China's oil quest causes friction

By Antoaneta Bezlova

BEIJING - Amid global shortages and price rises, what China is paying for its imported oil could involve much more than just cash. China's strategy of tapping new oil reserves in some countries, blacklisted by the US as troublesome, is meeting increasing political resistance from Washington.

A week before Chinese President Hu Jintao's scheduled meeting with US President George W Bush (later canceled due to Hurricane Katrina), on the fringes of the United Nations summit in New York, Washington warned Beijing that the two countries would be on a collision course if China continues to pursue energy deals in countries like Iran and Sudan. Deputy Secretary of State Robert Zoellick warned that Beijing's ties with "troublesome" states such as Burma and Zimbabwe were ''going to have repercussions elsewhere'' and the Chinese would have to decide if they wanted to pay the price.

China must choose whether it wants to work with the US to ameliorate problems posed by these states (while still protecting

Beijing's energy interests) or whether ''it wanted to be against us and others in the international system as well'', Zoellick was quoted telling reporters in Washington.

Beijing sees energy shortages as one of the biggest potential threats to China's national security and social stability. China became a net importer of oil in 1993 and imports since then have risen sharply. Last year it imported 2.46 million barrels per day (bpd), accounting for about 40% of current demand. By 2025, according to projections by the US Energy Information Administration, China's oil imports will reach 9.4 million bpd of a total consumption of 12.8 million bpd.

Most analysts agree that the surge in Chinese demand has kept global supplies of oil extremely tight, and was in large part responsible for the rapid oil price rises of 2004. In this supply-constrained environment, Chinese planners have become fixated on their goal of diversifying the country's sources of oil, gas, electricity and coal.

They have sought resources in Iran, a country the United States and Europe accuse of pursuing nuclear weapons, as well as other states that have been hit by political instability or are accused of human rights abuses. Among them are a clutch of African states that together meet 25% of Chinese oil import needs.

Sudan, whose regime has been accused of genocide in the Darfur region, is currently China's largest overseas production base. China National Petroleum Corporation (CNPC) holds 40% stake in a consortium that is developing large fields, and is building a US$215 million export terminal in Sudan. China paid for this investment, in part, by providing arms to the Sudanese government. Other controversial supply deals have been struck with Chad, Gabon and Nigeria.

In Iran, where US companies are prohibited from investing more than $20 million annually, Chinese companies have signed long-term contracts valued at $200 billion, making China Iran's biggest oil and gas customer. Zoellick said he had told Chinese officials that from a US perspective, ''it looked like Chinese companies had been unleashed to try to lock up energy resources''.

Such investments carry major political risks. Both the Sudanese and Iranian governments are the targets of the US administration and face political, trade or military sanctions by Washington. Already, China has stated it will veto a proposed resolution at the UN Security Council to impose sanctions against Sudan because of its human rights violations in Darfur.

With Iran, the situation looks even more precarious as Washington is revving up its opposition to the regime and soon, China may have to choose between agreeing to sanctions, which would potentially destroy the value of many investments it has made, or become an outcast in the international community. Zoellick, who spoke on key issues facing the two powers before the meeting of their leaders next week, said he was not sure whether Beijing's energy quest was propelled by new Chinese oil companies or by a government ''strategic plan''.

Last week, Beijing said energy issues would top Hu's political and economic agenda when he visits the US ''I think the two leaders will talk about energy exploration and the main idea is to strengthen cooperation,'' He Yafei, China's Director General of North American and Oceanic Affairs, said at a briefing on the visit. Hu was originally due to meet Bush at the White House but that visit was postponed due to the devastation caused by Hurricane Katrina. The two are still expected to meet at the UN summit, marking the 60th anniversary of the body's formation.

In Beijing, Chinese oil executives tried to strike a conciliatory note ahead of the meeting. Zhang Weiping, deputy chief engineer of China National Offshore Oil Corporation (CNOOC), said it was China's responsibility to the world to save energy and use resources wisely. He was speaking at an energy seminar in Beijing, organized by China International Relations Research Institute and the Royal Institute of International Affairs of Britain. CNOOC, China's largest offshore oil producer, was forced to drop its bid for US-owned oil giant Unocal this summer after a torrent of criticism from the US Congress.

The US is not the only country where China's quest for energy assets has ruffled feathers. China is increasingly facing off with India, as both countries are competing to ensure future supplies by either buying into new foreign oil and gas fields or by signing supply contracts when new reserves come on stream. The rivalry between the world's two largest developing countries was underscored, earlier this year, when Indian Prime Minister Manmohan Singh said that his country could ''no longer be complacent'' in its competition with China to secure international energy supplies.

Last month, CNPC won an auction for PetroKazakhstan, a Canadian oil company with operations in Kazakhstan, beating a joint bid by Oil and Natural Gas Corporation (ONGC), India's main, state-owned oil company, and the British-Indian steel maker, Mittal Group. A similar story unfolded in October 2004, when a bid by ONGC to buy an interest in an offshore block in Angola from Royal Dutch Shell was halted when China offered the African country a $2 billion aid package.

(Inter Press Service)