Middle East Economic Survey

VOL. XLIX

No 3

16-January-2006

REGIONAL/SUPPLY/DEMAND

China-Arab Energy Cooperation: The Strategic Importance Of Institutionalization

By Prof Wu Lei

The following paper was delivered to the China-Arab Cooperation Forum, sponsored by China’s Ministry of Foreign Affairs, in Beijing on 12-13 December 2005 by Wu Lei, Professor of International Relations at Yunnan University, Kunming, China. Qinyu Shen, lecturer at Capital University of Economics and Business in Beijing contributed to the authorship of the paper.

A Reassessment Of China’s Energy Security

With their continuous and rapid economic growth, China’s energy issues are becoming increasingly prominent, forcing the country to face a host of serious challenges, among which are a tight supply of primary energy such as coal, oil and gas, tremendous pressure arising from the need for a sustainable supply of energy, an irrational energy mix, low energy efficiency, environmental protection and the “China energy threat” repercussions. China’s diplomacy calls for new thinking.

Nevertheless, of all the above mentioned challenges, oil security is most the most important. From a supply-demand perspective, the following issues are of great magnitude:

• China’s oil demand is greatly outpacing its supply. From 1993 to 2003, China saw an annual growth rate of oil consumption of 5.11%, while the world’s average in the same period was only 1.37%. Also in the same period, China’s annual supply growth went below 1%.
   

• China’s dependency on imported oil is increasing rapidly, rising from 7.6% in 1995 to 34.5% in 2003. In 2004, its oil consumption went beyond 300mn tons, out of which 120mn tons were imported, rendering China’s dependency on foreign oil over 40%.
   

• At such a growth rate, China’s oil consumption and dependency on imported oil are logically increasing more rapidly than had been predicted and estimated. A careful look at the two indices since 2000 gives a clear picture that both have gone beyond what was forecast. Around 2000, some Chinese analysts predicted that only by the year 2020 would China’s oil consumption have reached the level of 500mn tons and its dependency on imported oil exceeded 60%. The new predictions, based upon the Grey Theoretical Model, have it that if China falls short of effective regulatory policies, its oil consumption will exceed 400mn tons in 2007 and climb further up to 500mn tons in 2010; if China’s domestic oil supply stays at 200mn tons in 2010, its dependency on imported oil will have to exceed 60%. In this sense, in 2010, not to say 2020, China’s oil supply shortage will reach 300mn tons. Therefore, it is obvious that China’s oil supply will face more serious challenges if proper regulations are not adopted.

EIA’s Estimates (2004) Of China’s Oil Supply-Demand Balance

(Mn B/D)

Strategic Opportunity

The fact that China’s future oil supply will have to depend on the Middle East and North Africa provides Sino-Arab energy cooperation with a huge strategic opportunity. Since 1999, China’s major sources of crude oil imports have been the Middle East and North Africa, and these imports have accounted for 70% of China’s aggregate crude imports. Though its imports from the Asia-Pacific markets are increasing, the proportion is actually decreasing.

Sources Of China’s Oil Imports Between 1999 And 2004

(10,000 Tons)

• Taking into consideration global oil distribution, producing capacity, supply potential, import costs and other factors, most of China’s future oil imports, accounting for 70-80% of the total, will have to come from the Middle East and North Africa, particularly from the Gulf nations. As today’s international oil security is rooted in the uneven distribution of oil resources, China has to be able to cope with it and get out of it as much as possible. Although oil imported from Russia, Central Asia and other parts of the world would help China improve its oil security, there is no denying that Middle East and North African oil has been and will continue to be a big element in China’s oil security formula.

Ratio Of Middle East And North African Oil In China’s Imports, 1999-2004

Estimates By EIA In 2004 Of China’s Oil Import Sources In 2020

• Over the past decade, China has targeted Russia and Central Asia in its search for diversified oil supplies. It is true that Russia, Central Asia and other parts of the world are of importance to China in terms of its multi-source oil supply strategy and of China-Russia or China-Central Asia energy cooperation; yet energy from either Russia or Central Asia can only serve to complement rather than displace the role of Middle East oil in China’s oil security program. This conclusion is supported by the following points. First, energy resources and development potential in Russia and Central Asia are generally no match for those in the Middle East. According to some international studies, Russia’s oil production will start to go down from 2010 and the export of oil and gas from Central Asia will not see immediate progress. Second, energy infrastructure in Russia and Central Asia is out of date and seriously drags down the oil production and export potential. Third, Russia, the “energy empire”, is not founded on oil, but on gas. Fourth, since President Putin came to power, Russia’s “energy nationalism” has been gradually coming back onto the stage and this has brought about some negative impact on China-Russia energy cooperation and joint development.
   

• Our analysis is that in the coming 5-10 years, assuming a smooth unfolding of China-Russia and China-Central Asia energy cooperation (pipelines construction, for example), the total contribution of oil from Russia and Central Asia to China will not be over the level of 100mn tons. A conservative estimate is that by calculating on the basis of the benchmark China will have to import 200mn tons of oil in 2010 and 300mn tons in 2020, with 140mn tons and 220mn tons coming from the Middle East and North Africa respectively, plus oil from other parts of the world (Latin America and Asia-Pacific). The two figures, when put together, indicate that China’s oil imports from the Middle East and North Africa will make up over 70% of the country’s total volume of oil imports.

The Strategic Significance Of Institutionalization In China-Arab Energy Cooperation

It is evident that China’s rapid economic growth and its increasing demand for oil create a tremendous strategic opportunity for Sino-Arab energy cooperation. Not only is China’s energy thirst changing the international energy pattern, but it is also contributing to the social and economic development in the Arab oil-producing nations.

China is well advised to review and reconsider the position of the Middle East countries, especially those Arab countries within the GCC, for they are an important part of China’s overall security strategy and foreign policy. Greater stress needs to be put on the Arab nations and an even higher priority being accorded them by a readjusting and reformulating China’s policies toward the region (energy policy included, of course). As energy security has been an important factor for China to work out its Arab policy, this very factor should play a more active role in repositioning the Arab nations in its overall foreign policy. Therefore, it is believed that the core of China’s Middle East policy should be: to make its strategic interest in the Middle East a policy objective, to enhance economic and trade relations centering on energy with Middle East and North African nations, and to vigorously get involved in the region’s affairs for promotion of peace and stability there.

China needs also to convince the Arab nations that for some time to come its social and economic development will continue to grow at a high rate, which means accordingly that its energy (oil) consumption will maintain a steady and rapid growth. Such growth is only natural in a nation’s social and economic development course and it can but boost the world’s economic development as a whole and the Arab oil-producing nations will definitely benefit from it. On the one hand, China’s energy consumption market is extremely huge; on the other hand, the Arab nations are capable of supplying China with the oil it needs. With this in mind, bilateral energy cooperation can be reinforced owing to the mutual benefits and a win-win game. Furthermore, the long-term strategic energy cooperation will pave the way for both partners to further collaborate in other areas like politics, culture, science and technology. Over recent years, oil and gas from Arab nations have come pouring into China, rendering China and Arab nations more closely tied economically; and bilateral trade has also seen a rapid increase. From 1991 to today, China’s exports to the six GCC nations have expanded 10 times and in 2003 alone, the increase rate was 45%. In 1991, China was Saudi Arabia’s 9th largest trade partner and now it ranks the 4^th and will possibly rank 3^rd in 2006. Yet, there is much room for deepened and widened bilateral economic cooperation.

Taking into account the active role Sino-Arab energy cooperation plays in developing bilateral economic and political ties, the time has come for this cooperation to be institutionalized to serve its strategic purpose.

• Over a range of issues under discussion within the China-Arab Cooperation Forum, a more prominent role should be given to the issue of energy cooperation. Under the framework of the Saudi-based International Energy Forum (IEF), a China-Arab energy forum should be established so that both sides can deepen their dialogue and widen their cooperation in the areas of oil markets, supply security, oil price, trade and investment all for a better understanding and coordination of each other’s policies and interest.
   

• A China-Arab Energy Forum should meet, at ministerial level at least, and be treated as an international organization in which strategic dialogues and consultations can be held on a regular basis to work out substantial and authoritative cooperative arrangements.
   

• To encourage expansion of bilateral trade and investment in energy, cooperation is necessary between the two sides. Until now, the Chinese side has absorbed direct or indirect investment from the Arab side in the downstream fields like refining and marketing. China should continue to be open to the Arab oil-producing nations in terms of more Arab investment in the fields of strategic petroleum reserves, infrastructure of energy transport and new refineries. Correspondingly, the Arab nations should make some constructive arrangements for China to participate in their upstream exploration and development. Only by doing this, the energy cooperation between the two sides can achieve substantial progress and China’s energy security be organically incorporated into that of the Arab nations.
   

• The Gulf region is undergoing a transitional period, characterized by instability, frequent civil unrest and conflicts, as well as interferences and interventions by big powers. So risk factors in energy security will persist for a long time. Needless to say, energy cooperation between China and the Arab nations goes well beyond energy itself. Geopolitical considerations are evident for facilitation of dialogues and coordination of each other’s energy policies. Such geopolitical energy cooperation can create a political environment for both sides’ energy security and this is conducive not only to deepening the energy partnership, but also to the further development of the political, social and economic relations between the two sides. To achieve this goal, it is imperative for both sides to exert every effort by means of open dialoguess and frank consultations on the basis of mutual benefit and a win-win game.