China’s Middle East Policy
The likely result of the intense competition in Central Asia could mean that the Chinese majors may be looking to place their investments in fields closer to home, away from the Gulf

As Cina’s demand for resources grows to fuel its burgeoning economy, the role that the Middle East, especially Oman, is playing is also increasing. Although the Western majors will continue to play a strong role in the Middle Eastern oil industry, China is looking to insert itself into valuable niches to guarantee both stability and variety of supply to its home market. The Middle East will remain a key target for Chinese oil companies, though the country’s ability to access supplies in sub-Saharan Africa and Central Asia may insert a level of competition between producers for China’s attention.

In 2005, China consumed some 2.5 billion barrels of oil, increasing by 7 per cent on year-on-year terms. With economic growth being a strong 10.7 per cent in 2006, the growing needs of China’s 1.3 billion population are only to likely grow vigorously. The International Energy Agency (IEA) expects oil demand in China to grow by 6.1 per cent in 2007, rising to 7.56 million barrels a day. Production within China is no longer keeping up with demand, despite increasing 1.7 per cent in 2006. Some 47 per cent of the country’s needs are being met through imports, with the Middle East supplying 58 per cent of the total. Iran, Saudi Arabia and Oman provided most of this supply.

Oil trade
For Oman, China represented 84.3 million barrels, or 32.2 per cent, of its overall oil exports in volume terms in 2005, slightly down on the 106.4 million barrels, or 40.4 per cent, recorded in 2004. East Asia dominates the Omani oil export picture, accounting for 99.1 per cent of all production. China has done more than simply being a willing recipient of oil from Oman, and its oil companies have won exploration and production rights over blocks 36 and 38 in southern Oman, worth an estimated $600 million in investment over the coming years. The two largest markets for China in the Middle East, however, remain Saudi Arabia and Iran, with energy deals and exploration agreements in the works, especially with Tehran.

China’s move into the international oil and gas arena has been championed primarily by China National Offshore Oil Corporation (CNOOC), China Petroleum and Chemical Corporation (Sinopec), and China National Petroleum Corporation (CNPC). In 2005-06, these emerging oil majors spent some $12 billion on investments and exploration. Unlike other oil majors, the Chinese companies have shown a willingness to get into difficult and niche markets, as well as accept lower rates of return, all to ensure sufficient supply for the home market. However, this does not mean that China has managed to establish a completely independent supply of energy. According to Eurasia Group, only around 320,000 bpd worth of equity oil flows into China, less than 10 per cent of present imports.

In order to boost the level of exploration and investment of these firms, the Chinese government has offered a range of tax incentives for activities in Bolivia, Ecuador, Kuwait, Libya, Morocco, Niger, Norway and Oman. The mix presents a good balance between established and secure oil producers as well as new, slightly riskier and untested markets.

Interestingly, key states such as Iran, Nigeria and Saudi Arabia were not put on the list, and even promising producers such as Egypt and Sudan – in which the Chinese are already seeking a role – were not included. China’s reticence in some markets may be influenced by the questionable contracts that were done with Iraq prior to 2003, with the deals inked with the Baathist government now on ice under the present Iraqi administration.

Central Asian market
Aside from the Middle East, Central Asia represents the next big opportunity for China to secure energy supplies. The 2005 purchase of PetroKazakhstan and the opening of a pipeline into northwest China from Kazakhstan demonstrate that China is attempting to create a “near abroad” of interests. By assisting in the development of the Kazakh oil infrastructure, China is aiming to source 15 per cent of its imports from the Central Asian state.

However, China is in a competitive market, and Russian and Central Asian oil and gas is also being sought by Japan. China has so far managed to maintain Russia’s favour, and it looks as if any extension of the pipeline network from Siberia will be to the benefit of China as a primary export destination. For the Americans and British, such pipelines threaten the primacy of the Baku-Ceyhan pipeline across Turkey, which was constructed with the eventual goal of being the window to the Mediterranean for Central Asian energy exporters. Hemmed in as they are geographically, the Central Asian states are very much the centre of massive speculation and intrigue as to how their energy resources will get to the market. Other competing routes include Iran, Afghanistan and Pakistan. For Oman and other more developed states, the likely result of the intense competition in Central Asia could mean that the Chinese majors may be looking to place their investments in fields closer to home.

However, as indicated by the spread of interests China has shown, it appears to be most keen in investing in markets where the major Western oil majors are not present, or where competition from them is absent because of political concerns. Sub-Saharan Africa has been a particular target, with China still heavily involved in the Sudanese and Angolan markets, while looking to expand into a number of other African countries. Oil from Sudan made up about 5 per cent of China’s supply in 2005, or around half of Sudan’s oil exports. Angola has exported some 700,000 bpd in oil to China, and a number of mixed equity deals are being secured. The core reasons for this African expansion are to provide a diversity of sources for China; though in the process, it has been exposed to some decidedly less stable partners. Through a combination of trade and aid, China seeks to woo and hopefully stabilise such countries, as well as extend its diplomatic and economic reach into softer markets.

China also has the ability to further develop its own energy reserves, but to do so would require the resolution of long smouldering border disputes with its neighbours. Japan and China are slowly beginning to resolve their border dispute in the China Sea, though the likelihood of that paving the way for exploration may not be any time soon. The South China Sea dispute is far more intractable. Involving the competing claims of China, Taiwan, Indonesia, Malaysia, Vietnam and Brunei, the chances of this supposedly gas-rich zone being opened up are even less likely.

Overall, for China the energy landscape remains a volatile place. In its need to fuel the engine of economic growth, it is being forced into more and more unreliable markets. It is possible that over the long term the chances it is taking will pay off, but for now the countries of the Gulf can breathe a sigh of relief. China will remain a good customer for the foreseeable future, and even if it manages to diversify its supplies, fresh demand will soak these up.

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