Energy Insecurities and Strategies of China and India!
Asia’s overall regional energy dilemma reflects a set of consistent trends, but conditions vary substantially in each country depending on a variety of resource, energy policy, and historical factors. These individual circumstances and policy frameworks largely shape the evolution of national energy security strategies. China and India represent a large share of Asia’s current and future energy needs, future import needs, and both will also be major actors in the region’s future geopolitical evolution.
China is the second largest energy consumer in the world after the US, and has traditionally been largely self-sufficient in energy supplies. Large domestic supplies of coal have dominated domestic energy use and coal continues to account for two-thirds of China’s overall consumption.
However, strong economic growth since the early 1980’s have fuelled oil demand growth and the government’s decision to expand the use of natural gas promises to boost future gas consumption. These developments will boost China’s future energy import dependence and fuel growing energy security concerns.
China has been Asia’s largest oil producer since the mid- 1960s, in recent years producing well over 3 MMBD. However, the acceleration in oil demand during the economic boom of the 1980s and early 1990s rapidly outran production during the 1990s. Oil demand doubled between 1985 and 1995 from 1.7 million barrels per day (MMBD) to 3.4 MMBD and doubled again by 2005 to reach an expected 6.8 MMBD for 2005.
By 2003 China surpassed Japan to become the world’s second largest oil consumer behind the US and the third largest importer. China now imports roughly 40% of its total oil needs and this import share is rising rapidly.
China’s leadership has responded with both domestic reforms and aggressive global energy security policies. Nevertheless, given limited resource prospects and high costs, domestic oil production is unlikely to rise significantly while oil demand and oil imports are very likely to continue growing relentlessly.
The IEA forecasts that China’s oil imports will rise five-fold by 2030, from slightly less than 2 MMBD in 2002 to 10 MMBD, when imports will account for 80% of China’s total oil needs. China’s leadership now faces the long-term realisation that oil import dependence is unavoidable and will grow.
Moreover, China will become heavily dependent on the Persian Gulf for future supplies and its oil will increasingly have to transit a series of vulnerable maritime choke points. It is likely that by 2015, 70% of China’s oil imports will come from the Middle East. Other significant shares of China’s oil imports will come from Russia by pipeline and rail, from Central Asia by pipeline, and from Africa.
Government policies aimed at substantially increasing the use of natural gas, while indispensible in environmental terms, promise to accentuate China’s import dependence and long- term energy security concerns. Beijing has embarked on an aggressive policy to increase gas use to help replace coal to generate electricity, diversify overall energy use, and provide cleaner-burning fuel for environmental needs.
Current plans call for gas to make up 8% of total energy demand by 2010. But, although China does have significant domestic gas reserves, beyond 2010 demand is likely to begin to outrun domestic production and a growing share of gas needs will need to be met through imports. The DOE forecasts that imports will account for 40% of China’s gas needs by 2025.
While China’s gas use will grow, rising electricity demand will also force continued growth in coal consumption along with efforts to expand nuclear and hydroelectricity production. China is the largest producer and consumer of coal in the world and coal still makes up roughly two-thirds of total energy use.
Driven by relentlessly rising electricity demand, China’s coal consumption is expected to double over the 2001- 2025 period. As a consequence, China is also expected to account for one-quarter of the world’s C02 emissions over that period. China may become a net importer of coal as early as 2015. Electricity needs also are driving China’s future nuclear power development.
China has the largest planned increase in nuclear power globally over the next two decades, with plans to add 40 large new nuclear power plants by 2020. Electricity demand will also drive strong hydroelectric development although ultimately this can only meet a small fraction of China’s electricity needs.
In sum, despite wide-ranging and strenuous efforts China faces an inevitable trend toward greater energy import dependence to fuel its dynamic economic growth. This trend will be most acute for oil but will become a growing concern over the longer term for natural gas supplies. Hence, energy security has become a central concern for Beijing and the thrust globally to secure future energy supplies has taken on great urgency.
In response, China has launched an aggressive strategy to secure its future energy supplies globally and regionally. With economic growth becoming the central focus of China’s national agenda, the country’s leadership increasingly fears that exposure to energy shortages and volatile world energy prices could threaten social stability and undermine the main claim to authority and legitimacy of the Communist Party.
China’s strategy has become increasingly coherent and wide-ranging over the past decade and is growing in reach and sophistication. For China’s leaders, energy security clearly is too important to be left to the markets and so far its approach has been decidedly neo-mercantilist and competitive.
Globally the programme has been dubbed the “Going Out” strategy and it is based on three major concerns. First has been the fear that sudden global oil supply disruptions could trigger serious energy shortages and sharp price spikes that would be difficult to insulate the economy from as was possible in the past when China was self-sufficient in oil.
Second, China faces a growing vulnerability for the majority of its oil needs on tanker flows from the chronically unstable Persian Gulf and other potentially unstable exporting regions such as Central Asia and Africa.
Third, China has felt increasingly threatened by US strategic dominance in the Persian Gulf and other key oil exporting regions and US control of critical transportation routes giving the US the power to deny vital oil supplies to China in the event of a confrontation, particularly over Taiwan. These concerns have been further aggravated by deeper extension of US power into the Persian Gulf and Central Asia in the wake of 9/11, the GWOT, and the Afghanistan and Iraq wars.
China’s Multi-Pronged Strategy for Energy Security:
China has pursued its energy security on a wide range of fronts. First, it has sought to strengthen its supply relationships in key areas, such as the Persian Gulf, while diversifying the geographic distribution of its crude oil suppliers and transportation routes. For example, Chinese state oil companies have broadened their crude sources by increasing imports from West Africa and even Latin America to offset a heavy dependence on the Persian Gulf and Southeast Asia.
In the Persian Gulf, the Chinese have rapidly expanded their role in various phases of Iran’s oil industry while boosting long-term crude supply contracts with Saudi Arabia, Oman and Yemen. In the longer run, China is seeking to increase pipeline supplies from Russia’s East Siberia and Western Kazakhstan through long-distance pipeline projects, which would have the added advantage of reducing vulnerability to disruptions in tanker flows from the Persian Gulf and Africa.
Second, state oil companies CNPC, Sinopec, and CNOOC have been aggressively buying equity stakes in many existing or prospective oil fields around the globe. In the mid-1990s China scrambled to buy stakes in a mixed bag of fields and countries, including Kazakhstan, Sudan, Venezuela, Iraq, and Peru. Inexperience led to overpayments in some cases but buying has become more selective and competitive with later experience.
China has now established fairly strong positions in its largest operation, Sudan, including production, pipelines, and refineries, as well as a growing position in western Kazakhstan. They recently are focusing on broadening their equity stakes into North Africa, Southeast Asia, especially Indonesia, Latin America, and most recently in North America, where they have acquired stakes in Canada’s western oilsand developments, and in the controversial bid by CNOOC to acquire Unocal.
Small stakes have been acquired in the Caspian Sea area in Azerbaijan and Turkmenistan. Another element of this equity strategy is to target countries subject to unilateral US sanctions which improves the competitive landscape and offers China better opportunities, but also works to undermine US sanctions policies.
Current estimates are that the three companies have managed to establish control over about 300 MBD of crude production, which could reach up to 600 MBD by 2008. China has also pursued a similar equity strategy regarding natural gas imports by demanding and getting upstream equity stakes in LNG projects destined to bring LNG to China beginning in 2007 from Australia and Indonesia.
The third leg of the strategy involves extensive cross- investment and commercial ties between China and key exporting countries in order to cement stronger long-term ties. China’s state oil companies and related construction and oil services companies have aggressively bid for oilfield development contracts, pipeline contracts, and refinery projects in Iran, Sudan, Kazakhstan, Kuwait and a growing list of countries.
Conversely, the Chinese government and oil companies have invited the state oil companies in key exporting countries to invest in downstream oil and petrochemical projects in China. For example, China recently finalised plans for a large joint refining investment in Fujian province in partnership with Saudi ARAMCO and ExxonMobil.
The fourth leg of the strategy involves Beijing’s active oil and gas diplomacy which serves to strengthen the oil supply contracts, equity stakes, and cross-investments with deeper and broader diplomatic and trade ties. China now has signed some form of “Strategic Energy Partnership” with nine countries, including Russia, Sudan, Iran, Venezuela, Brazil, Angola, and Kazakhstan.
Beijing’s leadership has follow-up with a long list of high-level diplomatic visits to cement stronger diplomatic, energy, and trade ties. China has also used state diplomacy to secure future LNG supplies in contracts with Australia, Indonesia, and Iran. China’s leadership sees the development of broader diplomatic and trade ties and alliances as a key element in securing its access to future oil and gas supplies. This also includes military sales and cooperation, sales of nuclear equipment, and other potentially problematic trade ties.
A fifth strand of the strategy has been China’s continuing active pursuit of its territorial claims in the maritime region surrounding China, both to assert Chinese sovereignty more generally but also to assert China’s control over potential oil and gas resources in these areas.
China has repeatedly asserted its maritime territorial interests in disputes over control of exploration and licensing blocks with Vietnam, Indonesia, and Japan over the past decade. Increasing military and fishing activity in the South China Sea in staking China’s claims to the Spratley and Paracel Islands goes hand in hand with these energy interests.
China also continues to assert its sovereignty over the Senkaku/Diaoyu Islands in the East China Sea against Japanese claims and is embroiled in a bitter dispute with Japan over an East China Sea gas field. China has no “Blue Water” naval capability to secure these areas in the face of US naval supremacy in the region but it has begun to realign its naval strategy to these needs by emphasizing submarine development and port access agreements in the South China Sea and along the coast of the India Ocean.
Finally, China has recently decided to follow the example of the industrialised countries and neighbours, Japan and South Korea in beginning construction in 2004 of a Strategic Petroleum Reserve to establish state-controlled stocks of crude oil that would be available in the event of a supply disruption. Supplies will begin to now flow to the first of these locations in August 2005.
Beyond this, China’s willingness to promote regional solutions to Asia’s energy security concerns has been very limited. It has been involved in discussions with Russia, led largely by South Korea on proposals to build a large regional natural gas pipeline from East Siberia, southeast through China and across the Yellow Sea to South Korea to link Russian gas supplies to both markets. It also has been involved as a member of APEC’s in recent discussions and proposals to improve Asia’s energy security.
In sum, China’s energy security strategy is wide-ranging and increasingly sophisticated. It is deeply state-centric and mercantilist, built on coordination between senior government policy-makers and China’s state oil companies and it is increasingly linked to broader diplomatic relations and alliances.
Through its search for energy security China also is on the way to becoming a major geopolitical player in the Persian Gulf, Central Asia, and Russia, with a growing capability to complement or complicate US interests in these regions.
India is now the sixth largest energy consumer in the world. Much like China, coal dominates the energy picture in India accounting for 51% of total energy use with most of that going into the production of electricity where demand has been growing at extremely high rates.
India has large indigenous supplies of coal, most of it is relatively low in heat value and high in sulphur and ash, and given limited domestic availability of oil and natural gas, coal is likely to remain the dominant fuel in the economy for the foreseeable future.
The DOE expects Indian coal consumption to rise by 70% over the next 25 years to meet booming electricity demand which is expected to rise by 150%. India alone is likely to account for over 10% of the entire world’s increase in coal consumption.
As in the rest of Asia, oil is looming as the key import concern. Oil demand in India grew by over 6% annually during the past decade, more than three times the world average, while at the same time, oil production rose barely at all. Consequently, imports jumped from 500 thousand barrels per day to 1.3 million barrels per day by 2004, or from 42% of consumption to 62% of total consumption.
Roughly one-half of India’s current oil imports come from the Middle East. Over time India’s import dependence will grow. Both the DOE and IEA expect Indian oil demand to be among the fastest growing in the world, along with China, at nearly 4% annually to 2025, rising from 2.1 to 5.3 MMBD.
Combined with essentially flat or declining oil production, this suggests that imports will account for 85% of total oil demand by 2025, most of which will have to come from the Middle East, with the balance from Central Asia and Africa.
India has been self-sufficient in natural gas historically, but given limited domestic gas resources and rising demand this will change rapidly in the future. Gas demand is expected to continue increasing to make India a major importer in the form of LNG and possibly pipeline supplies.
The DOE expects Indian gas consumption to triple from 0.8 trillion cubic feet (TCF) in 2001 to 2.5 TCF by 2025 driven by the growing need for electricity and the need to substitute for dirty coal. At the same time domestic gas production is likely to rise more slowly, meaning that 40% of India’s gas needs are likely to be imported by 2025.
India is already moving to develop the infrastructure to boost imports. India’s first LNG import terminal Petronet, a joint venture between India’s state oil and gas companies ONGC, GAIL, and IOC, along with Gaz de France, began operation in late 2003 and is importing gas from Qatar.
Another Shell sponsored terminal is planned for 2005 in Gujarat to bring LNG from Oman. In all, the government has approved plans for 12 possible import terminals in the future. Recently, there has been new progress on natural gas pipeline proposals to bring gas from Iran via Pakistan, and from Burma via Bangladesh.
Each of these proposals has serious geopolitical problems and the outlook for pipeline supplies will depend on resolving key regional geopolitical rivalries and constraints. The large majority of India’s future gas imports will necessarily come as LNG from the Persian Gulf, with some increment possible from Burma and Iran.
Like the other Asian energy importers, India is also looking to nuclear power development as an important source of electricity generation. Nuclear now accounts for less than 5% of electricity needs in India but 5-8 new plants are planned which would triple nuclear generation from 3 to 9 gigawatts (GW ). Even so, nuclear will only be able to meet a small fraction of India’s energy and electricity needs.
India’s rapidly growing dependence on imported oil supplies has recently catalysed a more aggressive strategy to secure supplies overseas and India seems to be emulating China in its overseas energy security strategy. ONGC, India’s major state-owned oil exploration and Production Company, is beginning to stake out new overseas oilfield investment plans through its international subsidiary ONGC Videsh Ltd.
India’s largest oil stakes to date are its 25% share in the Greater Nile Oil Project in Sudan, ironically in partnership with China’s CNPC, which it bought into for $750 million and its 20% share of the ExxonMobil led Sakhalin 1 project in Russia, which it bought for $1.7 billion.
ONGC is also beginning to source large supplies of LNG from the Persian Gulf through deals with Qatar and Oman. ONGC also recently signed a preliminary deal with Iran to buy LNG later in the decade for which ONGC would get the option to develop a large Iranian oil field.
Videsh has been bidding for Cairn Energy assets in Bangladesh, been awarded exploration blocks in Syria, and has been negotiating with Myanmar, Iran, Iraq, Libya, Kazakhstan, and US for exploration blocks. With more than 50% of its total oil supplies now sourced from the Middle East, India has announced plans to build a strategic oil stockpile but has not moved very far in doing so yet.