Friday, June 25, 2004

Energy Politics and China's Future

NEW DELHI - Energy security of nations has become one of the major issues gaining global attention today. Since the Middle East, which has been the synonym for oil and gas, has become a breeding ground of European and US energy politics, most of the imported-energy-dependent Asian countries are worried about their future energy security. In this context a rise in energy geopolitics can be foreseen in the Asian continent.

The politics over accessing Russian oil and gas by both China and Japan has become an important issue. Japan is more likely to gain the majority of Russia's Siberian supply since it can make a better economic offer to Russia than the Chinese. The Chinese government has almost lost all confidence in getting a pipeline built to Daqing. The plan for a pipeline to China from Russia's Siberian region was a decade-long ambition of Beijing. This would have supplied a sizable volume of oil and gas compared with the small quantity exported by rail to China.
China's energy hungerChina imported 100 million tons of crude oil in 2003, an increase of 20 million tons over the previous year. It made China the world's second-largest oil importer and consumer, after the United States. [1] Actual import and consumption has surpassed projections in China for many years. Moreover, the simultaneous shortage of oil, electricity and coal is an indicator that China needs to improve its energy security. [2] Since the pipeline project is still stuck in the pipeline, China will have to think more seriously about its growing energy needs, otherwise the energy shortfall may limit its economic growth.

China's pipeline option from Central Asia has been showing progress, and this might be the priority in Beijing's energy-security planning in the coming years. The Kazakh government issued a decree recently favoring the second stage of pipeline construction. The Sino-Kazakh oil pipeline, from Atyrau, a city on the coast of the Caspian Sea in Kazakhstan, to Dushanzi, Xinjiang, covers a distance of 3,000 kilometers and will transport 20 million tons of oil a year. Its construction is expected to cost US$3 billion. [3] But doubts about the economic viability of the pipeline will continue until the Chinese are sure it would supply around 20 million to 25 million tons of oil per year. This could be done only through connecting Kazakhstan's Uzen oilfield to the proposed pipeline, to which the Kazakhs expressed their disapproval long ago.
SPRs in ChinaA widely believed necessity of a "strategic petroleum reserve" (SPR) in China has to be analyzed in a context where energy supply for everyday activity is at stake. The role of an SPR is important in distributing oil during an emergency - a shortage in the energy supply due to unforeseen internal or external factors. Since the energy network supplying fuel to the growing daily domestic demand has not been effective in China, the four proposed SPRs with the investment of 6 million yuan ($725 million) may take longer than expected to complete.
Concern over the growing dependence on imports has been the main reason for the building of four 75-day-capacity SPRs, expected to be completed by 2010. In the coming years China will have to do an extensive search for energy, and this would surely make way for more investments in areas other than Russia and Central Asia.

New areas of energy exploration
Chinese policy in the coming decade will be more focused on gaining access to the energy-rich countries of the world. This may have similar features to Dale C Copeland's "theory of trade expectations", where the foreign policy of a country is greatly influenced by trade expectations. But here the expectations are much more focused on the energy sector.

For the past many years energy security has been one of the key factors that determined China's political as well as economic relations with other countries, especially with oil-rich countries in Africa and South America. The statistics currently used by China show that the volume of the country's oil resources is 106.9 billion tons, and natural gas 53 trillion cubic meters. Experts have corrected the above figures with various coefficients and determined that China's recoverable oil reserves stand at 13 billion to 16 billion tons and natural gas at 10 trillion to 15 trillion cubic meters. [4] This is a shocking fact showing that China's energy situation is much worse than previously thought. And so China will have to find energy sources from abroad other than in Russian and Central Asia.

Tan Zhuzhou, chairman of the China Petroleum and Chemical Industry Association, said: "Take our technologies and capital to Africa and South America and exploit oil there so as to have diverse supply and avert the risk brought about by concentrated oil imports." China should focus much toward these areas for its energy plans.

The growing energy demands of China necessitate its greater cooperation in the international energy market and in developing its relations with oil-rich countries. The present energy scenario in China shows its alarming demand for energy to support its economic growth.
As part of its search for energy sources, China may be able to focus on the South China Sea. China's energy plans in this area may witness coercion of those Southeast Asian countries with which China has strained relations due to the issue of the Spratly and Parcel island chains. Moreover with the South China Sea being one of the busiest energy-transportation routes to South Korea and Japan, China's energy-exploration plans may open the way for new geopolitical developments in this region.
China's "strategic partnership" with Russia has not been very fruitful in the Siberian pipeline negotiations because of Japan's involvement in the pipeline-construction plans. So if the Siberian pipeline is going to be off the table for the Chinese, that may reflect in the geopolitics of East Asia and more specifically in Sino-Japan relations in the future, including the Diaoyutai-Senkaku Islands dispute. But at present from the Chinese side a more pragmatic calculation will be evident by leaving behind the energy politics in this region and slowly moving away from the regional energy market and looking at Africa and South America for its energy supply to satisfy some of its energy needs.

Notes:[1] Feng Jianhua, "Energy Crisis", Beijing Review, January 15, 2004, p 28.
[2] Ibid, p 29.
[3] "Sino-Kazakhstan oil pipeline construction to start second stage."
[4] "China to establish four coastal strategic oil reserves", People's Daily, December 4, 2003

Friday, June 18, 2004

India, China and Energy Security

India and China have been witnessing a steady increase in their energy consumption for many years. Increasing economic growth characterized by high industrial activity has been the main reason behind it. Though consumption of coal accounts for a major share of the total energy use, imported petroleum takes an irreplaceable position in the energy mix of both India and China.
Until 1993, China was the world's fifth-largest oil producer and was a net exporter. Driven by a surge in economic growth, however, China's growth in oil consumption is now running close to 8 percent a year and, as a result, that country is now a major importer. (1) Meanwhile, India, the world's second-most-populous country, is also experiencing year-over-year consumption growth in excess of 8 percent, and has recently replaced France as the sixth-largest oil-consuming nation in the world. (2)
The key energy-related issues for these two countries are increasing energy dependency on imported oil, growing environmental concerns due to the dependency on coal, transportation and supply problems, and regional geopolitics.
China is the second-largest energy consumer in the world after the United States. A study projects that China's energy consumption will equal that of all the Organization for Economic Cooperation and Development (OECD) countries combined by the year 2020.
The geographic position of China is an advantage for its energy strategy. China borders Russia and the energy-rich Central Asian states on one side, and on the south it has the South China Sea, which is the main energy transportation route to Korea and Japan. Though China is planning to maintain production of about 3.1 billion barrels a day to limit its energy imports, depending only on domestic oil reserves will not be a long-term practical option. Moreover, China's plans for the establishment of strategic reserves to store up to 18 million tons of oil will keep its energy imports on for the near future. The west-east pipeline, which is to be built from Kazakhstan to Xinjiang and then to Shanghai, will bring the energy from Kazakhstan to the east coast of China.
Asia-Pacific: Nearly a third of world energy demandThe total Asia-Pacific energy demand is expected to be 31.4 percent of total world demand by 2005, and India and China will have the lion's share in it. While China has managed to spread its tentacles in the energy-rich regions of the world, India has been less successful in this regard. The main reason for this difference is the long-term political and economic policies of these countries toward their neighbors. Though China had border problems and political differences with Russia, now it is trying its level best to rope the Russians into building an oil pipeline to Chinese markets. China's interest in the Russian weapons trade is also a part of its long-term strategy to improve the strained relationship with the aim of accessing the energy market.
India is comparatively in a weaker position regarding these aspects. Russian and Central Asian energy is important for the Asian region, but the geographic position of India does not provide an opportunity to tap this source, as does China's. Even a direct pipeline from Iran to the northwest coast of India through Pakistan's coastal area has not been put into practice because of Pakistan's opposition to it. The pipeline plan from Central Asia faces similar problems, Pakistan being a geographic barrier to India.
The Indian energy sector is mainly dependent on coal; imported petroleum and other energy resources include nuclear and renewable resources. Petroleum products were introduced as an alternative to the less efficient, more polluting coal energy. Petroleum products are thus strategically important. Though natural gas is India's most important potential alternative to coal, the effective exploration and distribution infrastructure is yet to develop. As per the present situation, oil is the main imported-energy source.
Estimates indicate that oil imports to India will meet 75 percent of total oil-consumption requirements in 2006. (3) Since the energy import is mainly from the Middle East, volatility in that region's political situations will have a great influence on supply vulnerability. This vulnerability in the supply of energy resources affects energy security and thereby weakens national security at large. In this regard China has been in a much more advantageous position than India. It has been successful in diversifying energy resources, as well as developing a network of energy suppliers in spite of their foreign ventures and investments.
Though the economic growth rates of China and India are different, their energy-consumption growth is almost same. Moreover, as mentioned, both are imported-energy dependent. The energy strategy of these two countries will have a crucial role in their energy security. A Strategic Petroleum Reserve (SPR), which China is planning, alone may not provide any tangible relief to any energy shortage or oil shock. Developing alternative energy resources will have a greater importance than an SPR. India and China have great potential for renewable energy, nuclear energy, hydrogen energy etc. It is important to promote investment in these areas so as to avoid the fear of any supply shortage from abroad. While privatization of the energy field is promising, for an efficient domestic production and supply of oil the role of external and internal pressure groups in controlling the oil market should be carefully watched.
Kazakhstan: China's entry to Central Asian energyChina has been keen to develop its access to Central Asian energy resources, especially focusing on deepening relations with Kazakhstan. Since Kazakhstan is China's major entry point to access Central Asian energy, this region is of special importance to China. Moreover, China has been working very hard in Xinjiang (East Turkestan) to suppress ethnic or insurgency movements that might otherwise cause disturbances in the region in future.
There is vast potential for regional energy cooperation in South Asia. Subregional cooperation among the contiguous countries - Bangladesh, Bhutan, India and Nepal - is more promising. (4) While India has a huge market for energy, these neighboring states could be potential energy suppliers. Nepal and Bhutan have good hydroelectric potential and Bangladesh has natural-gas resources. If the political atmosphere is favorable, and other issues such as production, development, transportation etc are taken care of, these resources can be of much more use to the Indian energy sector than any other foreign energy import. These energy resources along with Myanmar's resources can be extremely important, and the northeastern states of India will chiefly benefit from it.
The politics of the world's energy sector has been witnessing the United States' attempt to dominate it for the past few years. The Gulf wars have sent a strong message to developing countries such as China and India of the danger of their heavy dependency on Middle East oil and the growing influence of Western powers in that region. This development has tremendous influence in shaping the energy policy of India as well as China.
China and India, as two big powers in Asia, will be the main energy consumers of the region. Burgeoning industrial growth and other energy-consuming activities are part of their economic development. As both these countries have similar patterns of energy use, their energy strategies may also have similarities. Any traditional approach to attain energy security may not be a solution to any kind of forthcoming energy shock or shortage of supply. That requires a comprehensive plan to act in a multi-dimensional way - investing in energy resources abroad, developing existing domestic energy resources, inviting foreign direct investment to develop renewable resources, and above all creating a well-structured network of regional energy cooperation.
Both India and China should look forward to creating an "Asian Union", ie, a Greater Asia that is economically, technologically and politically competent in the world, where the "energy security" of the Asian region will be free from the clutches of any political volatility of any region or any Western power.

(1) Published on the Obele Oil Corp's website.
(2) TERI, India's energy security, New Delhi, 2000.
(3) Ibid.
(4) Regional Energy Cooperation in South Asia, published in the World Energy Council Report, 2003.

Thursday, June 10, 2004

Energy = ASEAN + China + Japan + Korea

The imported-energy-dependent Asian countries are the major sufferers of the growing oil prices in the international market. Already the Asian countries are paying an energy-premium price for their imported energy. The soaring economic growth or the growing imported energy dependence cannot be blamed for this extra amount. And it is very evident that any hike in the energy price will be a setback to the developing Asian economy.

The 22nd AMEM+3 (ASEAN Ministers on Energy Meeting + China, Japan and Republic of Korea), which was held in Manila on June 9, has discussed these core issues and reached an understanding to work toward an effective solution for the energy security issues in the future. Energy has become the most valuable commodity in the international arena and it is high time that Asian countries work together toward attaining the energy security of the region. ASEAN (Association of Southeast Asian Nations) is a net importer of oil and 60% of its primary energy consumption is based on imports. The case is same with the People's Republic of China, Japan, the Republic of Korea and even India; only the percentage of dependency differs. Most important, the Asian countries must strengthen their relationship with the Persian Gulf countries and adopt a proactive energy policy by diversifying their energy resources.

The 22nd meeting of AMEM has proposed to concentrate on cooperation in energy security, natural-gas development, oil-market studies, oil stockpiling and renewable energy. According to SOME (Senior Officials' Meeting on Energy), "The AMEM+3 can work together for stable and secure energy markets in ASEAN+3 region and can develop the energy security communication system to enhance the regional capacity for timely emergency response by sharing information including oil data under the Joint Oil Data Initiative (JODI) for interested countries."

Other than the common energy goals, the 22nd AMEM+3 has notable relevance in bringing these countries together to solve the long-standing issues pertaining to the energy security of the region. The South China Sea is rich in oil and gas deposits and thus the ownership of the island chains in the region has been disputed by the countries nearby. Moreover this region is strategically important, as it is one of the busiest sea lanes of transport, transit and communication.

The 22nd AMEM+3 would be able to look at this issue and could bring an amicable solution for the long-pending issue of ownership. It would help to formulate a joint energy-exploitation plan in the South China Sea and would be a dependable energy source for the concerned countries. Simultaneously AMEM+3 would help to have greater cooperation among the partner countries.

The Russian energy pipeline that has been proposed to be constructed to the port of Nakhodka could possibly satisfy the energy appetite of the neighboring countries. Greater cooperation among China, Japan and the Koreas would help to build an energy network within Northeast Asia and this would provide a dependable consumer circle for Russia. The plan to bring in the Central Asian energy resources across China to the Asian market seems to be more practical at this stage. The investment for the pipeline construction can come from a joint front of ASEAN and the other Northeast Asian countries. The swift realization of the pipeline would be a great relief for the energy security of the region.

The larger the group, the stronger the bargaining leverage. India, being an inevitable partner for Asia's energy quest, must join hands with the AMEM+3 in the realization of energy security of the region. India currently ranks sixth in world energy demand and the dependence on imported energy has been growing. According to the Energy Information Administration, oil consumption in India is expected to grow rapidly, to 3.2 million barrels a day by 2010, from 2.0 million in 2002.

Though there are attempts to reduce India's dependence on Persian Gulf oil considerably, it (the Persian Gulf) will remain the major source of energy import for the foreseeable future. Most important, India's energy policy should include an approach of collective bargaining toward securing its energy supply from the Middle East and in its energy exploitation plans in non-Middle East energy reserves. In the Indian president's address on June 7 to the joint session of parliament, APJ Abdul Kalam stressed, "The government will put in place policies to enhance the country's energy security with special emphasis on petroleum and natural gas." This would bring forth a comprehensive national energy security that would mainly include developing domestic as well as overseas energy resources. Closer participation from India with its other Asian counterparts would help ensure energy security, and allow access to an adequate and affordable energy supply for economic development.