China Races for Energy Security to Keep Pace with GDP Growth

China embarked upon its remarkable GDP growth under the leadership of Deng Xioaping, Mao’s successor. Deng’s message to his comrades: “To get rich is glorious.” China responded by creating a middle class which is now nearly the same size as the entire population of North America. By meeting the country’s energy demands to feed such rapid growth, China has engendered a worldwide race, most notably with neighboring India but also with others, to accumulate sufficient energy sources and raw commodities. Yet on the horizon, China has a serious energy crisis which could reduce this amazing GDP growth.

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By the late 1990s, northeastern China’s vast Daqing oil fields passed their peak, and no new oil fields of that magnitude were discovered. A net oil exporter until 1993, China’s growing appetite for energy sources and other commodities has created what some call a ‘super cycle’ bull market in commodities. Now the world’s second largest oil importer behind the United States, China’s dependence on foreign oil jumped by 10 percent during the first six months of 2006, compared to the same period a year earlier. Oil imports during the first half-year grew to 47.3 percent silk road economic belt.

In the context of previous years, the growth of oil imports clearly illustrates China’s astonishing escalation of imported oil. According to the Xinhua news agency, the country’s percentage of imported oil stood, in 2001, at slightly less than 27 percent of total consumption. As of 2004, this percentage had soared above 41 percent. By that year, China was driven to diversify its country-mix of energy sources. The Middle East supplies about 45 percent and Africa exports some 29 percent to China.

Having about 20 percent of the world’s population, China only consumes four percent of what the world’s oil fields produce. But, a growing middle class will simply consume more petroleum products as the decade comes to a close. Presently importing three million barrels of crude oil every day to fuel the growing number of automobiles, where will China find the oil to produce gasoline in 2020, when the country could have as many as 140 million cars on its roads?

Because of China’s Industrial Revolution, Beijing’s streets, once overflowing with bicycles, are now jammed with nearly three million automobiles. The Chinese middle class want more energy to accompany their new wealth, but where will it come from? Since 2001, China has acquired more than 100 oil fields and companies to sustain its heavy flow of imported oil for this demand. Chinese state-owned oil companies have spent $15 billion over the past five years to build up their oil reserves.

The country’s state-owned media arm refers to China’s exploration and acquisition expeditions for new oil fields beyond its borders as developing “new silk roads.” These roads have led to Central Asia, South America and Africa in China’s quest to establish more and more energy sources. Is this strategy working fast enough or not?

Are China’s New Silk Roads Filled with Pot Holes?

China’s creation of new silk roads of energy sources has been challenging. Emerging in the mid 1990s as an economic powerhouse to be taken seriously, in the wake of Japan’s economic slowdown and the collapse of the Soviet Union, China has all but dictated world commodity prices in a frustrating drive to continue fueling the country’s rapid growth. Unfortunately, both Russia’s resolve to monopolize energy assets in Central Asia and U.S. political paranoia about China’s global ambitions have led to a number of disappointments and setbacks.

Remember China’s failed attempt to takeover of UNOCAL? Had China National Offshore Oil Corporation (CNOOC) bought UNOCAL, the acquisition would have impaired U.S. economic influence in both Thailand and Burma. Despite this setback, China continued investing heavily in Burma. The Chinese hope to someday export their neighbor’s hydroelectric power, by helping the Burmese build a dam across the Salween River.

By acquiring rights to Daewoo’s recently discovered offshore oil and natural gas in Burma, China will probably build another pipeline into its country. With each major stride forward, China is frequently pushed back a step. China has grown accustomed to the habit of settling for less in order to meet the country’s demand for energy security. Meanwhile, China has been criticized for buying marginally producing oil fields, overpaying for commodities and doing business with unsavory nations.

Trouble in Central Asia

In Kazakhstan, China was delayed for seven years in building an 1800-mile oil pipeline across the Kazak border into neighboring Xinjiang province. After China’s acquisition of PetroKazakhstan, an oil company whose assets were in Kazakhstan but which was registered in Canada, the Kazak government passed legislation declaring strategic control of the oil assets would be determined by its lawmakers.

China began developing its relationship with the Kazaks in the wake of the Soviet Union’s disintegration into several sovereign countries. After an initial meeting with Kazak president Nursultan Nazarbayev, China helped create the Shanghai Cooperative Organization (SCO) in 1996 signing a “mutual trust” agreement with Russia, Kazakhstan, Kyrgyzstan and Tajikistan. Pejoratively known as the Shanghai Five mechanism, the bombastic Nazarbayev called the pact, “the most substantial political move in the Asia-Pacific region of this century.”

How long does a handshake with Nazarbayev last? On January 11, 2006, Nazarbayev and Chinese Vice President Zeng Qinghong celebrated the completion of the Sino-Kazakh pipeline, vowing to strategically partner in future energy deals. But before China’s Premier Wen Jiabao inked a deal with Australian Prime Minister John Howard to buy Australian uranium in early April, Russia quietly began negotiations with uranium-rich Kazakhstan.

It was evident China would reach for Central Asia’s uranium, second only to Australia’s known recoverable reserves. In June, three weeks before the G-8 Summit in St. Petersburg, Russia, Kazakhstan’s president and Russian President Putin announced a uranium production deal, worth about $1 billion and lasting through 2020. A month later, on July 25th, the two countries announced a $10 billion joint venture to build three nuclear reactors in Kazakhstan and a joint venture for further uranium exploration at the Zarechnoye deposit in southern Kazakhstan near Kyrgyzstan and Uzbekistan.

After more than a decade of China’s cultivating a relationship with President Nursultan Nazarbayev, Russian President Putin has somewhat undone China’s diplomacy for energy security from this country in a matter of months. On January 13th, the Moscow Times reported Vladimir Putin was rebuilding the nuclear energy ties of the old Soviet states, having first invited the Ukraine and Kazakhstan into the fold. Putin has also built up the Eurasian Economic Community, which is comprised of Russia, Kazakhstan, Uzbekistan, Kyrgyzstan, Belarus and Tajikistan. All are former Soviet states.

The same members also belong to the Collective Security Treaty Organization, of which Uzbekistan’s Islam Karimov announced his country would soon join. His country’s large natural gas fields are being developed in the western part of the country by Russia’s Gazprom to help satisfy European demand. In other words, Russia is slowly edging China out of Central Asia’s prolific oil and gas assets. One might expect China’s hopes for Kazakh uranium are fairly well dashed.

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