Tuesday, June 10, 2014

Myths breed around China's energy Queest

The conclusion of a Sino-Russian US$400 billion, 30-year gas contract last month, Beijing's deployment of an oil rig near the disputed Paracel Islands, and tense encounters between China, the Philippines, and Vietnam in the South China Sea - and between China and Japan in the East China Sea and Diaoyu Islands - have focused renewed attention on China's hunt for energy security.

China's pursuit of energy, especially foreign energy, is easy to fathom. On the demand side, China's rapid development, status as a manufacturing powerhouse, reliance on energy - intensive infrastructure for growth, burgeoning car culture, and evolving consumer lifestyles have fueled its energy thirst. On the supply side, China's readily accessible energy supplies are rapidly diminishing. All of this, coupled with a desire for cleaner fuel, has put China on a determined quest for energy supplies.

China's quest has fueled billions of dollars of loan-for-oil and loan-for-gas deals such as its 2004 accord with Angola, its 2006 deal with Russia, and its 2004 agreement with Venezuela. It also has lubricated multi-billion dollar oil and gas purchases such as China's 2009 immense natural gas deal with Australia to purchase natural gas.

As many know, a major facet of China's pursuit of secure energy supplies entails Chinese energy companies, both state-owned enterprises (SOE) and private ones, making multiple-billion dollar energy-related foreign direct investments (FDI). For instance, in 2010, Chinese SOEs and private firms invested more than $29 billion to make energy acquisitions. Beyond this, Chinese firms have been aggressive in building or facilitating oil and gas pipelines in countries such as Myanmar, Kazakhstan, and Russia.

Those directing our gaze to China's quest for energy security frequently are critical and, more importantly, often make unwarranted charges about the lengths to which China has been going to realize its energy requirements.

First, it is hinted that China has used military force to satiate its energy hunger. Second, it is suggested that China has made extreme diplomatic concessions to build or sustain partnerships with energy rich countries. Third, it is implied that China's energy extremism has driven it to build new energy relationships with a slew of countries. Fourth, it is claimed that China's energy dealings are largely with countries like Ecuador and Venezuela that embrace socialism and are distant from Washington. Fifth, it is asserted that Chinese energy FDI in Africa is encountering a lot of problems, putatively as a result of Chinese shortcomings.

The "facts", though, are not so clear as they are made to be. First, one would be hard pressed to point to genuine instances of China using force to secure energy or facilitate Chinese energy FDI. Indeed, China's most noteworthy uses of force in the South China Sea - Paracels (1974) and Mischief Reef (1995) - occurred before its foreign energy needs became significant. Even if we accept that China used military force, it is not valid to conclude that China is going to military extremes for energy.

Its assertiveness vis-a-vis its territorial and maritime issues with Japan, the Philippines, and Vietnam are not just about energy, but also have to do with changing relative power positions, territorial integrity and sovereignty, history, national identity, and domestic politics. Second, while Beijing clearly has embraced various diplomatic measures - for example, high-level summitry, financial aid, and supportive political stances - to support energy ties and FDI, the basis for arguing it has gone to extreme lengths diplomatically (sacrificing fundamental principles) is questionable.

Third, Chinese firms have been investing abroad since the mid-1990s and indeed many massive energy deals took place between five and 10 years ago, with some occurring more than 20 years ago. The 2008 financial crisis also created an opening for the recent surge in FDI by Chinese energy firms, which exploited a buyers' market rather than acted out of desperation.

Fourth, while it is true that Beijing has good relations with countries like Venezuela that embrace socialism and are unfriendly to Washington, Venezuela has the world's second-largest oil reserves and is, thus, a logical FDI destination.

On a related note, China has noteworthy energy investments in Australia, Canada, and Colombia, which are neither socialist nor hostile to Washington. Finally, a few problems in Chad and Gabon do not symbolize the contribution that China's African energy activities make or do not make to China's energy security.

It is important to have a balanced understanding of China's quest for energy security and its overseas energy FDI because if countries mistakenly view China as going to great lengths diplomatically, economically, and militarily to secure energy, then they may mistakenly adopt extreme countermeasures.

In many cases (Iran, Iraq, and Venezuela), however, China actually has proven quite sensitive to others' concerns. Moreover, if the image is of a China hell-bent on investing in energy abroad regardless of circumstances then one may neglect the fact that Chinese energy firms consider a variety of normal business rationales in their overseas investment and operating decisions, which, in turn, can preclude opportunities for cooperation and pragmatic economic bargaining. Of note in this regard, China has joined hands with India, Indonesia and the Philippines in oil exploration.

China is a contributor to some of the aforementioned anxieties. After all, its opaqueness drives observers to make worst-case assumptions. It also has not taken sufficient steps to increase awareness of the ways that its energy activities benefit host countries and global energy markets.

On top of this, it sometimes silent or, worse, cavalier or about environmental and human rights issues surrounding its activities. To address the preceding problems, China must become more transparent and provide more data about what it is doing.

Regarding benefits, China needs to stress more how it is helping host countries establish integrated supply chains, transform resource endowments into growth, and bolstering energy infrastructure and supplies. In addition, Chinese firms need to become better corporate social responsibility practitioners to win greater public acceptance. China should intensify public diplomacy, too.

China's quest for energy security and is globe-spanning energy activities merit our attention, but superficial analyses serve no purpose other than to vent gas.

Jean-Marc F Blanchard, PhD, is Assistant Dean, School of International and Public Affairs, Shanghai Jiaotong University, and Executive Director of the Center for the Study of Multinational Corporations. Maya Horin is a graduate student in the Chinese Politics and Economics Program at SJTU SIPA.

1 comment:

  1. Russia–China strategic relations are still less than meets the eye
    Vladimir Putin and Xi Jinping don’t see eye-to-eye with the US and its allies on many issues. The two leaders have recognised there are pragmatic benefits to working together on these issues and other world leaders might well view this strategic partnership with alarm. But history and the asymmetry of the relationship — China has the upper hand — suggest that this may be a shaky foundation for a grand design.
    Recently, China Natural Petroleum Corporation and Gazprom signed a deal that will see a new pipeline built linking Siberia’s Chayandinskoye oil and gas field to China. 38 billion cubic metres of gas will be exported annually from 2018–48. Gazprom CEO Alexei Miller boasted that the deal is worth about US$400 billion — giving a unit price somewhere around US$350 per 1000 cubic metres. Price has been the main sticking point in bilateral energy deals. This is at the low end of European pricing (up to US$450), more expensive than China’s imports from Turkmenistan and certainly less than Russia — in a weak negotiating position following the Ukraine crisis — would have liked.
    The deal still makes sense for both sides. China currently relies heavily on imports of fossil fuels and suffers permanent neuralgia at its vulnerability, with 90 per cent of oil imports coming in on ships that pass through the Malacca Strait. Heavy reliance on coal (around 80 per cent of electricity generation) exacerbates severe air pollution and the Chinese leadership has resolved to tackle this socially disruptive problem.
    But there is more to this ‘strategic partnership’ than the economics of energy. In a highly active diplomatic program, the relationship with Russia seems to be at the top of Xi Jinping’s agenda. Symbolically, Moscow was his first trip abroad as president. He has since been back for the G20 Summit in St Petersburg and even the Winter Olympics in Sochi, in the first attendance by a Chinese president at a major overseas sports event. Other bilateral visits have filled the gaps: Putin has probably spent more time with President Xi than any other head of state. The website of China’s foreign ministry quotes Xi describing the relationship as one of ‘close contact, high-level mutual trust, and candid communication, promoting the high-level development of the bilateral relations and the continuous expansion of cooperation in various fields’.
    Where will this all lead? Both sides are reaping strategic and economic benefits from this ‘partnership’ that should keep it going for some time. But this is a deeply practical sort of alliance: the trust base is thin and, like with the rest of its neighbours, China has the upper hand.
    Rebecca Fabrizi is Senior Strategic Research Fellow at the Australian Centre on China in the World, College of Asia and the Pacific, ANU.