China's thirst for oil fuels potential global flashpoint
China’s growing thirst for oil will place a greater strain on the world’s top supplier, Saudi Arabia, at the very time doubts are being raised about the kingdom’s ability to substantially increase production.
Should output falter in Saudi Arabia and other Middle East nations, some analysts warn of growing tension – or even conflicts – over access to diminishing resources between China and the world’s biggest oil importers, the United States and Japan, unless alternative sources of energy are found.
With its economy booming, China is striving to meet its enormous energy needs by intensifying its ties to major energy producing countries and seeking to buy a wide array of foreign oil and natural gas assets.
A unit of China’s biggest state-owned oil firm, China National Petroleum Corporation, announced last week that it reached an agreement to buy a major oil producer in neighbouring Kazakhstan for $4.2bn (€3.4bn).
Beijing’s strategy was dealt a blow earlier this month, however, when state-controlled CNOOC abandoned its $18.5 (€15.1bn) bid to acquire California-based Unocal Corp., citing enormous opposition to the deal in Washington.
But even if China were to double in the next five years the foreign energy reserves it acquires for its own domestic use, it would meet only a fraction of its expanding oil appetite, experts who follow China’s oil industry say.
“China will never be able to satisfy its oil demand through foreign acquisitions,” says Gavin Thompson of the Beijing office of British oil consultants Wood Mackenzie.
”They are now getting 55-60% of their oil imports from the Middle East. In the future that proportion will only increase, because the Middle East is where the oil is.”
Chinese oil experts say the country will remain heavily dependent on crude from that region.
“It is an unarguable fact that China’s dependence on Middle East oil is increasing,” said a recent report from the government-sponsored Chinese Academy of Social Sciences. “And this reliance will continue. Henceforth the Middle East will be the most important supply source of international oil for China.”
Out of China’s total oil consumption last year of 6.7 million barrels a day, almost half came from imports, according to BP PLC statistics. Chinese customs figures show Saudi Arabia provided 16% of China’s import needs, with Oman and Iran contributing another 24% between them.
Less than 10% of its imports – about 300,000 barrels a day – came from foreign oil properties controlled by Chinese firms, said Wu Kang, a fellow at the University of Hawaii’s East-West Centre in Honolulu, citing Chinese statistics.
And as China’s economy expands, Wu estimates that its import demands will swell to five million barrels a day by 2010.
Saudi Arabia is probably the only country that can meet those demands, Wu says - at least for the next several years.
“But in the long term, there is a big problem,” Wu said.
Adrian Loh, an analyst with Merrill Lynch in Singapore, believes the situation will deteriorate even sooner. He predicts China’s oil import needs in 2010 will grow to at least 10 million barrels a day – twice Wu’s projection and an amount that would leave it struggling to find Persian Gulf suppliers.
“We believe that more than 50% of China’s oil imports in five years will have to come from Saudi Arabia,” Loh said. “The problem is, I’m not sure they’ll be able to deliver them.”
In recent months, influential oil analysts have begun to question Saudi Arabia’s petroleum potential.
They cite the refusal of state-run oil company Saudi Aramco to provide reliable data about the performance of its fields and the methodology underlying its doubling of the kingdom’s estimated oil reserves in 1988.
Houston investment banker Matthew Simmons, author of the recently published “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy,” has emerged as a leading critic of the Saudi oil claims.
He argues that Saudi Arabia’s best oil fields are ageing rapidly and warns that the giant Ghawar field, which produces half the kingdom’s output, could collapse in coming years because of mounting structural problems – with devastating consequences for global energy markets.
Questions about Saudi oil output, China’s growing demand, plus the wild card of terrorism are the recipe for “a perfect storm” that could spark future conflicts over access to oil, says Gal Luft, executive director of Washington’s Institute for Analysis of Global Security, a conservative think tank that advocates reducing America’s demand on foreign oil sources.
Recent tensions between China and US over trade, oil acquisitions and China’s military buildup, as well as friction between China and Japan over conflicting claims to energy resources in the East China Sea and historical memories about World War II, have already created a delicate atmosphere, Luft says.
“In an environment of tension like this small incidents can spin out of control and lead to military confrontation,” Luft says. “It doesn’t necessarily mean war, but in all of this energy will be the main sticking point. It’s far more important than any other issue.”
Analysts said state-owned CNPC International’s acquisition of PetroKazakhstan was partly influenced by China’s desire to cement ties with Central Asia, reflecting its unease at the presence of US forces in the former Soviet region that borders Afghanistan.
