The Great Zero-Sum Game: China and the U.S. Vie for Oil Resources
By David Stanway
23 Sep 2005 at 07:42 AM EDT
SHANGHAI (Interfax-China) -- A few years ago, five previously unknown authors caused a media sensation by publishing China Can Say No!, a nationalist and non-Party screed that railed against the perceived ill-treatment of China by the United States. The feelings have remained popular, and can now draw on the bombing of the Chinese embassy in Belgrade in 1999, the shooting down of a U.S. spy plane over Hainan Island in 2001, and the rejection of the bid for the California-based Unocal by the China National Offshore Oil Corporation (CNOOC) [NYSE:CEO].
For China, the regular reports by the U.S. administration on subjects including China's human rights record, its increased military spending, or its violation of intellectual property rights, all serve as further evidence of victimization. With the growing number of critical reports in U.S. media and government circles about China's efforts to secure resources in countries like Sudan, and about its growing impact on world oil prices, China's sense of injustice also extends into the world of energy, arguably the most politicized industry of them all.
This week, one of the authors of China Can Say No!, Song Qiang, told reporters that the attempted acquisition of Unocal by CNOOC proved one of their main theses, that the U.S. - in its attempt to "contain" the growing influence of China - was not playing by the rules of the game.
That sentiment, of course, was expressed all throughout CNOOC's ill-fated bid, especially when the honorable members of the U.S. Congress began urging the administration to step in and block the Chinese company. Academics, government officials and angry contributors to the nation's online bulletin boards shared the general opinion that the U.S. was bucking the market in order to serve narrow political interests.
China's offshore oil monopoly was engaging in "ordinary commercial practices," said a number of figures ranging from CNOOC head Fu Chengyu to Foreign Affairs Ministry spokesman Liu Jianchao, while the opponents in the U.S. were once again using the "China Threat Theory" to justify non-market tactics.
Statements from Congress and the House of Representatives demanded that the administration reject the CNOOC bid on the grounds that it involved strategic national interests, and that the Chinese company was being financed by soft government loans. Reports in the right-wing press even claimed that some of Unocal's overseas holdings involved sensitive mineral resources that could be used to make advanced weaponry. In the end, the matter did not require the direct intervention of the U.S. government. The Unocal board, worried by the political implications of the CNOOC offer, agreed to accept the lower bid by the Chevron Corporation.
China commonly expresses its opposition to the U.S.'s "politicization" of the energy industry. China also saw the hand of the United States in the efforts by Japan to secure an oil pipeline from Siberia to Russia's eastern Pacific coast, a route that would delay the plan to construct pipelines to Daqing in northeastern China. It also worries about clandestine U.S. activities to undermine the left-wing government of Hugo Chavez in Venezuela, which is in favour of boosting oil exports to China.
Securing Oil at the Source
The U.S. has been criticizing China for attempting to "secure oil at the source." China's state-owned companies are being encouraged to "go overseas" and buy stakes in exploration and production projects, including those in "countries of concern" such as Sudan and Iran.
The U.S. Deputy Secretary of State Robert Zoellick said two weeks ago that China would be increasingly in conflict with the U.S. if it continues to pursue energy deals with "problematic" countries. China's Foreign Affairs Ministry spokesman, Qin Gang, replied by saying that China has no intention of "plundering" the world's energy resources, and was merely seeking "constructive cooperative relations" and "peaceful and mutual development".
But Zoellick's fears have considerable resonance in the U.S. Former U.S. President Bill Clinton, speaking at a forum in Hangzhou last weekend, also expressed his worry that China's efforts to secure oil were misguided. The scarcity of world oil resources will "make conflict far more likely," the former President said, especially with China trying to buy up oil fields around the world.
The U.S.-China Economic and Security Review Commission said in its latest report to the U.S. Congress that China's growing energy demand was posing a direct threat to U.S. economic security. It was also pursuing the morally-dubious strategy of buying up stakes in oilfields in "countries of concern to the United States" and working on the basis of bilateral agreements rather than established international mechanisms. By locking up resources in countries such as Algeria, Azerbaijan, Ecuador, Kazakhstan, Myanmar, Thailand and Venezuela, as it had done in the previous year, it was acting against the interests of the international community, especially net-importing countries.
Many Chinese observers express surprise about the fuss. "It's necessary for Chinese companies to enlarge overseas oil investment to diversify the supply structure instead of merely relying on oil trading, which is far from enough," said Wang Zheng, the head of the Business Management School of the China Petroleum Institute, in a conversation with Interfax.
"Apart from the Middle East, which is mainly occupied by the U.S. and UK, China has to find a breakthrough for its oversea oil asset acquisitions, including countries in Africa, southeastern Asia, Central Asia and South America, some of which are not in harmony with the U.S. China is looking for cooperation partners based on the actual situation and is looking for economic benefit only," said Wang.
Wang also suggested that the U.S. is exaggerating the capabilities of Chinese companies. "Compared with the world's leading oil companies, domestic oil companies are 10 times behind in assets, corporate governance, financing and so on," said Wang.
Venezuela
China's increasing interest in the oil resources of Venezuela has been given a great deal of attention in the United States, with many worried that in the "zero-sum game" of energy politics, oil that was previously sold on the U.S. market will be diverted to China by Hugo Chavez's government, which is generally hostile to the current administration in Washington.
But the possibility, expressed frequently in the U.S. media, that Chavez would seek to divert exports from the U.S. market to the Chinese one is not high, said a senior U.S. State Department official on Tuesday. The U.S. already has strong advantages over China when it comes to the oil resources of Venezuela, he noted.
According to U.S. media reports, Charles Shapiro, a senior Western Hemisphere specialist at the State Department and also the former U.S. ambassador to Venezuela, told a Senate panel on Tuesday that China's increasing interest in Venezuelan oil is unlikely to have any effect on U.S. supplies, given U.S.'s favorable geographical position, suitable refinery facilities and a larger scale of investment in Latin America.
Shapiro said that the U.S.'s oil refineries are especially designed to refine heavy Venezuela crude oil while Chinese refineries would require an investment of billions of dollars. Overall Chinese investment in Latin America and the Caribbean is small compared with that of the U.S., he added.
Robert Forden, the deputy director for China at the State Department, told the panel that there was no evidence that China's increased investment in the region meant that it was trying to meddle in Latin American political affairs. He said its motives were primarily economic.
A Chinese energy expert told Interfax that China's investment in Venezuela was a normal commercial matter and would not necessarily reduce Venezuela's oil exports to U.S.
"US and Venezuela have been in close energy cooperation for a long time and around 15% of the U.S.'s total oil demand is imported from Venezuela. After Hurricane Katrina, Venezuela also provided aid to the U.S. very actively," Niu Li, the global energy expert with the State Information Center, told Interfax.
"Venezuela will not reduce oil exports to the U.S. merely on the basis of political concerns. They will decide oil deals on the basis of economic interests," said Niu. He added that "it is very normal for China to invest in Venezuela," which is rich in oil resources.
PDVSA, the Venezuela state oil company, opened a commercial office in China on August 22 with the aim of improving the market for Venezuelan oil in Asia. It was a significant step forward after the two countries signed the "Memorandum of Understanding on Greater Cooperation in the Energy Sector" during the visit paid by Hugo Chavez to Beijing in December 2004.
During Chavez's visit, the China National Petroleum Corporation (CNPC) signed cooperation agreements with PDVSA regarding the joint exploration of the Zumano Oilfield in eastern Venezuela and the surveying of the Orinoco Oil Belt Block Junin 4.
Rafael Ramirez and Ma Kai, the head of the National Development and Reform Commission (NDRC), China's industry watchdog, also confirmed that they would implement measures to supply hydrocarbons to China in excess of 300,000 barrels per day, or 15 million tonnes per annum, within the next few years.
The Battle for Central Asia
Central Asia contains some of the world's most promising new oil resources, particularly around the Caspian Sea. It has therefore become one of the major geopolitical battlegrounds, with China and the U.S. joining regional players like Iran, Kazakhstan and Russia in the battle for power and influence. China hopes eventually to be the beneficiary of a trans-Asian pipeline network connecting its interests in Iran to pipelines running the breadth of Kazakhstan and entering China through Xinjiang in the northwest. The U.S., on the other hand, would prefer a pipeline connecting the Caspian Sea with Turkey and Europe, or heading south to the Indian Ocean through Afghanistan and Pakistan. Russia, anxious not only for political influence, but also for the lucrative transit fees, would prefer Kazakh oil to be fed into existing pipelines heading north.
Two of China's major oil companies, Sinopec [NYSE:SHI] and CNOOC, were blocked in their efforts to secure a stake in the Kashagan oilfield in the Caspian Sea in 2003, but political efforts by China paid off earlier this month when the Kazakh government agreed in principle to allow Sinopec and CNOOC to explore the Caspian region.
Global Oil Prices - Who's to Blame?
As Interfax reports this week, a senior member of the Chinese government has again spoken out against the allegations that China itself is responsible for the spike in global oil prices. Xu Dingming, the head of the NDRC's Energy Bureau, hinted that the U.S. was actually using high oil prices as a way of undermining the Chinese economy.
"Petroleum has changed from a normal commercial product into a weapon. The main beneficiaries of high oil prices are the U.S. and other oil producing countries," he said at a conference.
The International Energy Agency is among a number of voices suggesting that the current high price is a result of China's increasing demand, and its desire to build up those strategic reserves. China has also denied the latter point, saying that it will not boost its strategic reserves by buying expensive oil from the international market.
Other Chinese officials stress that Chinese demand is still nothing compared to the U.S. Zhou Dadi of the NDRC Energy Research Institute said that Chinese imports are still only a seventh of the world total, and that China's impact on the world market is still lower than Japan.
Sino-U.S. Cooperation
Wang Zheng, the head of the Business Management School of the China Petroleum Institute, told Interfax that cooperation as well as competition is crucial for both the U.S. and China.
"The increasing energy demand in recent years has made China realize the importance of energy and also the cooperation with U.S. There are more signs that two countries are reinforcing the energy dialogue," said Wang.
Wang mentioned to the first Sino-U.S. energy dialogue held in Washington in late June by Zhang Guobao, the vice director of the NDRC, and the U.S. Secretary of Energy. The U.S. Energy Department established a Beijing representative office at the same day.
"However competition is also unavoidable in the future as the two countries are both big energy consuming countries," said Wang.
Niu Li of the State Information Center agreed that there was a great deal of room for cooperation between the two countries.
"We should not always politicize these issues. We should see that there is huge room for Sino-U.S. cooperation. Actually we have already launched collaboration in the fields of new energy and environmental protection," said Niu.
Niu also agreed that while China's increasing energy demand will unavoidably lead to competition with the U.S. in the global energy market, China's energy import portion in the global market is still very small compared with U.S. and the country's general energy policy is to 'be based on domestic supplies' so the competition is not going to be fierce. (With additional reporting by Winnie Zhu)
© InterFax-China 2005. For more intelligence on Chinese metals and mining, click here or call Alison Crawford in London on +44 (0) 20 7256 3919.
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