.lib.duke.edu/dspace/bitstream/handle/10161/8459/MP_Final_Tang.pdf?sequence=1 p.p. 5-6
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Source: U.S. Energy Information Administration
Out of the nine suppliers of Liquefied Natural Gas (LNG)27 to China in 2014, two of them are Arab countries from the Persian Gulf: Qatar and Yemen, together supplying about half of China’s LNG demand. Qatar is responsible for the overwhelming amount of 48 percent, and Yemen for the remaining five percent.28
In 2009, China National Offshore Oil Company (CNOOC)29 signed a 25-year deal with Qatar for the annual supply of two million tons of LNG starting from 2009. At about the same time, PetroChina30 signed a separate 25-year deal with Qatar to purchase three million tons of LNG per year.31 As of 2014, Qatar supplies China over one third of its total LNG imports, and is China’s largest LNG supplier.32 China is Qatar’s fifth
26 “China”, U.S. Energy Information Administration, May 14, 2015, accessed July 1, 2015, http://www.eia.gov/beta/international/analysis.cfm?iso=CHN
27 Liquefied natural gas (LNG) is natural gas (predominantly methane, CH4) that has been converted to liquid form for ease of storage or transport. It takes up about 1/600th the volume of natural gas in the gaseous state. “What is LNG?”, Shell Global. Accessed August 21, 2015,
http://www.shell.com/global/future-energy/natural-gas/liquefied-natural-gas/what-is-lng.html
28 Tang, “China’s Natural Gas Imports and Prospects”, p. 8.
29 China National Offshore Oil Corporation, or CNOOC Group (中国海洋石油总公司) is a major national oil company in China. It is the third-largest national oil company in the People's Republic of China, after CNPC and China Petrochemical Corporation.
30 PetroChina Company Limited (中國石油天然氣股份有限公司) is a Chinese state owned oil and Gas Company and China's biggest oil producer.
31 Khizar Niazi, “Kuwait Looks towards the East: Relations with China”, Middle East Institute, September 1, 2009, accessed June 14, 2015, http://www.mei.edu/content/kuwait-looks-towards-east-relations-china
32 Al-Tamimi, “Why Arabs Should Embrace China’s Silk Road”.
Natural Gas
5%
Petroleum 21%
Coal 63%
Hydroelectric Power 9%
Nuclear Electric Power 1% Reneable Energy
1%
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largest natural gas customer, accounting for 6.4 percent of its natural gas and LNG exports.33
Another country from the Gulf that might begin to supply natural gas to China is Iran. Iran and China have signed in the past many agreements for developing natural gas fields, such as the deal between Iran’s Pars Oil and Gas Company34 and CNOOC to develop the North Pars gas field. However, it seems like until now exports of natural gas from Iran to China did not take place, mostly because of UNSC sanctions. Yet, these sanctions also had a positive outcome for China, as it won contracts for natural gas fields development in Iran thanks to the fact that Western companies had to back out due to the limitations imposed by the sanctions.35
After the sanctions were eased, China plans make up for the lost time and re-launch its planned project for a gas pipeline from Iran to China via Pakistan, as was announced by China’s president Xi during his visit to Pakistan in April 2015. The Iranian section of the pipe, 900 kilometers long has already been built, and the remaining Pakistani section of 80 kilometers is scheduled to be built soon.36