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China adjusts to future as world’s largest oil importer

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In Brief

In late October China completed a pipeline through Myanmar, allowing Middle Eastern oil and gas to circumvent the Malacca Straits and South China Sea. This is a major event; and it’s part of a story that entered a new chapter recently, when the US Energy Information Administration reported China is now the world’s largest importer of oil.

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This new status has profound implications both for global geopolitics and Chinese domestic politics.

Long-term structural factors ensure China’s share of global oil imports will continue rising. United States’ oil consumption peaked in 2005 and is now about 10 per cent lower than eight years ago. Oil dependence will no longer be the determining factor of United States’ foreign or economic policy it once was. Meanwhile, China’s growth model is increasingly oil-dependent. Oil’s main function is urban transport. China’s population is about 51 per cent urban, with around 20 million people urbanising each year, leaving scope for about 400 million to urbanise over the next 20–30 years (the figure is almost a third larger than the population of the United States). Until alternatives become affordable and mainstream, oil demand from China will be immense. China needs options.

Almost all oil and gas coming to China passes through the Malacca Straits, then the South China Sea — the scene of long-running territorial spats between China and several ASEAN states. China sees the maintenance of its sea-route access, even (especially) in the case of conflict with the United States, as more critical than relations with smaller neighbours, such as the Philippines and Vietnam. But China’s control of the sea is not assured. The United States is committed to preserving open sea-lanes, and few see China as ready to maintain such public goods. The United States is also committed to allies with strong territorial claims to much of the area claimed by China.

This explains China’s urgency in developing alternative supply routes, such as the Myanmar pipeline. The Chinese-controlled Gwadar Port in Pakistan, expected to be operational by March 2014, is part of larger plans for a trans-Pakistan economic corridor allowing goods and piped oil and gas into China without crossing the Indian Ocean or South China Sea. And the West–East Oil and Gas Pipeline began construction on stage three last year, allowing oil and gas from Central Asia and China’s Xinjiang Province to reach the east-coast economic powerhouses (complementing existing lines from Russia).

The United States remains more involved in security issues of many oil countries than China, giving it political influence China lacks. But it is clear China’s foreign relations are increasingly determined by energy priorities. These priorities also increasingly challenge China’s domestic politics.

China’s oil and gas industries are controlled by three central state-owned enterprises (SOEs): Sinopec, China National Petroleum Company (CNPC) and the China National Offshore Oil Company (CNOOC). Sinopec and CNPC control all onshore oil and gas in China. As central SOEs the chairmen (CEOs) of these companies are political appointments with bureaucratic rank equal to a provincial governor, making them extremely powerful. Under Hu Jintao and Wen Jiabao, former CNPC General Manager Zhou Yongkang was responsible for domestic security (and was ninth in overall seniority). Significantly, Zhou directed security policy in the turbulent regions of Tibet and Xinjiang, which connect the rest of China to South and Central Asia, respectively.

Zhou is now the subject of wide-ranging corruption investigations led by Wang Qishan, who is sixth under Xi Jinping and Li Keqiang and young enough to stay around after Xi and Li retire in 2022. Wang’s investigation has claimed several members of the ‘Oil Clique’ that Zhou sat atop. Wang’s first big scalp was a protégé of Zhou’s, Liu Tienan, who directed the National Energy Administration — Liu’s approval was needed for all major energy investments: a strong position for collecting ‘favours’. More recently four other CNPC executives were arrested on corruption charges, and there were reports that Zhou himself was placed under investigation in October.

Despite moves against Zhou and his oil clique, the power wielded by China’s oil barons makes them formidable. China is desperately trying to deal with the environmental consequences of industrialisation, reduce energy intensity and ensure oil security. Li Keqiang has advocated shengtai wenming (roughly ‘ecological civilization’, or environment-friendly culture) and placed chengzhenhua (roughly ‘small-town urbanisation’) at the centre of his development strategy. But implementing these strategies relies on local agencies ranked below the oil and gas companies — whose interests are impinged by these strategies. The result is potent.

In all this one thing is clear: we have a desperate lack of knowledge about China’s politics and how they drive China’s international behaviour. But we can be sure energy will continue to be a conspicuous, if conflicted priority.

Dominic Meagher is an associate of China Policy, Beijing.

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