Growing links in energy and geopolitics between China, Russia, Central Asia and the Gulf

Mehmet Öğütçü and Xin Ma [1]

Overview

China’s dependency on imported energy has surged in recent years and is expected to grow at a similar or increasing rate in the coming decades, driven by an unprecedented industrialization mobilization and urbanization process. As a result, the Chinese leadership feels increasingly insecure and vulnerable as greater dependency has exposed the country to the risks of global supply disruptions, chronic instability in energy exporting regions, and the vagaries of global energy geopolitics. As access to sustainable and secure energy at a reasonable cost is perceived by the leadership as critical for China’s continued development, political endurance, and social stability, energy issue has become a matter of “high politics” of national security and no longer just the “low politics” of domestic energy policy[2].

Securing energy resources is no doubt a highly political matter. This was the case for Japan before the Second World War. It is also the case for China today with its growing energy demand. Just like other governments with a long history of central planning economy, the Chinese government believes that security is too important to be left entirely to the markets. Instead, it combines government approaches with market measures to secure the needed energy as demonstrated by the ambitious shopping behavior of the Chinese national oil companies and the high profile energy diplomacy, conducted by the government. This is undoubtedly going to have a profound impact on the international market, particularly on the major energy exporters, namely the Gulf, the CIS, and Africa.

This paper attempts to analyse the expanding energy linkages of China, one of the most dynamic major consumers, with the Middle East, a leading petroleum producer and the CIS, a core non-OPEC emerging producer, not only because they are well established oil exporting regions, but also because of their geopolitical relevance to China as key players in a possible energy corridor linking China with the Gulf at some point in the future. The paper concludes that the economics and geopolitics of energy supply for China dictate different approaches to each of these regions, with the CIS territory ensuring its energy to be transported across the ocean where China could be vulnerable to potential maritime disruption in the event of serious international disputes, and with the Gulf offering more flexible commercial arrangements.

China takes different economic and geopolitical approaches towards Russia and the Central Asian/Caspian producers. Compared to Russia, seen as relatively unreliable, Central Asian hydrocarbon resources seem more promising and feasible for China, although funding problems and political calculations plaguing all pipeline projects offer no exception[3] Furthermore, China’s extending its Central Asian land routes from Kazakhstan and Turkmenistan and then down to northern Iran is seen as a visionary Sino-Arabic oil passage to the Gulf ports[4]. China is also willing to join the northern line transportation for its expected stake in Siberia and the Russian Far East, by some oil swap options between China, Kazakhstan and Russia. Similar natural gas projects are under work or consideration linking China to Central Asia and Russia.

These corridors could eventually position the Middle Kingdom at the centre of a "Pan-Asian Global Energy Bridge" that will connect existing and potential suppliers to Asia (i.e., the Gulf, Central Asia, and Russia) with the key consumers (China, Japan and Korea). If successfully implemented, this will not only largely improve the energy security of China, but also will enhance Beijing’s geopolitical influence in this geography.

As the international energy sector has undergone significant changes since the beginning of this century, due to the emergence of new players and the changing of dynamics among all players, the resultant energy scene requires adjustments to make room for new players in the marketplace and develop effective, “win-win”, collaborative mechanisms to promote confidence. Energy security concerns need to be addressed from the standpoints of both consumers and producers. Otherwise, geopolitical rivalry and tough competition for scarce resources will likely intensify, leading to “zero-sum” confrontations.

Changing dynamics in international petroleum sector

The pattern of international petroleum sector is under serious transformation due to the emergence of new powers, such as China, or old players being equipped with new powers, such as Russia, Central Asian countries and the Gulf countries, and an increasing concern of energy security from both consumer and producer perspective. The changing nature of the international petroleum market thus requires new rebalanced mechanisms, and new forms of partnerships among players.[5] These major consumers and producers are interacting with each other, taking active measures to conduct energy diplomacy, establishing new strategic partnerships with a view to changing rules in a way that will better serve their national interests.

The profound changes in world energy, still underway, could be summed up as follows:

First, the increased international petroleum prices have, together with many other factors, shifted power significantly to oil producing countries, especially a few large ones, where the majority of remaining reserves are located, such as the Gulf, Russia, and Central Asia[6]. This power, coupled with the huge financial assets accumulated by those producers in a high price environment, has fuelled the international ambitions of these countries to seek changing or reshaping the traditional rules of the game for the benefit of their national interests.[7] Some of them, such as Russia, not only host large share of world petroleum reserves, but also has the political will to use energy as an instrument to advance its economic and political interests.[8] Aware of their increasing power, many of the resource-rich countries have either re-nationalised their oil industries or established strategic control through further transfer of power into the hands of governments.[9]

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Full-text of the paper is available, click here. (pdf, 42 pages)

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The Reflection Cafe thanks to the authors for their permission to re-publish this article in the Cafe. The article has been published earlier in Insight Turkey:

http://www.insightturkey.com/currentissue.htm / http://www.insightturkey.com/is0903.htm

[1] This paper represents the authors’ personal views and not those of any organisation they are associated with.

Mehmet Ögütçü, former Turkish diplomat, senior OECD/IEA staff in Paris, an International Board member of the Windsor Energy Group, and currently with BG Group in London. He is the author of numerous books including, inter alia, “China’s Quest World-wide for Energy Security” (IEA, 2000), “Eurasian Energy Prospects and Politics: Need for a Western Strategy” (Energy Charter Treaty, 1994), “Asian Energy Security Concerns and Geopolitical Implications for the Middle East, the Indian Ocean and the Central Asia” (IDSA New Delhi: February 2003), “China’s Regional Development and FDI”, (OECD,2004), “International Investment for Development” (OECD, 2005), “Does Our Future Lay with Asia” (1998, Milliyet Publishing) and “2023 Turkey Roadmap” (Etkilesim Publishing, 2007). He can be contacted at ogutcudunya@yahoo.co.uk

Xin Ma, a researcher and doctoral candidate at Centre for Energy, Petroleum and Mineral Law and Policy at the University of Dundee, has a Master degree on management engineering at University of Petroleum (China). She spent four years working at PetroChina Ltd. The focus of her current research is National Oil Company reforms and the impact to commercial efficiency. She can be contacted at x.ma@dundee.ac.uk

[2] China's quest for energy security since its becoming a net crude importer in 1993 and dethroning Japan as the world’s second largest consumer of oil a decade later has driven the Middle Kingdom to the world’s principal hydrocarbon producing and exporting regions.

[3] Petroconsultants, October 1998, p.51. G. Kemp, R. Harkavy, Strategic Geography and the Changing Middle East (Washington, DC: Carnegie Endowment for International Peace, 1997), p. 131.

[4] Xiaojie Xu, “The Oil and Gas Links between Central Asia and China: A Geopolitical Perspective”, OPEC Review, Vol. XXIII No.1, March 1999, p.48.

[5] Ernst&Young (2007). Partnership in the Oil and Gas Sector: New Models, New Agendas 1-19. P3 Mandil, C. (2007). The Energy Future International Oil and Gas: Financial Review 2007. M. Crisell, Euromoney International Investor PLC 1-3. P1

[6] Despite four years of high oil prices, market tightness is likely to increase beyond 2010 as global oil demand will grow from an annual 2 percent average over the next five years to 2.2 percent. The increase will largely be caused by faster growth in Asia and the Middle East. At the same time, non-OPEC supply will decrease, partly because of delays on major oil projects but also because supplies are nearing a peak. While biofuel production is expected to double over the next few years, it will still only account for 2 percent of global oil supplies by 2012.

[7] Mandil, C. (2007). The Energy Future International Oil and Gas: Financial Review 2007. M. Crisell, Euromoney International Investor PLC 1-3.P1

[8] Lo, B. and A. Rothman (2006). China and Russia: Common Interests, Contrasting Perceptions Asia Pacific Strategy, Asian Geopolitics Special Report, CLSA Asia-Pacific Markets: 1-31.P13, 21

[9] See “The new seven sisters: oil and gas giants that dwarf the west’s top producers”, Financial Times, March 12, 2007. A recent study measuring the shift in power in global energy markets revealed that seven major state controlled energy corporations from non-OECD countries (i.e. Saudi Aramco, Gazprom, PDVSA, China’s CNPC, Iran’s NIOC, Petrobras of Brazil and Petronas of Malaysia) presently control over 30 percent of global oil and gas production and over 30 percent of reserves, while the original seven (now four) OECD-based energy blue chips which have dominated global energy markets since World War II (i.e. ExxonMobil, BP, Chevron, Shell) now control just 10 percent of production and 3 percent of reserves.

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