China's Thirst for Oil Fuels Competition

By DAVID HOLLEY

July 28, 1997 12 AM PT

TIMES STAFF WRITER

BEIJING — Pushed by an economic boom that is rapidly transforming this huge country into a big-time oil importer, China’s main petroleum firm is becoming a major player in the worldwide oil scene.

Analysts say China’s surging thirst for energy will put upward pressure on prices, contribute to global warming and trigger diplomatic consequences--prompting closer ties to many countries but perhaps exacerbating conflicts with others.

The state-owned China National Petroleum Corp., or CNPC, previously a mainly domestic producer, signed four deals last month valued at a total of nearly $6 billion, including a $4.3-billion deal in Kazakhstan that analysts say marks the largest investment outside the country China has made.

The Kazakhstan deal places China squarely in the middle of growing international competition to exploit vast oil reserves of the Central Asian nations of the former Soviet Union.

China also announced plans to spend an additional $3.5 billion to build a 1,800-mile pipeline to carry oil from Kazakhstan into China. The Chinese are expected to retain control of the pipeline project but seek engineering assistance from a Western or Japanese firm.

“These deals are the beginning of a new era in China’s relationship with the rest of the world,” said Daniel Yergin, oil historian and president of Cambridge Energy Research Associates.

In the second of the four deals, CNPC made an unusual foray into Latin American oil production, bidding a total of $359 million for rights in two marginal Venezuelan fields that are producing only small quantities of oil but that could yield more by the use of advanced technology.

The other agreements were a $1.2-billion deal for development of an Iraqi oil field--although exports cannot be made until U.N. sanctions against the country are lifted--and a strategic alliance with Italy’s Agip, the oil exploration and refining arm of the state-owned energy group ENI.

“These new deals represent an effort by CNPC to turn itself into an international operator and help secure the oil China will need,” Yergin said. “This is another example of them putting old-fashioned socialism behind them: They don’t have to be self-sufficient in oil. They’re going to be such an enormous exporter of other goods, they can pay for oil with those exports.”

Many analysts see China as the most dramatic example of an overall boom in Asian demand for energy. The Tokyo-based Institute of Energy Economics estimates that by 2010, major Asian countries besides Japan will need to import about 14.3 million barrels of oil per day, triple their 1992 level.

Steadily Rising Imports

China became self-sufficient in oil in the mid-1960s, then grew to be a major exporter, with exports peaking at 36% of production in 1985. It became a net importer in 1993, and the inflow has now risen to about 500,000 barrels a day.

Analysts and the Chinese government say that figure may hit 1 million barrels a day as early as 2000. By 2010, China is likely to be importing about 3 million barrels a day, predicts Cambridge Energy Research Associates.

“According to our forecast, based on constant 1990 prices, by 2020 China’s total gross domestic product will be 10 times that of 1990,” said Hu Angang, an economist at Beijing’s Qinghua University who specializes in energy and environmental issues.

“The total population, now at 1.2 billion, will reach 1.5 billion,” he added. “So China has to import more and more oil and gas resources from the international market to support the population’s consumption and support China’s economic growth. . . . I think for Exxon, for other companies, this news is good news because China needs international oil. For these companies, it’s a good opportunity.”

While China’s growing appetite for energy may indeed be good news for oil firms, the effect on ordinary consumers in the West may not be so benign. Details, however, are hard to predict.

China’s emergence as a major oil importer could push prices higher, but other factors--such as exploitation of untouched oil and gas reserves plus use of advanced technology--may head off severe price jumps even as world consumption grows, analysts say.

“Obviously they will be a big importer,” said John B. Cheatham, president of Arco International Oil and Gas Co., a division of Arco of Los Angeles. “[But] whether their increased demand is going to really drive up prices is hard to say. There are still huge reserves in Russia, Iran, Iraq and other places that are going to open up.”

Cheatham gave the example of China, not too far into the 21st century, perhaps consuming about 5 million barrels a day more than it does now.

“That’s a huge amount, and it requires huge investment to do that,” Cheatham said. “But it’s only 7% of today’s [global] production. If you did that all at once, there’d be a huge spike [in prices]. But if you do it over time, the industry seems to be able to deal with it.”

Global Warming

Many industry experts seem more worried about China’s impact on global warming than about oil supplies or price.

“I think there’s plenty of oil for a long time, and oodles of gas for as far as the eye can see,” said Sarah Miller, editor of the New York-based Petroleum Intelligence Weekly. “[But] there are various environmental and global-warming issues when you talk about developing a country of that population.”

China--with relatively few motor vehicles and 75% of its energy coming from coal--today uses only about one-fourth as much oil as the United States. Moreover, its oil imports are only about one-seventh the demand of 3.76 million barrels a day, whereas Americans import more than half the oil they use.

But the implications of China replacing bicycles with cars are obvious, both from an energy and environmental standpoint.

China’s heavy reliance on coal, a relatively dirty fuel, is one reason China is already second only to the United States in production of greenhouse gases, which are responsible for the threat of global warming.

Hu of Qinghua University said the World Bank has calculated that China, with more than 20% of the world’s population, has only 2.34% of the world’s known oil resources, 1.2% of natural gas resources, 13.2% of potential hydroelectric resources and 11% of the world’s coal.

Just a couple of years ago, there was still very strong resistance among Chinese leaders to the thought of becoming dependent on foreign oil supplies. Now this view is rapidly changing. Hu and other scholarly researchers have promoted this shift by publishing articles advocating just the sort of policy changes that are now unfolding.

“My idea is that a country’s security, even in food and energy, is based on international competitive capacity,” Hu said. “If you export more and more, you can get more and more capacity to import anything--even oil or other strategic resources.

“But be careful not to import from just one country, or one region. Don’t put all your eggs into one basket. By diversity, you can reduce the danger, reduce the risk. . . . Oil is really just one case in this strategy. The same sort of strategy can be applied to other resources such as grain and minerals.”

The desire for diversification appears to be a key reason for China’s interest in last month’s Venezuelan deals.

Kazuya Fujime, the Institute of Energy Economics’ managing director, said: “China is trying to avoid too much dependence on the Middle East. If something happens there, China wants to be able to secure resources from other places.”

By 2020, net oil imports will be more than 40% of China’s total oil consumption, Hu predicted. But China will continue to rely heavily on coal and other domestic sources of energy, so the percentage of imported oil in its total energy consumption will still be less than 10% even in 2020, he said.

Oil historian Yergin and others say that China’s increased integration into the world economy, as reflected in its petroleum strategy, on balance should be win-win for China and the West.

“There certainly are scare scenarios out there about China flooding the world economy [with cheap exports enabling it to buy oil] and about conflict over access to energy supplies,” Yergin said.

“But I think the logic of China’s involvement in the world economy will tend to promote market solutions rather than political conflict over these issues. What’s really astounding is not the conflict but the degree of cooperation that’s emerging. It’s a very healthy thing for China to be making investments outside China . . . because it ties people together in cooperation.”

Hu said it is likely that China’s two long-established oil firms--CNPC and China National Offshore Oil Corp., plus a small new firm, China National Star Petroleum Co., which is an offshoot of the Ministry of Geology and Mineral Resources--will start behaving more like corporations and less like government agencies.

“I think it would be best if some foreign enterprises were competing with them too [inside China],” he added.

U.S. Access to Markets

But just how accessible China’s own oil reserves will be to Westerners remains to be seen. While many Western oil firms have a modest presence in China, often in exploration of relatively marginal areas, “the Chinese typically have kept the better areas for their own companies,” said Arco’s Cheatham.

Cheatham added, however, that he believes foreign firms will play a greater role in China’s domestic oil industry because China simply doesn’t have the capital to do everything it needs to do.

Also, while China’s own oil technology is sufficient for routine operations, it can benefit from deals that bring in Western technology for deposits that are hard to find or extract. It is already doing that to some degree.

Arco, one of the biggest Western players in China, earns about $65 million annually from the offshore Yacheng gas field about 60 miles from China’s southern Hainan Island, Cheatham said. The gas is carried to Hong Kong by a 500-mile underwater pipeline that was built by the firm and began operating early last year.

Arco also has a 20% equity stake in the Zhenhai Refining and Chemical Co., which runs China’s third-largest refinery, in Ningbo, about 100 miles south of Shanghai.

China’s search for oil and gas supplies, said Miller of the Petroleum Intelligence Weekly, probably will mean far stronger economic ties to three areas that are strategically important to the United States: Russia, the area around the Caspian Sea and the Middle East.

“I think one can envision that developing as a very important factor in global politics,” she said.

Koof Kalkstein, vice president of the Boston Consulting Group, said he is struck by the degree to which China is “playing the Muslim card,” dealing on very friendly terms with countries such as Iran where the United States “has more diplomatic difficulties.”

The area in which experts see the greatest possibility of China’s thirst for oil exacerbating conflicts is the South China Sea, where China asserts a vast territorial claim to islands far from its own shores but close to its neighbors. The sharpest tensions so far have been with Vietnam.

One reason Beijing is making such extensive claims, some analysts say, may be that it realizes that the most likely areas to find oil lie much closer to Indonesia, Malaysia and Vietnam--which are pressing conflicting claims--than to the Chinese mainland.

But Cheatham notes that there are similar disputes “all over the world,” and it is in the interests of China and its neighbors to settle this one in a way that would allow exploration and production to proceed.

Etsuko Kawase of The Times’ Tokyo Bureau and Anthony Kuhn of the Beijing Bureau contributed to this report.

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China’s Oil

China was a net exporter of petroleum until 1993, when its booming economy began demanding more oil than the country could produce.

1993: Year China became net importer of oil

Note: Figures after 1995 are projections

Source: Cambridge Energy Research Associates