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Wednesday, March 9, 2011

Beijing's struggle to achieve energy security


SINGAPORE — Since China's surging demand for oil started to exceed domestic production in the early 1990s, Beijing has been preparing for a range of possible threats to its energy supply — including turmoil in the Middle East.

The world's second largest oil consumer after the United States has part-financed and built, or is building, a network of transnational pipelines to import crude oil from fields in Central Asia and Russia.

Chinese state-owned companies are also constructing a 1,100-km pipeline through Myanmar to carry oil imports from the Middle East and Africa into southwestern China, bypassing the increasingly congested Straits of Malacca and Singapore.

This international waterway linking the Indian and Pacific oceans is the shortest sea route between Middle Eastern and African oil exporters, and East Asian economies that buy most of their oil from these exporters.

It is described by the U.S. energy department as "the key choke point in Asia" on the long sea supply line that brings oil in giant tankers to China and other leading economies in the region.

The two-way shipping channel is less than 3-km wide in the straits off Singapore. Despite coordinated patrols and other assurances from the coastal states, Beijing remains worried that this vital artery could be blocked in a crisis, ranging from a serious shipping accident to a terrorist attack or a military confrontation with the U.S. and its allies in the region.

Beijing's strategy of diversifying both its sources of imported oil and their routes into China is likely to be a partial success, at least in the short term. A study by the Paris-based International Energy Agency (IEA) published last month calculates that China's total pipeline oil imports from Central Asia and Russia, and through Myanmar, could reach 1.44 million barrels per day (BPD) over the next few years. This would be 23 percent of China's projected total oil imports of 6.4 million BPD in 2015.

Although oil transported through the Myanmar pipeline by 2014 at a rate 440,000 BPD would still be from the Middle East or Africa, only about 54 percent of China's total oil imports would then come via the Malacca and Singapore straits, down from the current level of 77 percent.

Nonetheless, because China's demand for foreign oil is already so big and expected to get bigger, China will need a much more effective multipronged strategy than overland pipeline construction to achieve longer term oil security. This will involve using oil much more efficiently and building adequate reserves for emergencies, both of which Japan has done.

China must also shape its oil diplomacy as part of an overall policy to cope with increasing dependence on foreign countries for essential raw material imports, including energy, minerals and food.

The outcome of this debate in China will determine the extent to which the world's most populous nation uses its growing economic and financial strength to transform itself from a continental state to a continental maritime power deploying long-range military forces to protect Chinese interests.

Beijing must also decide the extent to which it will use its power cooperatively or coercively with other nations and in international institutions. This has important implications for East Asia because of China's extensive overlapping offshore claims with several Southeast Asian countries in the South China Sea and with Japan in the East China Sea.

China is expected to put aircraft carriers into service, possibly starting as early as next year. Its power projection capabilities will continue to increase. Scott Bray, senior China specialist in the U.S. Office of Naval Intelligence, has summarized the outlook in this way: "China likely intends to use aircraft carriers to bring the air component of maritime power to the South China Sea and other regional areas to protect Chinese sea lanes (and) shipping, and enforce maritime claims.

Additionally, an aircraft carrier would likely be used in regional humanitarian assistance and disaster relief missions."

Why must Beijing reshape its foreign and defense policies based to a significant degree on its energy interests? Since China first became a net oil importer in 1993, its dependence on foreign supplies has risen to 55 per cent in 2010 and is forecast by the IEA to reach 79 per cent by 2030.

The IEA expects that in the five years to 2015, almost half of global oil demand growth will come from China. Unless China can sharply reduce its oil use or find a cost-effective substitute for oil, it will continue to depend heavily on suppliers in the Middle East and Africa, many of them in politically volatile countries.

At present, seaborne supplies make up more than 80 percent of China's total oil imports, meaning that 40 percent of all the oil used by China to provide feedstock for refining and petrochemicals, and fuel its transport system, comes by sea.

Nearly all is the via the Malacca and Singapore straits. As the IEA points out, it is only the share of Chinese oil imports transiting the straits over the next few years that will fall, not the total volume. This is actually projected to increase to nearly 3.5 million BPD in 2015, from around 3.1 million BPD now, in line with rapidly rising Chinese demand for oil.

China's reliance on seaborne oil imports seems set to grow in the years ahead. This can only mean that Beijing's interest in the continuing security and reliability of the Malacca and Singapore straits as a key supply channel will intensify.

Michael Richardson is a visiting senior research fellow at the Institute of South East Asian Studies in Singapore.


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