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| Volume VII, June 2000, Number 3 |
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| China
and the Middle East: Cross-investment
in the Energy Sector |
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| Xiaojie Xu |
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Mr. Xu is the founder and a research fellow of Petro
Strategic Studies in Beijing. The
author would like to thank Edward Morse of the Hess Corporation for his
insightful suggestions and valuable corrections of the paper. The opinions expressed and any errors or
omissions are entirely the responsibility of the author. For a printable pdf version of this article, click here.
BACKGROUND
China experienced double-digit economic growth in the first half of the 1990s and a growth of 7-8 percent in 1996-98. The Asian financial crisis dampened Chinese growth, even though the country's foreign-exchange rates were maintained. China's economic growth fell to 7.8 percent in 1998, 7.1 percent in 1999 and may hover around 7.5 percent in 2000.
Meanwhile, China's huge population of over 1.2 billion people and its high economic growth have created rising demand for energy (over 5 percent per annum in 1986-95) making the country the second-largest energy consumer, after the United States, since 1993.1
China should be able to maintain its economic growth at over 6-7 percent until 2010. Under this scenario, its GDP per capita would be over $800 in 2000 and $1500 in 2010. Meanwhile, the population has been forecast to grow to 1.28 billion by 2000 and 1.42 billion by 2010, while the urbanization rate should be over 32 and 38 percent after the years 2000 and 2010, respectively2 (see Table1). High economic growth, meanwhile, has exposed the country to new vulnerabilities with respect to oil and gas supplies.
Table 1: Chinese Socioeconomic Development to 2010
Source: CASS, 1997
Oil
According to a Chinese geological survey, there are 424 basins with possible hydrocarbon deposits inside the country. About 150 of them have been explored over the past four decades. As a result, about 14 billion tons of proven oil reserves (accounting for 3.7 percent of the world's reserves) and 30 tcm of gas have been confirmed. Large oil reserves are found in such basins as Songliao, Bohai, Tarim, Uygur, Zhujiangkou, Pinghu (the East China Sea) and Yingehai (the South China Sea). Chinese oil production grew rapidly from 0.12 million tons (mt) in 1949 to 100 mt in 1978 and 160 mt in 1999. However, the reserves to production (R/P) ratio has decreased below 14 years since the early 1980s.3
Chinese indigenous oil supplies have been lagging behind demand since 1993. The oil deficit is forecast to be around 40 mt in 2000 and over 80-100 mt in 2010. Northwest China is the region with the richest natural resources and is expected to be the main source of new oil. The China National Petroleum Corporation (CNPC), along with foreign oil companies, has invested billions of dollars on exploration and production (E & P) activities in three strategic basins (Tarim, Junggar and Tuha) in the region over the past decades. The result to date is far below expectations, although there are some encouraging discoveries. Three projections have been made for future production growth (Table 2). It is now estimated that the b and c projections may come to fruition but will be about five years later than expected.
Table 2: Possible Western Oil Output (mt)
Notes: *a, b and c stand for three scenarios to 2010
Source: Wan.
Gas
China is endowed with huge natural-gas resources as well. Fifty-four large and medium-size gas fields have been found over the past few years, mainly in such basins as Ordos, Sichuan, the Tarim, the Juggar and the Qaidam, along with the western South China Sea. E & P activities 1991-98 in these basins resulted in newly added proven reserves totaling 853 billion cubic centimeters (bcm). Authorities now believe that additional reserves of about 100 bcm per annum will be needed (Table 3) in the foreseeable future.
Table 3: Gas-Output Forecast (bcm)
Source: SDPC Energy Institute, 1996
An in-depth study shows that gas demand in China has been restricted in the past.4 Considering China's current environmental situation and future economic goals, there is a strong desire to enhance the use of natural gas. The high economic growth forecast above will require an annual gas output of at least 100 bcm in 2010 and 150 bcm in 2020. However, such a high level of natural-gas usage confronts several obstacles, including inadequate internal supply, weak infrastructure and lack of economic incentives.
Strategies
Having reviewed these vulnerabilities, CNPC unveiled a plan in late 1996 aimed at developing 300 mt of oil equivalent by 2010, two-thirds produced from Daqing, Bohai basin, Xinjiang and Sichuan within the country and the rest (i.e.,100 mt) from abroad. Domestically, the plan requires new governmental regulations as well as effective policy and management measures. As a result, both CNPC and Sinopec have to relax their output pressures on oil producers and restructure themselves to stay competitive in both domestic and international markets. At the same time, China has to expand its overseas hydrocarbon resources.
As of 1997, CNPC signed seven major oil-exploration and production contracts with foreign energy firms and governments and 14 subcontracts for a total of some 400 mt of extractable reserves, more than half of which have come into operation. Among them are development projects in Peru signed in 1993 and 1995, an integrated project in Sudan in 1996, a contract with Iraq signed in June 1997 in collaboration with the Chinese Northern Industrial Company, two joint development projects in Venezuela in 1997, and two contracts signed in June and September 1997 with Kazakhstan.
China also intends to tap into Russian oil and gas resources by negotiating with Gazprom and Sidanco regarding gas transportation from Russia to China. In addition, there are dozens of contracts pertinent to technical support and service exports valued at more than $60 million. In 1996-97, China forged its energy links with neighboring regions. Among them are gas and oil pipelines from Russia's eastern region, Central Asia, and traditional oil and liquefied natural gas (LNG) sea-lanes from the Middle East and Southeast Asia. Comparatively, the oil from the Middle East region is not only indispensable but also a strategically critical source for China.
CLOSER LINKS BETWEEN THE MIDDLE EAST AND CHINA
It is well known that Middle East oil accounts for 31 percent of total world oil output and 64 percent of world proven reserves. No one can ignore the great potential of the oil in the region and its long-lasting position in the world market.
In 1997, about 58 percent of Middle East (especially Gulf) oil was exported to Asian markets. At the same time, 74 percent of the oil imports of the Asian Pacific region came from the Middle East.5 Although the import level was slightly lower in 1998 (70 percent) due to the Asian financial crisis, the trend is expected to continue upward to 77 percent over the next five years.6 As a result, there are now concerns over the stability and sustainability of the market in Asia and of effective supplies from the Middle East. The Asian oil glut and low oil prices in 1997-98 resulted from the collapse in demand in the Asian Pacific and the relative oversupply from the Middle East.7 The lessons from the crisis indicate the extreme importance of both the sustainability of major consuming markets and the appropriate adjustments to supply. Stable markets and supplies play an interactive role not only in pricing but also in security. China, as the third-largest oil consumer in the world and the second-largest in the Asian Pacific, will continue to play an increasingly important role in balancing and securing markets. A better understanding and evaluation of Chinese involvement in and its closer links with the Middle East are key to gauging the importance and possible changes in the energy-security scene in Asia and beyond.
Chinese Oil Imports
Historically, Chinese oil imports from the Middle East can be traced back over a millennium to the Tang and Song dynasties. At those times, Persian oil was used for fireworks during wartime. However, sizable oil imports from the Middle East started only after 1985. The import volume in 1998 was 16.67 mt, accounting for 61 percent of total Chinese imports (Table 4). The import volume was 17.41 mt in 1999 and cost $2.27 billion. Oman and Yemen are major sources because of the low sulfur content of their crude-oil streams. (Table 5).
Table 4: Chinese Crude Oil Imports 1992-99 (mt)
Source: Chinese Customs Statistical Review, 2000
Table 5: Chinese Oil Imports from the Middle East (mt)
Source: Chinese Customs Statistical Review, 2000
Table 4 indicates that Chinese crude imports from the Asian Pacific declined to 20 percent, the lowest level since 1993. Chinese crude-oil imports from the Middle East declined 0.7 percent in 1998 compared with 1997. Total oil imports in 1999 are estimated at 40 mt, about 60 percent from the Middle East. Chinese refining facilities have been improved significantly. Some coastal refiners including WEPEC, a Sino-foreign joint venture, are capable of processing high-sulfur-content crude oil from Iran and Saudi Arabia. With these major technological improvements, Chinese sulfur processing capacity has been close to 28.50 mt and will be 36.50 mt in 2005. As a result, Chinese imports from the Middle East could grow by 70-80 percent.
In addition, Chinese liquid propane gas (LPG) imports from the Middle East grew materially over the past few years. Saudi Arabia dominates Chinese LPG imports. Meanwhile, the UAE, Iran and Qatar have been actively trying to increase exports of LPG to China since 1999 and have expressed interest in gas-market penetration in southern China. As reported, China's first LNG receiving terminal is to be constructed in Guangdong province in southern China in 2000-05. Its first stage is projected to cost $592 million, including a receiving terminal with a capacity of 3 mt and a 204-km high-pressure transmission pipeline to Fushan. The second and third LNG receiving terminals have also been planned for Fujian and Shanghai, respectively. Western mobile LNG facilities are applicable to LNG receiving terminals in Guangdong. These projects and other technological innovations present a bright future for LNG importers in the not so distant future.
Table 6: Chinese LPG Imports from the Middle East (mt)
Source: China Customs Bureau, 2000
Oil Services
The Middle East is not only a dominant source of oil but a huge oil-services market as well. Chinese penetration of the Middle East started with its labor-service exports in the early 1980s. China Petroleum Engineering and Construction Corporation (CPECC), the CNPC overseas construction arm, moved into the Pakistan, Kuwait and Iraq markets in 1983 by competing for subcontracts and small turnkey projects as its entry strategy. Its business expansion took place in 1995, when CPECC won an oil-storage reconstruction project valued at $400 million in Kuwait, as well as five highway construction projects in Pakistan. These experiences were soon applied to oil services in Sudan and Egypt. The value of Chinese overseas oil-service contracts by the end of 1997 reached $10 billion. A large increase occurred in 1992-97, from $60 million to $553 million. Operating revenue in 1999 was $1.1 billion. Oil material and equipment exports grew 710 times, from $0.43 million in 1992 to $322 million in 1997. Meanwhile, the Great Wall Drilling Company (GWDC), set up in 1993, captured growing drilling opportunities in Sudan, Egypt, Qatar, Tunisia, Nigeria, Oman and other parts of the Arab world.
Table 7: Chinese Drilling Services Abroad
Source: GWDC brochure, 1998
It was estimated by Gulf Investment that construction investments in Saudi Arabia were $82.7 billion during 1991-95. UAE investment in infrastructure will be over $15 billion in the next three decades, while Kuwaiti and Iraqi oil facilities will also involve significant investments. It has been widely reported that Iraq planned to offer foreign oil companies service contracts to apply technology to eight already-producing fields. This will likely include new reservoir developments at the north and south Rumaila, Zubair, Luhais, Subba, Abu Ghirab, Buzurgan and Fuqa fields. Iraq also will provide incentives to promote exploration in the remote Western Desert. Located near the Saudi and Jordanian borders, Iraq has identified at least 110 prospects from previous seismic work in this region. It is believed that there is a large service potential in the Gulf and the other Middle Eastern countries in the years ahead.
E & P Activities in the Middle East
Thus far, China has a few E & P activities in the Middle East. Considering its low domestic R/P ratio and its growing demand and quest for Middle Eastern oil, China has to expand its direct investments and related activities in the Middle East. Table 8 shows an outline of Chinese E & P projects and investment worldwide. Its main targets, however, have been refocused in Sudan, Iraq and Iran.
Table 8: Chinese Oil FDI Projects in 1997
Source: CNPC Statistical Report
Sudan and Other African Countries
Sudan, Africa's largest country in area, has maintained good relations with China since 1959. Its domestic oil consumption (around 26.34 thousand barrels per day, or 1.31 mt in 1996) was mainly met by imports. Chinese involvement in the African country started in 1995. In March 1997, CNPC signed a comprehensive contract with the Sudanese government. According to the contracts, oil-production capacity from Sudan Block areas 1, 2 and 4 will reach 7.50-10 mt; an oil pipeline 1.54 km in length, completed in May 1999, will deliver 15 mt of oil to Sudan's port. With 40 percent of equity interest, CNPC will hold 2.40 mt of oil output in 2000. At the same time, refinery processing capacity of 2.50 mt is under construction in Khartoum, 50 percent of which is owned by CNPC. Based on its dominant position in Sudan, CNPC will accelerate its investment in the country.
Again, the CPECC and GWDC services support CNPC's exploration and development in Sudan and some other African countries. CNPC proposed to wrap its success up and expand its presence to such others as Nigeria, Algeria and Egypt. Currently, China has four drilling rigs in Egypt and is scheduled to expand its activities in 2000.
Iraq
In May 1997, an Iraqi oil official stated that 3 mbd of production capacity could be resumed within one year, 3.5 mbd within 3-5 years, and an expansion to 6 mbd could be reached less than a decade after the lifting of the U.N. sanctions. This would be accomplished by a threefold development effort: 1) reworking and upgrading existing upstream and downstream facilities, 2) attracting foreign investment for new field developments and production, and 3) actively conducting exploration and development activities in areas such as the Western Desert.
Field development under the three phases would be extensive, with 33 fields containing 50 billion barrels of reserves and a potential production capacity of 4.65 mbd slated for eventual development. Of these 33 fields, 25 have been appraised but never developed. Of the 25 appraised fields, 11 are located in southern Iraq and have an output potential of 3 mbd. Smaller undeveloped fields are located in northern and central Iraq, with estimated output capacities of 450,000 bbl/d and 300,000 bbl/d, respectively. A further eight of the 33 fields are already in production but will require more work to tap additional reservoirs and bring another 900,000 bbl/d of production online.
Although development costs in Iraq are as low as $1 per barrel, there is no doubt that any post-sanctions oil program will require massive amounts of foreign investment. Iraq's former OPEC deputy secretary general, Fadhil al-Chalabi, estimated in May 1997 that Iraq would need at least $5 billion of foreign investment during the first 2-3 post-sanctions years in order to bring the country's oil output back to pre-Gulf War levels. He also projected that $30-$50 billion of foreign investment would be required to bring capacity up to 6 mbd.
As of March 1998, there reportedly were dozens of foreign oil companies from a wide variety of countries, including American oil firms, in discussions with the Iraqi government. Iraq plans to offer new fields to foreign oil companies through production-sharing contracts (PSCs), joint ventures and service contracts. Initially, Iraq plans to offer up to 25 new fields to foreign companies. Ten of these, with a production potential of 2.7 mb/d, are slated for development under PSCs with foreign companies. Four of these fields are located in southern Iraq and, with a combined production potential of 2.1 mb/d, represent the cornerstone of Iraq's post-sanctions development plans. These four "giant" southern fields are Majnoon, West Qurna, Nahr Umar and Halfaya.
As of October 1998, Iraq had signed PSCs (reportedly on relatively generous terms) for a handful of post-sanctions field developments. One deal is with the CNPC and Chinese state-owned Norinco for development of the al-Ahdab field. Al-Ahdab is located about 40 miles south of al-Kut in central Iraq. The field contains an estimated 180 mt of oil and has a production potential of roughly 5 mt annually. CNPC and Norinco signed a contract with Iraq on June 4, 1997, and formed a new company, al-Waha, to develop the field. Development and operating costs are expected to be around $1.3 billion because of U.N. sanctions. CNPC activity has, to date, apparently been limited mainly to surveying work on al-Ahdab. In 1998, CNPC and its Iraqi counterpart were negotiating another contract to develop the Halfayah field. This may be the biggest of any of CNPC's overseas development projects, with a possible output of 18 mt if a final contract is inked. But neither project will unfold unless the U.N. sanctions on Iraq are lifted.
Table 9: CNPC Investments in Iraq
Sources: various
Iran
Iran is the largest natural-gas producer and the second largest oil producer, after Saudi Arabia, in the Middle East. Iran's economic development and petroleum production have in particular been hampered by a harsh political environment since 1979. Although the postwar reconstruction era of 1989-92 led to some economic recovery, the U.S. dual-containment policy and the unilateral implementation of the Iran-Libya Sanctions Act (ISLA) created a slowdown in foreign investments in Iran.8 However, the sanctions, despite their extreme nature, have been unable to achieve their primary objective of halting international involvement in Iran's oil industry. That industry is in a state of restructuring and development to keep up with growing local demand. While its international projects represent attractive business opportunities, American firms have not been allowed to compete in this market.9
In August 1998, the ministry announced invitations to bid on 43 petroleum projects worth some $8 billion in what has come to be known as the "buyback" investment method. The offers include some 20 oil and gas projects in the Persian Gulf, including downstream, at the refineries at Bandar Abbas and Lavan Island, as well as upstream, including several offshore oil fields. So far, China has no direct E & P activity in Iran. Some service projects are under serious review. In theory, China should have stakes in Iran because its growing imports from Iran can place China at a vantage point to develop future business opportunities. Therefore, China will not ignore Iran's gas.
COUNTER-INVESTMENT
Counter-investment is a way to promote capital flows when cross-investment is emphasized. First, the investment or counter-investment in the consuming market needs to be in line with a strategic intent to maintain market sustainability and enhance energy security. It is well-known that Saudi Arabia, Kuwait, Iran and Oman have huge overseas assets thanks to petro-dollars deposited after the 1970s. Initially, Saudi Arabia and Kuwait's overseas investments were largely located in the developed countries. Their investments in emerging Asian markets have been emphasized only since the early 1990s. Iran and Oman joined some refining projects in Southeast Asia and Central Asia, for example. These counter investments are in fact needed for oil-consuming countries like China because of the domestic-capital bottleneck.
Saudi Arabia
Saudi Arabia has taken aggressive measures to secure market share for its crude-oil exports through its downstream ventures in the United States, Europe and Asia. In February 1998, the South Korean Daelim Engineering Company agreed to build a chemical plant in Jubail for $170 million. The plant was to produce 500 mt of ethyl-benzene and styrene monomer beginning in March 2000. In January 1998, Japan's Chiyoda Corporation won a $500-million order from Saudi Arabia's Eastern Petrochemical Corporation to build a 500 mt ethylene-glycol plant in the Jubail Industrial area. Another project, Yanpet II, is being developed by Saudi Arabian Basic Industries Corporation (SABIC) and Mobil's Yanbu Petrochemicals subsidiary at a cost of $2.2-2.5 billion. Yanpet II involves construction of a second 800-mt ethylene cracker, with the capability to produce polyethylene and ethylene glycol.10
Saudi Arabia at one time proposed constructing a large refinery, with 100 thousand bbl per day of processing capacity in Shangdong province in China. It also proposed another large petrochemical plant with ExxonMobil in Fujian province to capture market potential in southeastern China. The latter project has dual benefits to both companies. Sino-Saudi cooperation will be expanded and broadened further because each country promised to open its own domestic markets to the other when Chinese President Jiang Zemin officially visited Saudi Arabia on October 31, 1999. An agreement signed by the two countries includes oil, education and broadcasting and TV cooperation.
Kuwait
Since the 1980s, Kuwait has undertaken wide overseas investments in Europe, America and Asia. Kuwait Foreign Petroleum Exploration Company (KFPE) maintains about 30,000 bbl/d in overseas oil production, mainly in Tunisia, Australia, Indonesia and China. In 1988, KFPE signed a contract with China National Offshore Oil Company to develop China's largest offshore gas field, Y13-1, with 15-percent interest. Kuwait Oil Thailand and Thai Petrochemical Industry are planning to build a 300,000-bbl/d refinery in Rayong, Thailand, as well as an export refinery located near Pattaya on Thailand's southeast coast. Kuwait is also planning to construct an oil refinery in Indonesia.
The oil- and gas-related service contracts mentioned above all fall into "counter-capital flow" as well. In addition, Saudi Arabia, Kuwait and Qatar have commissioned giant tanker builders in Japan, South Korea and even China to construct their oil and LNG tankers. On August 20, 1999, China signed five contracts with Iran to build 1.5-mt oil tankers with a value of $400 million. This investment will continue to grow.
Generally speaking, Middle Eastern investments in Asia and China remain small but are growing steadily, increasingly influenced by oil prices and markets in Asia.
Table 10: Middle Eastern Capital Export to China ($ millions)
Note: *author's estimates
Source: China Customs Bureau, 1998
GEOPOLITICAL INTERACTIONS
China has emphasized maximizing linkages in its overseas activities. Among those in transportation are oil links with the Middle East, Central Asia and Southeast Asia. China has to build up its energy bridges to enhance oil cross-investment with oil-producing regions, although this is not an easy task considering the geopolitical interactions and implications.
Closer Links with Middle Eastern Oil Producers
Middle Eastern oil producers are located in the Persian Gulf and North Africa. Internal and external relations in the region make oil resources strategically sensitive. Chinese oil inputs in the region started after 1985, beginning with oil-construction services and technical support, and have grown by 50 percent since 1995. Oman, Yemen, Iran, the UAE, Saudi Arabia and Angola are major targeted countries. Over recent years, China's oil projects in Sudan have been prioritized and will continue to be in the near future. Its potential investments in Saudi Arabia and Iraq will be maintained or enhanced. At the same time, these oil producers are being encouraged to enter China both upstream and downstream. This will make China turn its import business with the Middle East into cross-investment and trade, including sea shipments and land pipelines.
China's investments in Central Asia and Russia have some advantages geographically, as compared with the Middle East. China has been involved in two development projects in Kazakhstan. Aktyubinskneft, based in western Kazakhstan, has estimated oil reserves of 483 million tons. Its current annual output of crude, over two mt per year, would be doubled by 2010. CNPC has a plan worth hundreds of millions of dollars to boost Uzen's output to a higher level in the next decade. It was estimated that $10-20 billion and 3500 km of pipeline would be considered for over 10 mt of oil from the region by 2010. China is now also interested in oil and gas development in Eastern Siberia and the Russian Far East region. The key factor behind this is the fact that Chinese gas demand is expected to double by 2010, taking gas imports from Eastern Siberia into account. As a major exporter, Russia recognizes China as a major geopolitical player in the power balance in East Asia. Based on its judgment of China's position in the world, Moscow generated a strategic partnership with China in 1996, to which China responded positively. Sino-Russian oil and gas pipeline projects involving more than $20 billion in investment requirements were confirmed in April 1996. In recent years, the Sino-Russian relationship has been characterized more by mutual and balanced geopolitical need than economic factors. Considering the geopolitical closeness of the two countries and their common interest in economic development, it is believed that a strategic partnership will be implemented between China and Putin-led Russia in the years to come. A big move could take place in 2000, when the fifth in a series of meetings between the prime ministers is held.
Comparatively, in terms of resource availability, Middle Eastern oil will be a predominantly reliable and realistic objective for China in the next decade or longer. While Table 11 presents Chinese trade relations with Middle East countries in general, Tables 4, 5 and 6 indicate close linkages between China and Middle Eastern oil producers in particular. Oil cross-investment addressed in section 4 would be enhanced in the future if a Sino-Saudi Arabian agreement could be fully implemented and possibly extended.
Table 11: Chinese Trade Relations with Mideast Countries in 1997 ($ millions)
Source: China Customs Bureau, 1998
Interactions with the Major Powers
Western penetration of the Middle Eastern oil area can be traced back to 1908, when British explorers unearthed commercial oil in Iran and established the British-Persian Petroleum Company the following year. American involvement in the Middle East started in the 1920s. America, Britain, France and the Netherlands reaped substantial benefits through their concessions until the nationalizations of the 1970s. Western countries remain dominant in the region. More important, Western policies towards the Middle East remain colored by oil, even if their dependence on the region has declined slightly in the past few years (Table 12).
Table 12: Western Imports from the Persian Gulf Region
Source: EIA
Japanese dependence on the Middle East, especially the Persian Gulf, requires diplomatic flexibility toward the region. Open sea lanes from the southwest are critical to the energy security of East Asia. Safety of navigation through both the South China Sea and the Taiwan Strait is particularly sensitive for Japan and China. In 1998, American oil imports from the Middle East reached 104.4 mt, accounting for 20.33 percent of its total oil imports, or 24.99 percent of net oil imports.11 Western European net imports from the region remain substantial. The United States, Western Europe and Japan have competitive oil objectives. The "realist school" of American politics insists that any other entrant in the political arena with new views in and about the Middle Eastern oil producers could threaten or jeopardize Western oil interests. The U.S. government even makes "rogue states" out of those oil-producing countries (Iran, Iraq, Libya and even Sudan) whose behavior it cannot control. China and the United States have different ways of thinking about the region, and potential Sino-U.S. conflict over oil issues exists in this regard. However, both China and the United States have a similar interest in maintaining regional stability and sea-lane safety. It is a foregone conclusion that similar interests rather than conflicts of interests should be emphasized.
Meanwhile, China would like to cooperate with Russia on Middle Eastern issues. Russia has never given up its plan to re-enter the Middle East politically and economically. On February 1, 2000, Russia and the United States co-hosted Middle East peace talks in Moscow. This is the first sign of Russia's strategic intent to resume its coordination of policies in the Middle East since the U.S.-Soviet talks in Madrid in 1991. China shares a worldview with Russia regarding the new world order. Therefore, China would not want to confront Russia in the region. Instead, a balance of influence in the region is the Chinese intention. To secure its oil and gas, China has several choices and can make trade-offs among sources in the Middle East, Russia and Central Asia.
CONCLUSIONS
Considering its growing domestic energy demand, Chinese expansion into the Middle East is a must. China realizes the importance of stable oil supplies from the region over the next decade. It was estimated that there is room for China to penetrate some niche markets involving both services and direct E & P investments. Future linkages between the Middle East and China will accelerate investments and trade. Sino-Middle East cross-investment is a reasonable way to incorporate the mutual interests of both sides. By comparison, Central Asian and Russian oil and gas sources seem less competitive when prices fall below $15/bbl; in any event, they will not be available in substantial quantities until 2010. Currently, although petro-dollar counterflows into China remain small, Chinese activities in some small oil producers (Sudan, for example) and some potential re-emerging oil producers (Iraq) have been emphasized. China's presence in Sudan is a successful case of entry into the Middle East. Chinese projects in Iraq will be opened once the United Nations lifts its sanctions on the country. Looking forward, Sino-Middle East oil cross-investment will also contribute to market sustainability and energy security, providing improvements in the international political setting.
Geopolitically, China is ready to tackle its interactions with the United States, the EU and Japan on Middle Eastern issues carefully, especially regarding Iran, Iraq and Sudan. China has independent diplomatic policies and approaches toward these countries. While dealing with the major powers mentioned above, China has to emphasize regional stability, energy security and balance of strength. Any domination of the Middle East, either by internal or outside powers, is not expected or acceptable.
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1 BP-Amoco Statistical Review of World Energy, June 1999.
2 Chinese Economic Development with Projection to 2010, CASS (China Academy of Social Sciences) Research News (Chinese), March 15, 1994; Chinese Economic Development Blue Report, China Social Sciences Press, 1997.
3 Wan, 1996.
4 Chinese Natural Gas Demand Projection to 2020, SDPC Energy Institute, 1996.
5 BP, 1998.
6 Fereidun Fesharaki, "Crystal Ball," a keynote speech for Asian Oil and Gas Conference in Malaysia, June 1999.
7 James Richard, "New Cohesion in OPEC's Cartel?, Pricing and Politics," MERIC Newsletter, 1999.
8 EIA (Energy Intelligence Agency) web site.
9 Hooman Estelami, "A Study of Iran's Responses to U.S. Economic Sanctions," Middle East Review of International Affairs, Vol. 3, No. 3, September 1999.
10 EIA.
11 BP-Amoco.
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