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.