Oil And Gas In China: The New Energy Superpower's Relations With Its Region : The New Energy Superpower's Relations with Its Region 9789814277952, 9789814277945

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OIL AND GAS IN CHINA The New Energy Superpower’s Relations with its Region

Series on Contemporary China

(ISSN: 1793-0847)

Series Editors: Joseph Fewsmith (Boston University) Zheng Yongnian (East Asian Institute, National University of Singapore) Published* Vol. 8

China’s Elite Politics: Political Transition and Power Balancing by Bo Zhiyue

Vol. 9

Economic Reform and Cross-Strait Relations: Taiwan and China in the WTO edited by Julian Chang & Steven M Goldstein

Vol. 10 Discontented Miracle: Growth, Conflict, and Institutional Adaptations in China edited by Dali L Yang Vol. 11 China’s Surging Economy: Adjusting for More Balanced Development edited by John Wong & Wei Liu Vol. 12 Tobacco Control Policy Analysis in China: Economics and Health edited by Teh-Wei Hu Vol. 13 China's Science and Technology Sector and the Forces of Globalisation edited by Elspeth Thomson & Jon Sigurdson Vol. 14 Migration and Social Protection in China edited by Ingrid Nielsen & Russell Smyth Vol. 15 China’s Reforms at 30: Challenges and Prospects edited by Dali L Yang & Litao Zhao Vol. 16 Political Booms: Local Money and Power in Taiwan, East China, Thailand and the Philippines by Lynn T White Vol. 17 Politics of China’s Environmental Protection: Problems and Progress by Chen Gang Vol. 18 Oil in China: From Self-Reliance to Internationalization by Lim Tai Wei Vol. 20 China’s New Social Policy: Initiatives for a Harmonious Society edited by Zhao Litao & Lim Tin Seng Vol. 21 Oil and Gas in China: The New Energy Superpower’s Relations with Its Region by Lim Tai Wei

*To view the complete list of the published volumes in the series, please visit: http://www.worldscibooks.com/series/scc_series.shtml

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Series on Contemporary China – Vol. 21

OIL AND GAS IN CHINA The New Energy Superpower’s Relations with its Region

Lim Tai Wei

National University of Singapore, Singapore

World Scientific NEW JERSEY

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LONDON

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SINGAPORE

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BEIJING

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SHANGHAI

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HONG KONG

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TA I P E I

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CHENNAI

Published by World Scientific Publishing Co. Pte. Ltd. 5 Toh Tuck Link, Singapore 596224 USA office: 27 Warren Street, Suite 401-402, Hackensack, NJ 07601 UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE

Library of Congress Cataloging-in-Publication Data Lim, Tai-Wei. Oil and gas in China : the new energy superpower's relations with its region / Lim Tai Wei. p. cm. -- (Series on contemporary China, 1793-0847 ; v. 18) Includes bibliographical references and index. ISBN-13: 978-9814277945 ISBN-10: 9814277940 ISBN-13: 978-9814277952 ISBN-10: 9814277959 1. Petroleum industry and trade--China. 2. China--Foreign economic relations. 3. China--Foreign relations. I. Title. HD9576.C52L5364 2010 338.2'7280951--dc22 2009042568

British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library.

Copyright © 2010 by World Scientific Publishing Co. Pte. Ltd. All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission from the Publisher.

For photocopying of material in this volume, please pay a copying fee through the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA. In this case permission to photocopy is not required from the publisher.

Typeset by Stallion Press Email: [email protected]

Printed in Singapore.

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Chapter

2 Contents Foreword

vii

Acronyms, Initials, and Glossary

ix

CHAPTER 1

1

Introduction

CHAPTER 2 The Emergence of the Chinese Oil Industry in Northeast Asia — Transition from Japan (1978 Daqing Crude Trade) to Russian Oil Relations (Sino–Russian Oil Communiqués 2002/3)

17

CHAPTER 3 The Emergence of the Chinese Oil Industry in Southeast Asia: China–ASEAN Sub-Regionalism — Pan Pearl River Delta (PPRD) Regionalism and Cooperation in Oil

39

CHAPTER 4 The Emergence of the Chinese Oil Industry and Potential Flashpoints?

57

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CHAPTER 5 Seeking Energy Security: Cooperation and Competition between China, Japan, and India

81

CHAPTER 6

95

Year 2004: China’s Landmark Energy Crisis

CHAPTER 7 The New Energy Superpower’s Internal Debates: Development or Environmentalism?

117

CHAPTER 8 Conclusion — Alternative Energy Trends, Conservation, and Renewing Old Resources?

129

Bibliography

145

Index

159

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2 Foreword The two books — Oil in China: From Self-Reliance to Internationalization and Oil and Gas in China — published by World Scientific represent the monumental work of painstakingly constructing the complete political economy and developmental history of the post1949 contemporary Chinese oil industry. It is the culmination of intense transnational field work carried out across the Asia Pacific accompanied by taxing translation work over three languages as well as archival research. These two volumes on the Chinese oil industry are the first of its kind in detailing China’s rise as an energy superpower at a period of time when global attention is focused in this area. The first book — Oil in China: From Self-Reliance to Internationalization — seeks to analyze key historical developmental concepts and events in the Chinese oil industry: namely the concepts of selfreliance, Sino-Japanese oil trade and the transition from self-reliance to internationalization; from the establishment of the Daqing oilfield to its early days of internationalization. These themes were examined in the subsequent chapters and are embedded within the empirical case study of Daqing, the premiere oilfield People’s Republic of China (PRC) for most of the postwar period and a symbol of industrialization and self-reliance in the country. In the process of vii

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examining the selected themes, Japan’s role in stimulating the development of the Chinese oil industry was highlighted as the Japanese state and its business sectors emerged as suppliers of technology and equipment to the Chinese oil industry and its first major oil customer in the early internationalization phase of the industry. The political and conceptual metamorphosis of self-reliance to internationalization are also examined in this volume. The second volume entitled Oil and Gas in China examines crucial topics and contemporary questions about the Chinese oil industry. The volume examines the impact of its rapid economic growth on China’s relations with other countries in its neighboring region when it seeks more oil importation from overseas sources. The impact of pressures to look for new sources of oil has implications for potential regional rivalries, the success of regional agreements on maritime resources and bilateral/multilateral frameworks for easing of tensions, confidence-building and perhaps resolution. Perhaps the most important sections of this volume go into China’s ability in striking a balance between economic growth and energy consumption, its internal debates over development or environmentalism, and the growing importance of the post-industrial debate and environmentalism. This highlights the issues of alternative energy trends, conservation and renewal of old resources to meet China’s future energy needs.

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2 Acronyms, Initials, and Glossary API gravity — An arbitrary scale adopted by the American Petroleum Institute (API) for expressing the specific gravity of oils. Its relation to specific gravity is as follows: degrees API = (141.5/specific gravity at 60°F) − 131.5. (Source: Sharma, S. and Tan, J. L. H. (1991). Global Oil Trends (Singapore: ASEAN Economic Research Unit Institute of Southeast Asian Studies), p. 122.) ASEAN — Association of Southeast Asian Nations. Asphalt — Natural or mechanical mixtures in which bitumen is associated with inert mineral matter. The term is normally qualified by indication of type or origin, for example, lake asphalt and natural asphalt. (Source: Sharma, S. and Tan, J. L. H. (1991). Global Oil Trends (Singapore: ASEAN Economic Research Unit Institute of Southeast Asian Studies), p. 122.)

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Barrel — A common unit of measurement of liquids in the petroleum industry. It is equivalent to 42 US standard gallons. (Source: Sharma, S. and Tan, J. L. H. (1991). Global Oil Trends (Singapore: ASEAN Economic Research Unit Institute of Southeast Asian Studies), p. 123.) B/d — Barrels per day. Bitumen or asphaltic bitumen — Black to dark brown solid or semisolid organic material which gradually liquefies when heated. These materials are usually obtained as residues from the vacuum distillation of petroleum. (Source: Sharma, S. and Tan, J. L. H. (1991). Global Oil Trends (Singapore: ASEAN Economic Research Unit Institute of Southeast Asian Studies), p. 123.) CAD — Computer aided design. CCP — Chinese Communist Party. CNCIEC — China National Chemicals Import and Export Corporation (or Zhongguo Huagong Jingchukou Gongsi). CNODC — China National Oil and Gas Development Corporation. CNOGEDC — Petroleum Company of China and the China National Oil and Gas Exploration and Development Corporation. CNOOC — China National Offshore Oil Corporation. CNPC — China National Petroleum Corporation. COCOM — Coordinating Committee for export controls. CPFC — China Petrochemical Finance Company (CPFC or Zhongguo Shihua Caiwu Gongshi). CPC — The Chinese Petroleum Corporation. CPIC — China Petrochemical International Company (or Zhongguo Shihua Guoji Shiye Gongshi).

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CPSC — China Petrochemical Sales Company (or Zhongguo Shiyou Huagong Xiaoshou Gongshi). Cracking — A process in which the feedstock is subjected to a high temperature for a limited time with the objective of increasing the yield of light products, for example, gasoline, at the expense of the heavier. Cracking processes are also the source of the olefins which are the intermediates in the manufacture of many petroleum chemicals. Sometimes a substance which promotes reaction, that is, a catalyst is present. This has the effect of reducing the temperature at which cracking takes place and gives one greater control over the reaction. (Source: Sharma, S. and Tan, J. L. H. (1991). Global Oil Trends (Singapore: ASEAN Economic Research Unit Institute of Southeast Asian Studies), p. 124.) Crude Oil — The oil produced from an underground reservoir, after being freed of any gas which may have been dissolved in it under reservoir conditions, but before any other operation has been performed on it. In the oil industry, it is simply termed “crude”. (Source: Sharma, S. and Tan, J. L. H. (1991). Global Oil Trends (Singapore: ASEAN Economic Research Unit Institute of Southeast Asian Studies), p. 124.) Desulphurization — The removal of sulfur or sulfur compounds from crude oil or its products. (Source: Sharma, S. and Tan, J. L. H. (1991). Global Oil Trends (Singapore: ASEAN Economic Research Unit Institute of Southeast Asian Studies), p. 125.) Diesel oil — This term is used in the report to include fuels suitable for use in diesel and other compression ignition engines and which are also frequently referred to as high-speed diesel oil and as automotive gas oil; the term “gas oil” is used to describe fuels inferior in quality to diesel oil but suitable for use in low or medium

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rotational speed engines; the term “diesel–gas oil” refers to both grades. (Source: Sharma, S. and Tan, J. L. H. (1991). Global Oil Trends (Singapore: ASEAN Economic Research Unit Institute of Southeast Asian Studies), p. 125.) Distillate — A product obtained by condensing the vapors evolved when a liquid is boiled and collecting the condensate in a receiver separate from the boiling vessels. (Source: Sharma, S. and Tan, J. L. H. (1991). Global Oil Trends (Singapore: ASEAN Economic Research Unit Institute of Southeast Asian Studies), p. 125.) Distillation range — A single pure substance has one definite boiling point at a given pressure. A mixture of substances will, however, exhibit a range of temperature, usually determined at atmospheric pressure by means of standard apparatus, which is termed the “distillate” or “boiling” range. (Source: Sharma, S. and Tan, J. L. H. (1991). Global Oil Trends (Singapore: ASEAN Economic Research Unit Institute of Southeast Asian Studies), p. 125.) DoE — US Department of Energy. Dwt — Dead weight ton measurement for oil supertanker capacity. FCC — Fluid catalytic cracking. FDI — Foreign direct investment. FOB — Free-on-board (Source: International Energy Agency (2000). China’s Worldwide Quest for Energy Security (France: International Energy Agency), p. 4.) FTA — Free trade agreement. Fuel oil — A general term applied to an oil used for the production of power or heat. In a more restricted sense it is applied to any petroleum product that is burnt under boilers or in industrial funaces.

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These oils are normally residues, but distillates or blends of distillates and residues are also used as fuel oil. (Source: Sharma, S. and Tan, J. L. H. (1991). Global Oil Trends (Singapore: ASEAN Economic Research Unit Institute of Southeast Asian Studies), p. 125.) Gasoline — A refined petroleum distillate, normally boiling within the limits of 86 and 392°F and suitable for use as a fuel in sparkignited internal-combustion engines. (Source: Sharma, S. and Tan, J. L. H. (1991). Global Oil Trends (Singapore: ASEAN Economic Research Unit Institute of Southeast Asian Studies), p. 125.) GDP — Gross domestic product. GNP — Gross national product. IFICL — Imperial Fuel Industry Company Law. JCEA — Japan–China economic association. JNOC — Japan National Oil Corporation. JNODC — Japan National Oil Development Corporation. Kerosene — A refined petroleum distillate intermediate in volatility between gasoline and automotive diesel oil. Its distillation range falls within the limits of 300 and 572°F. Its main uses are as an illuminant, for heating purposes, and as a fuel for certain types of internalcombustion engines. (Source: Sharma, S. and Tan, J. L. H. (1991). Global Oil Trends (Singapore: ASEAN Economic Research Unit Institute of Southeast Asian Studies), p. 126.) LDP — Liberal Democratic Party. LTTA — Long term trade agreement. MITI — Ministry of International Trade and Industry. MNCs — Multinational companies.

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MOEA — Ministry of Economic Affairs (Nationalist China). MOPI — Ministry of Petroleum Industry. MPI — Ministry of Petroleum Industry. MTOE — Million tons oil equivalent. NGMA — National General Mobilization Act. NRC — National Resource Commission. ODA — Official development assistance. Oil shale — A rock, of sedimentary origin, with an ash content of more than 33 percent; the contained organic matter yields oil when destructively distilled, but not appreciably when extracted with ordinary solvents for petroleum. (Source: Sharma, S. and Tan, J. L. H. (1991). Global Oil Trends (Singapore: ASEAN Economic Research Unit Institute of Southeast Asian Studies), p. 127.) Olefins (alkenes) — A series of aliphatic hydrocarbons containing a double bond which are more reactive than paraffins. The lowest members are ethylene, propylene, and butylenes. (Source: Sharma, S. and Tan, J. L. H. (1991). Global Oil Trends (Singapore: ASEAN Economic Research Unit Institute of Southeast Asian Studies), p. 128.) OPEC — Organization of Petroleum Exporting Countries. PCC — Petroleum Company of China. PIL — Petroleum Industry Law. PLA — People’s Liberation Army. Recoverable reserves — Reserves of oil and gas recoverable from known reservoirs, with existing technology, under present economic conditions.

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(Source: Sharma, S. and Tan, J. L. H. (1991). Global Oil Trends (Singapore: ASEAN Economic Research Unit Institute of Southeast Asian Studies), p. 128.) RMB — Ren Min Bi (Chinese currency). SEZ — Special Economic Zone. SGB — State Geological Bureau. Sinochem — China National Chemicals Import and Export Corporation. Sinoil — China oil. Sinopec — China Petrochemical Corporation. SOE — State owned enterprises. SPC — State Planning Commission. SPCC — State Power Corporation of China. Sweet — Products which give a negative result in the Doctor test, a test for the presence in light distillates of a particular type of sulfur component known as mercaptans. (Source: Sharma, S. and Tan, J. L. H. (1991). Global Oil Trends (Singapore: ASEAN Economic Research Unit Institute of Southeast Asian Studies), p. 129.) TCE — Ton of coal equivalent. USGS — United States Geological Survey. Volatility — The ease with which a product begins to vaporize, volatile substances have relatively high vapor pressures and therefore boil at relatively low temperatures. (Source: Sharma, S. and Tan, J. L. H. (1991). Global Oil Trends (Singapore: ASEAN Economic Research Unit Institute of Southeast Asian Studies), p. 130.) WTO — World Trade Organization.

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Conversion Factors Barrels per metric ton Crude oil: Crude in China = 7.3 Crude imported from Russia into China = 7.35 Products: Asphalt = 6.06 Diesel oil = 7.46 Hydrocarbon solvents = 7.00 Kerosene = 7.46 Jet fuel = 7.93 Light oil for chemical industry = 8.50 Liquefied petroleum gas (LPG) = 11.60 Lubricants = 7.00 Motor gasoline = 8.50 Naptha = 8.50 Paraffin wax = 7.87 Petroleum coke = 5.50 Residual fuel oil = 6.66 (Source: Haijiang, H. W. (1999). China’s Oil Industry and Market (The Netherlands: Elsevier), p. xii.) Wartime Nationalist China’s metric system. 1 kilometer = 0.62137 (land) miles 1 square kilometer = 0.3861 square miles 1 mow = 1/6 acres 1 picul (new style) = 110 pounds (Source: Freyn, H. (1940). China’s Progress in 1940 (Chungking: The China Information Committee), p. ii.)

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Conversion Factors Metric ton (mt) equals 2204.6 pounds or 1000 kilograms. Metric ton (mt) also equals 1.1023 short tons (st) or 0.9842 of a long ton (lt). Tpy and tpd are tons per year and tons per day. Ton-unit means one percent of content in weight. Hundredth weight, or cwt, means 1 percent of a gross ton. Kiloliter equals 6.29 US barrels; and liter equals 0.264 of a US gallon. Barrel equals 42 US gallons and 34.97 imperial gallons. Bpd and bbl are abbreviated for barrels per day and barrels. Bpd multiplied by 50 is roughly equivalent to mtpy. For most crude oils, a metric ton equals 7.2–7.6 barrels. For cement, a barrel equals 376 pounds, or four 94-pound bags. Cubic meter equals 1.308 cubic yards and 35.31 cubic feet. Kilometer (km) equals 0.62137 of a mile. Meter (m) equals 1.0936 yards and 39.37 inches. Kw and kw h are abbreviated for kilowatt and kilowatt-hours. Dwt means deadweight tons in shipping. (Source: Wang, KP and Chin, E. (1978). Mineral Economics and Basic Industries in Asia (Colorado: Westview Press/Boulder), p. xxv.) The Chinese unit ‘yi’ is equivalent to a hundred million. (Source: Foreign Language Teaching and Research Press (2002). New Century Chinese-English Dictionary (Singapore: Foreign Language Teaching and Research Press and Learners Publishing), p. 1486.)

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Weights 1 picul (shi) = 100 catties (chin) = 133 1/3 lbs. = 60.453 kilograms 1 catty (chin) = 16 taels (liang) = 1 1/3 lbs. = 604.53 grams 1 tael (liang) = 1 1/3 oz. = 37.783 grams 16.8 piculs = 1 long ton 16.54 piculs = 1 metric ton Measures 1 li = 1.3 mile =1/2 kilometer 1 ch’ih = 1 Chinese foot or cubit = 14.1 inches 1 mou = 1/6 acre 15 mou = 1 hectare (Source: Hsu, I. C. Y. (2000). The Rise of Modern China (New York and Oxford: Oxford University Press), unpaginated.) Units MMbd = million barrels per day. Mcf = thousand cubic feet. tcf = trillion cubic feet. kw h = kilowatt-hour. MM = million. Btu Equivalents 1 bbl crude oil: 5.8 million Btu; 1 Mcf gas: 1.03 million Btu; 1 kWh electric: 3.4 thousand Btu; 1 ton coal: ~21 million Btu. GDP = gross domestic product. (Source: Energy Information Administration (EIA), Energy Infocard — United States, EIA website [downloaded on 1 May 2005], available at www.eia.doe.gov/kids/infocardnew.html.)

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Chapter

1 Introduction INTRODUCTION — BACKGROUND In the 1960s and 1970s, China’s domestic fuel consumption was relatively low with oil consumption growing at a manageable pace of 18.44 percent per year between 1964 and 1978.1 As the Chinese economy was relatively underdeveloped, the numerical figures were also small. For example, in 1970, the number of motor vehicles in China was reported to be only 130,000, which was low even when compared to other developing nations, i.e. 1 car to every 5,711 Chinese in contrast to India’s ratio of 1 to 902 or Thailand’s 1 to 175.2 With its open-door policy, China’s economy underwent a transformation and, by the time the economic reforms yielded results, China’s thirst for oil became apparent. By 1985, China had caught up with other developing countries with an annual energy consumption 1

Thomson, E. (2001). China’s Growing Dependence on Oil Imports. EAI Background Brief No. 87 (Singapore: East Asian Institute), p. 4. 2 US Government Printing Office (1974). (printed for the use of the Committee on Foreign Affairs), Oil and Asian Rivals Hearings before the Submittee on Asian and Pacific Affairs of the Committee on Foreign Affairs House of Representatives 93rd Congress First and Second Sessions, 12 September 1973; 30 January, 6, 20 February, and 6 March 1974 (Washington: US Government Printing Office), p. 45. 1

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rate of about 20 GJ per capita but they were still far from developed country levels.3 In absolute numbers, though, the picture looked much different. In 1999, the total Chinese oil consumption was 200 million tons and ranked third in the world after the US (883 million tons) and Japan (259 million tons).4 With the boom in the Chinese economy, China’s consumption in crude oil has increased at a rate of 5.77 percent on average in recent years (see Table 1.1). China’s oil production also climbed up in the world rankings, becoming the sixth largest oil producer in the world three decades after Daqing’s discovery in the late 1950s and, by 1995, she had an output of 2.98 million barrels per day (b/d) of oil, accounting for 17.9 percent of the country’s total energy production.5 Similarly, her refining industry was also upgraded during the 15 years after China rejoined the international community in the late 1970s, achieving crude distillation of 4.1 million b/d through a combination of intense investment and influx of foreign technologies, becoming the fifth largest refining industry in the world.6 By the mid-1990s, China entered the top five ranking of both petroleum consumption and production tabulations (see Table 1.2). Though China’s production continued to increase from 104 million tons in 1978 to 163 million tons in 2000,7 its domestic production lagged behind the increase in consumption and became a net importer in 1993.8 See Table 1.3 for the crucial years in which China transitioned from oil supplier to importer. Older oil fields like Yumen began to mature and experienced declining output. See Tables 1.4 and 1.5. 3

Smil, V. (1976). China’s Energy (NY: Praeger Publishers), p. 4. Elpseth, T. (2001). p. 4. 5 Fesharaki, F., Banaszak, S. and Wu, K. (1998). The Outlook for Energy Supply and Demand for Northeast Asia, Institute on Global Conflict and Cooperation (IGCC) Policy Papers, Paper p. 36 [downloaded on 1 January 2005], (California: University of California Multi-Campus Research Unit), available at the eScholarship Repository, University of California http://repositories.cdlib.org/igcc/PP/pp36, pp. 8–9. 6 Fesharaki, F., Banaszak, S. and Kang, W. (1998). p. 8. 7 Thomson, E. (2001). p. 1. 8 Thomson, E. (2001). p. 1. 4

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Introduction 3 Table 1.1. China’s crude oil production and consumption 1949–1997 (unit: million tons of oil equivalent).

Year

Production

1949 1953 1957 1958 1959 1962 1965 1970 1975 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

0.12 0.62 1.45 2.22 3.80 5.77 11.32 30.56 77.05 104.03 106.10 105.95 101.22 102.12 106.07 114.61 124.90 130.69 134.14 137.05 137.64 138.31 140.99 142.10 145.24 146.08 150.33 156.43 159.50

Percentage change per year

1.99 −0.14 −4.46 0.89 3.87 8.05 8.98 4.64 2.64 2.17 0.43 0.49 1.94 0.78 2.21 0.58 2.91 4.44 1.96

Consumption

Percentage change per year

1.44 3.10 4.83 6.78 7.64 13.57 30.05 66.93 90.83 89.27 87.57 83.14 82.03 83.59 86.27 91.69 97.28 103.12 110.93 115.84 114.86 123.84 133.54 147.21 149.56 156.06 172.50

−1.72 −1.90 −5.06 −1.34 1.90 3.21 6.28 6.10 6.00 7.57 4.43 −0.85 7.82 7.83 10.24 1.60 4.35 10.53

Source: Wong, J. and Wong, C. K. (1998). China’s New Oil Development Strategy Taking Shape (Singapore: World Scientific), p. 9.

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4 Oil and Gas in China Table 1.2. World’s top ten crude oil-producing and consuming countries/regions. Crude oil consumption 1995 (million tons)

Country 1. USA 2. Japan 3. China 4. Germany 5. Russia

806.8 267.3 157.5 135.1 146.2

Country/region

Crude oil production 1996 (million tons)

1. Saudi Arabia 2. CIS 3. USA 4. Iran 5. China

404 352 324 184 156

Source: Wong, J. and Wong, C. K. (1998). China’s New Oil Development Strategy Taking Shape (Singapore: World Scientific), p. 9.

Table 1.3. China imports and exports, reflecting its change from oil supplier to customer (millions of tons).

Imports 1990 Imports 1993 Imports 1997 Exports 1990 Exports 1993 Exports 1997

Crude

Products

2.92 15.67 35.33 23.99 19.44 19.83

3.12 17.39 23.20 5.42 3.71 5.56

Source: International Energy Agency (2000). China’s Worldwide Quest for Energy Security (France: International Energy Agency), p. 49.

Table 1.4.

Crude production by Yumen (mt).

1980

1985

1988

1990

1991

1992

1993

0.583

0.058

0.528

0.546

0.69

1.05

0.44

Source: Paik, K. W. (1995). Gas and Oil in Northeast Asia (Great Britain: The Royal Institute of International Affairs), p. 118.

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Introduction 5 Table 1.5.

Crude production by Yumen (000 b/d) region/field.

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 11

11

11

11

10

10

9

9

9

8

9

8

Source: Haijiang, H. W. (1999). China’s Oil Industry and Market (The Netherlands: Elsevier), p. 84.

While the production shot up by a factor of 10 from 11 million tons in 1965 to 106 million tons in 1979,9 growth between 1979 and 1993 cooled down to 2.3 percent and from 1994 to 2000, slowed down further to 1.64 percent.10 Oil usage also began to exceed domestic production. The Middle East Economic Survey (MEES) in fact ran an article by Jonathan Story (Shell Fellow in Economic Transformation, INSEAD, Fontainebleau France), who argued that China was aware of its oil self-sufficiency slowly slipping away as early as 1986, when the State Planning Commission decided that the country must move away from oil self-sufficiency.11 China is now getting used to oil importing, different from the heyday of Daqing euphoria in which China she was even coined the “new Saudi Arabia”.12 Renowned academicians like Kim Woodard highlighted the rumors that China would overtake the USSR and the US in energy production shortly after 1980.13 In that period, even International Energy Agency (IEA) admitted that experts suggested that the most promising Chinese hydrocarbon reserves could surpass that of Saudi Arabia.14 It was a period of great optimism, one that 9

Thomson, E. (2001). p. 2. Thomson, E. (2001). p. 2. 11 Story, J. (2004). The Global Implications of China’s Thirst for Energy, Middle East Economic Survey (MEES), Vol. XLVII, No. 7, dated 16 February 2004 [downloaded on 20 May 2004], available at www.mess.com/postedarticles/oped/ a47n07d01.htm, p. 1. 12 Smil, V. (2004). China’s Past, China’s Future Energy, Food, Environment (London: RoutledgeCurzon), p. 9. 13 Woodard, K. (1980). The International Energy Relations of China (California: Stanford University Press), p. 5. 14 International Energy Agency (2000). China’s Worldwide Quest for Energy Security (France: International Energy Agency), p. 23. 10

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had to be understood in its own context. The 1990s smashed any possible lingering remnants of this notion. In 1995, China’s oil consumption defined as consumption of petroleum products plus other uses of oil came up to 3.3 million b/d, more than twice the average of 1.7 million b/d in the 1980s.15 The annual growth rate of petroleum product consumption in China was 4.9 percent between 1980 and 1995 before jumping to 7.3 percent between 1990 and 1995.16 In 1995, China’s net oil imports amounted to 230,000 b/d.17 Her consumption continued to grow. In 1995, China’s petroleum product demand amounted to 3.2 million b/d, of which gas oil (including automobile diesel, industrial diesel, and diesel-range chemical feedstock) took up 33 percent, followed by fuel oil (including direct crude burning) 25 percent, and gasoline 22 percent.18 Fuel oil is utilized for power generation, international shipping, and other various industrial applications. By 2003, China used about 250 million tons of crude oil, including 91.12 million tons imported, a year-on-year increase of 10 percent.19 Between 1990 and 2000, Chinese oil consumption increased 5.88 percent yearly while its local production trudged along at 1.54 percent annually.20 According to the US Department of Energy (DoE) projections, China’s domestic oil production will probably stay stagnant in the coming decades while its demand is projected to grow by 4 percent annually.21 In 2025, the DoE extrapolates China’s total utilization of oil will increase to 12.8 million barrels of oil daily while

15

Fesharaki, F., Banaszak, S. and Wu, K. (1998). p. 8. Fesharaki, F., Banaszak, S. and Wu, K. (1998). pp. 8–9. 17 Fesharaki, F., Banaszak, S. and Wu, K. (1998). p. 9. 18 Fesharaki, F., Banaszak, S. and Wu, K. (1998). p. 19. 19 People’s Daily Online, Russia Welcomes China to Participate in East Serbia Oil Development, People’s Daily Online dated 29 March 2004, [downloaded on 29 March 2004], available at english.peopledaily.com.cn. 20 Wong, J. and Kong, W. C. (1998). China’s New Oil Development Strategy Taking Shape (Singapore: World Scientific), p. 1. 21 Klare, M. (2004). Blood and Oil (New York: Metropolitan Books), p. 165. 16

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its production will remain at 3.4 million barrels, with a shortfall of 9.4 million barrels annually.22 In addition, the DoE also projects that, by 2025, China’s industrial and economic capacities will expand its energy consumption by approximately 3.5 percent annually from 40 quadrillion Btu in 2001 to 91 quadrillion Btu in 2025, when its level of oil utilization will equalize with the sum of all Western European states combined and second only to that of the US.23 To put the DoE’s figures into perspective, however, it is perhaps necessary to point out that China’s per capita consumption of crude gasoline and jet fuel has been comparatively low even on the eve of entering the 21st century when her annual per capita consumption of crude, gasoline and jet fuel came up to only a quarter, fifth and tenth of the global average.24 In 1999, China consumed 1.193 barrels of crude oil per capita, lower than the world’s average of 4.546 and significantly lower than the US average of 25.545, Taiwan’s 14.457, Malaysia’s 9.207, and Indonesia’s 1.929 (see Table 1.6).25 It is the sheer absolute numerical size of China’s population that is most significant in contributing to the figures that is making China a ranking consumer of oil globally. This perhaps is a concern for many analysts as China has proven oil reserves of 24 billion barrels (bb), which consists of 2.3 percent of the world’s total for a country with 22 percent of the global population.26 Statistically, when China became a net oil importer in 1993, the Chinese government only allowed a limited quantity of foreign oil into China. However, the floodgates opened in 2000 when the year experienced a 92 percent increase in imported oil, 70 million tons, compared to 1999.27 The year 2000 also marked the reduction of the

22

Klare, M. (2004). p. 165. Klare, M. (2004). p. 165. 24 Thomson, E. (2001). p. 5. 25 Thomson, E. (2001). p. 5. 26 Downs, E. S. (2000). China’s Quest for Energy Security (Prepared for the United States Airforce) (California and Virginia: RAND), p. 6. 27 Wong, J. and Wong, C. K. (1998). China’s New Oil Development Strategy Taking Shape (Singapore: World Scientific), p. 1. 23

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8 Oil and Gas in China Table 1.6. International comparison of per capita consumption of crude oil, gasoline, and jet fuel, 1999 (barrels per year). Crude oil

Gasoline

Jet fuel

1.193 25.545 11.554 1.175 56.060 16.290 16.787 14.457 11.782 17.033 1.929 9.207 2.232 4.618 4.546 26.240

0.225 10.817 2.398 0.255 1.591 2.817 1.421 2.773 0.320 4.867 0.400 2.584 0.368 0.811 1.184 19.000

0.027 2.190 0.692 0.057 4.586 0.627 0.536 0.787 3.458 2.433 0.028 0.738 0.089 0.373 0.262 10.310

China US Western Europe Africa Singapore Japan South Korea Taiwan Hong Kong Brunei Indonesia Malaysia Philippines Thailand World China as percentage of the world

Source: Thomson, E. (2001). China’s Growing Dependence on Oil Imports EAI Background Brief No. 87 (Singapore: East Asian Institute), p. 18.

country’s dependence on coal by the Chinese government in favor of more environmentally friendly fuel.28 Because of this increased demand, China could not afford to export this scarce resource as it gradually becomes a net importer of oil. Some observers marked this as the beginning of the abandonment of a jealously-held principle of self-sufficiency.29 Many reasons were offered as compulsions for China to turn away from the doctrine of self-sufficiency. One of the most important reasons is China’s infrastructure development encouraged by the booming economy revitalized by the end of the Cultural Revolution as well as its acceptance of foreign investments. Another reason was situationally specific to the mid-1990s. 28 29

Wong, J. and Wong, C. K. (1998). p. 1. Thomson, E. (2001). p. 4.

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At that time, the three main oil-producing locations in China which included Daqing were considered to be nearing depletion, Xinjiang’s geological makeup was seen as a deterring technologically challenging factor while the offshore East China Sea oil was considered to be expensive to extract while representing only 7 percent of total Chinese oil production.30 These factors then became a form of reality check for China’s planners, including the then Premier Li Peng who promoted China’s outward shift from oil intake in 1997: “as the economy develops and people’s living standard rises, demand for oil and gas is certain to increase by large margins. While striving to develop our own crude oil and natural gas resources, we have to use some foreign resources.”31 Li Peng’s remarks were also entrenched in a May 1997 policy paper in which he approved Chinese oil firms’ exploration and development overseas oil and gas reserves, directly leading to subsequent aggressive foreign investments of China National Petroleum Corporation (CNPC) and China National Offshore Oil Company (CNOOC).32 With all these measures in place, beginning with 1993, China’s imports of crude oil grew at an annual average rate of 9.1 percent in the 1990s.33 Table 1.7 indicates that transportation, post, and telecommunications infrastructure accounted for the greatest increase in share of oil consumption (12.8–21.4 percent) between 1985 and 1998 when China was on the verge of joining the WTO while industry remained the largest user of oil by sector (67.3 percent in 1985 and 54.9 percent in 1998).

30

Troush, S. (1999). China’s Changing Oil Strategy and its Foreign Policy Implications, Center for Northeast Asian Policy Studies CNAPS Working Paper [downloaded on 1 January 2005], available at www.brookings.edu/fp/cnaps/papers/ 1999_troush.htm. 31 Troush, S. (1999). www.brookings.edu/fp/cnaps/papers/1999_troush.htm. 32 International Energy Agency (2000). China’s Worldwide Quest for Energy Security (France: International Energy Agency), p. 10. 33 Troush, S. (1999). www.brookings.edu/fp/cnaps/papers/1999_troush.htm.

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Oil and Gas in China Table 1.7.

China’s consumption of oil in 1985 and 1998 (percent).

Total consumption Consumption by sector Farming, forestry, animal husbandry, fishery and water conservancy Industry Construction Transportation, Post and telecommunications services Commerce, Catering services, materials supply, marketing and storage Others Residential Consumption by usage Final consumption Industry Intermediate consumption (Consumed in transformation) Power Generation Heating Coking Gas production Losses in petroleum refining

1985

1998

100.0 8.3

100.0 6.5

67.3 3.2 12.8

54.9 1.5 21.4

0.4

2.1

5.5 2.5

8.6 4.9

77.0 48.7 (of total)

88.4 44.0 (of total)

19.0 15.5 (of total) 3.1 (of total) 0.4 (of total) 1.2 (of total) 2.7

10.6 6.6 (of total) 2.3 (of total) 0.2 (of total) 1.6 (of total) 1.0

Source: Thomson, E. (2001). China’s Growing Dependence on Oil Imports EAI Background Brief No. 87 (Singapore: East Asian Institute), p. 17.

POSSIBILITY OF CONFLICTS? For some observers, because of growing consumption of oil in China and its shift towards foreign importation to meet its needs, the prospect of regional competition over oil between China and other East Asian powers (namely Japan) suddenly increased. But for others in the East Asian region like the Southeast Asian states, China presents itself as an opportunity in terms of raw materials exports, especially for oil-rich states like Indonesia, Brunei, Malaysia (palm oil), etc.

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Introduction 11

However, when framing the issue in Sino–Japanese terms, the picture is less optimistic with discussions often couched in relatively more pessimistic terms as the oil demands for Japan’s economy as the world’s second largest remained high (although tapering off with alternative energy sources) while China’s economic development sees it consuming unprecedented levels of petroleum, shifting the country from a net energy exporter in the 1970s to a net energy importer in the early 21st century.

CHINA’S OIL NEEDS AND ASEAN With China’s thirst in energy, oil has come forward to assume a dominant position in the enhanced proposed cooperation between nations within the Pearl River Delta region. Research on the littlestudied oil interactions between China and ASEAN countries in the Pearl River Delta region has potential to generate new knowledge at a time when the oil resource is increasingly coming under regional competition. The potential of the Thai Isthmus of Kra as a shortcut for pipelines/tankers/railway supplying oil to China or the prospects of Sino–Vietnamese issues in overlapping territorial claims are just some of the little-studied subjects with significant implications on the Pearl River Delta region.

CHINA’S OIL NEEDS AND NORTHEAST ASIA Since China’s oil energy needs increased exponentially, there has been a shift of Chinese focus in oil diplomacy from the Japanese to the Russians in the mid-21st century. The reasons for Chinese oil diplomatic shift from Japan to Russia can be classified into macro environmental geopolitical factors (end of Cold War, Chinese domestic economic factors, industrialization, and the need for oil and geopolitical concerns) as well as Japanese and Russian domestic factors. Ironically, China’s increased oil ties with Russia have seen the PRC come up against its former oil trading partner, Japan. Sino–Japanese rivalry in Russia is demonstrated most graphically and

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dramatically by their competition over access to Siberian oil, pitting the world’s second largest economy against the world’s fastest-growing economy. The outcome of Sino–Japanese rivalry over Russian oil resources will determine the shape of East Asian energy outlook for decades to come, perhaps, emblematic of Sino–Japanese competition over economic resources in East Asia in general.

MARITIME RESOURCES Another area which had seen the rise of Chinese energy activism is in maritime energy resources. This untapped region potentially acted as a source of tension between China and Japan due to its evaluated large deposits of natural gas lie beneath the East China Sea. A major point of disagreement is how to demarcate the two states’ exclusive economic zones (EEZ), which legally enables coastlining states to control maritime resources for 200 nautical miles off their shorelines. Tokyo’s definition of maritime boundary centers on the median between the two countries’ shorelines, while China, utilizing the U.N. Convention on the Law of the Sea, argues that its territorial waters extends to the end of its continental shelf, which includes the area claimed by Tokyo. (In a surprising turn of events, compromise was reached over one of these disputed islets Chunxiao in 2008. This will be discussed later in the book.) Other territorial issues include the tussle over Diaoyu (known as Senkaku to the Japanese) islands with China. The stakes over these islands are high with some analysts suggesting the presence of oil under these islands.34 China lost these islands to the Japanese in the 1894–1895 Sino–Japanese war. On 3 January 2003, when Japan decided to rent the islands out to a private organization, Japan’s ambassador to China was summoned to the Chinese foreign ministry

34

The Japan Times (2003). Japan has Land Lease on Another Senkaku Island, Japan Times Online [downloaded on 1 January 2004], available at www.japantimes.co.jp.

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Introduction 13

building to meet Vice Foreign Minister Wang Yi to face Chinese protestations over the islands.35 The Sino–Japanese tussle over Senkaku/Diaoyu is complicated by the fact that Japanese activities in the disputed islands had been traditionally associated with rightwing organizations in Japan.36 In July 1996, a group of Japanese rightwingers constructed a lighthouse and raised the Hinomaru (Japanese flag) over the rocky hills.37

RENEWING OLD ENERGY RESOURCES Besides turning outwards, China is also looking inwards to rejuvenate aging oilfields and find new ways to exploit them to meet energy needs. For example, the Liaoning Provincial Bureau of Foreign Trade and Economic Relations’ development of oil shale resources within their provincial purview, especially since the new Chinese leadership is currently stressing on reviving the Northeast economy (“zhenxin dongbei”).

ISSUES TO BE EXAMINED With the above backdrop in mind, the following issues are examined in this book in the following order and chapterization: (1) Chapter 1: Introduction — China benefits from globalization. In what ways does this impact on China’s relations with other countries in its neighboring region when it seeks more oil importation from overseas sources?

35

People’s Daily Online (2003). To Occupy China’s Diaoyu Islands, Japan’s Fond Dream for Long, People’s Daily Online [downloaded on 1 January 2004], available at english.peopledaily.com.cn. 36 Kristof, N. D. (1996). Gang Ties Are Behind Japan’s Furor Over Tiny Isles, People’s Daily Online [downloaded on 1 January 2004], available at english.people daily.com.cn. 37 People’s Daily Online (2003). Reclaiming Diaoyu Island A Volunteer’s Memoir, People’s Daily Online [downloaded on 1 January 2004], available at english.people daily.com.cn.

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(2) Chapter 2: The Emergence of the Chinese Oil Industry in Northeast Asia — Transition from Japan (1978 Daqing Crude Trade) to Russian Oil Relations (Sino–Russian Oil Communiqués 2002/3) — China’s relations with Japan and Russia as well as interactions with other ASEAN countries would impact on China’s oil supply and distribution. (3) Chapter 3: The Emergence of the Chinese Oil Industry in Southeast Asia: China–ASEAN Sub-regionalism — Pan Pearl River Delta (PPRD) Regionalism and Cooperation in Oil Energy — China’s industrial growth in the Pan PRD region is outstripping its oil supply and that it is turning to ASEAN countries connected to its Pearl River tributaries as a supply source. Pipelines in Myanmar and Thailand: How and where will they build these pipelines? What are the current proposals for these pipelines? Way-forward for diversification of energy sources and geopolitical challenges? Other proposals for oil delivery to China include building ports on both sides of the Isthmus of Kra, which allow tankers to deposit oil on one side of the Thai Isthmus of Kra, bypassing the congested waterways of the Straits of Malacca and transporting that oil through either railway or oil trucks connecting to the port on the other side of the Isthmus, facilitating deliveries carried forth by Chinese tankers waiting on the other end. (4) Chapter 4: The Emergence of the Chinese Oil Industry and Potential Flashpoints? Sources of increasing tension. Pressure for new sources of oil. Can this pressure translate into tension and conflicts? Potential rivalries: What is the extent for rivalry between the two giants? Maritime disputes: For example, China’s unhappiness with Petro Vietnam’s oil exploration in South China Seas (and the precedent of the 1974 Paracel island episode). How will this impact on the development of oil resources in the South and East China Seas? Will it become a source of conflict? Competition over maritime resources will require bilateral and multilateral frameworks for easing of tensions, confidence-building, and perhaps resolution. (5) Chapter 5: Seeking Energy Security: Cooperation and Competition between China, Japan, and India.

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Introduction 15

(6) Chapter 6: Year 2004: China’s Landmark Energy Crisis — China’s economic growth. The processes which generate greater demand for oil in China — How will China be able to strike a balance between economic growth and energy consumption? (7) Chapter 7: The New Energy Superpower’s Internal Debates: Development or Environmentalism? The growing importance of the post-industrial debate and environmentalism. What are the implications of post-industrialism for China? (8) Chapter 8: Conclusion — Alternative Energy Trends, Conservation and Renewing Old Resources? The future. How will China utilize the options of alternative energy, energy conservation, and reinvigoration of old energy resources to meet its future oil needs?

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Chapter

2 The Emergence of the Chinese Oil Industry in Northeast Asia — Transition from Japan (1978 Daqing Crude Trade) to Russian Oil Relations (Sino–Russian Oil Communiqués 2002/3) INTRODUCTION With the economic growth, China’s consumption in crude oil has increased at a rate of 5.77 percent on average. China used about 250 million tons of crude oil in 2003, including 91.12 million imported, a year-on-year increase of 10 percent.1 With this burgeoning demand, China had to look for new sources of oil and it seems like the Russian Federation offers one of the most promising areas of oil supply for the booming Chinese economy. This chapter aims to show how 1

People’s Daily Online (2004). Russia Welcomes China to Participate in East Serbia Oil Development, People’s Daily Online, date 29 March 2004 [downloaded on 29 March 2004], available at english.peopledaily.com.cn. 17

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Chinese oil diplomacy has significantly shifted from being an oil supplier to Japan since the 1970s, tapering off in the 1980s to become a major oil importer from Russia in the 21st century.

SINO–JAPANESE OIL RELATIONS The Background After the war ended, history is not without its ironies. With the declaration of the People’s Republic of China and its subsequent embargo and de-recognition by Washington, the industrially nascent PRC had to find ways to obtain much needed foreign reserves and manufactured goods. Its nearest source was Japan which coincidentally needed the very raw materials found in abundance in China (including coal and oil) for its postwar reindustrialization. In this manner, the two wartime foes had found complementarity in the immediate postwar years. The historical roots of Japan’s decision to resume relations with China is considered by some to be traceable back to 1952 when it was advocated by a number of politicians in the ruling Liberal Democratic Party (LDP) and the main opposition in Japanese Socialist Party (JSP).2 It was then perceived by them as something inevitable and a celebrated moment signaling independence in Japan’s foreign policy. Allied with this group of politicians were powerful industrialists and capitalists interests eagerly awaiting penetration into the age-old China market with its one-billion consumers. However, due to various political complications, Sino–Japanese trade was stagnated for much of the 1950s, severely curtailed in the 1960s. It was only with the resumption of Sino–Japanese economic relations that a more permanent treaty in the form of the Long-Term Trade Agreement (LTTA) between Japan and China in 1978 was formed. This was the final step in formal normalization of trade ties between Japan and China since the China–Japan Trade Agreement in 1974. 2

Newby, L. (1988). Sino–Japanese Relations (London: Routledge), p. 5.

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The first significant element of the LTTA was that it was longer in duration than the 1974 China–Japan Trade Agreement, being eight years in duration.3 It was also more explicit in its goals, projecting a US$20 billion trade between the two countries in the period between 1978 and 1985 with each side contributing US$10 billion.4 The chief items that the Japanese needed from the Chinese during this period were energy commodities, beginning the phase of “(Japanese) technology for (Chinese) oil”. The crucial sweetener for persuading the Chinese to sign the agreement was a US$7–8 billion transfer of Japanese technologies and US$2–3 billion worth of heavy machinery and construction materials to China.5 Recognizing China’s economic situation, the LTTA agreed to China’s deferred payments for these goods, an economic carrot that would replay over and over again.6 The main trickle-down effect that China was looking for from FDIs was the transfer of technology necessary for its modernization program. This methodology was encapsulated in the Chinese slogan “one enterprise imports, one hundred enterprises benefit” (yi jia jinkou, bai jia de li).7 The benefit for Japan was her appetite for raw materials and fuels from China, including 8–9 million tons of coal and 47.1 million tons of crude oil.8 The self-interest in this area on the part of the Japanese is sparked off by the 1973 oil cartel embargo following the Arab–Israeli conflicts. The fact that estimates during this period placed total Chinese petroleum volume at 2–6 billion tons was particularly enticing in such a scenario.9

3

Newby, L. (1988). p. 7. Newby, L. (1988). p. 7. 5 Newby, L. (1988). p. 7. 6 Newby, L. (1988). p. 7. 7 Newby, L. (1988). p. 35. 8 Newby, L. (1988). p. 7. 9 Rothenberg, M. (1977). Whither China: The View from the Kremlin. Monographs in International Affairs Center for Advanced International Studies. (Washington DC: University of Miami), p. 123. 4

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Factors that Superseded Sino–Japanese Oil Diplomacy Several factors transitioned Sino–Japanese political economic relations towards a new platform. These factors include new value-added items in Sino–Japanese trade, Japanese domestic political shift towards nuclear energy, and the diversification policy minted by China. They will be discussed in this order below.

Higher Valued-Added Economic Ties By the 1980s, Sino–Japanese trade ties were also no longer confined to oil or other heavy industries as in the mid-1970s. China realized the importance of FDIs to her economy as early as 1978 when the government took steps to set up Special Economic Zones (SEZs) that included the opening of 14 Southern coastal cities, perks for foreign investors, and legal infrastructure.10 These investor perks eventually sparked off the 1984 electronics boom characterized by a Japanese investment scramble in China. Japanese FDI joint ventures jumped from 10 a year before to 47. In terms of figures, the jump in Japanese investments went from US$3 million in 1983 to US$114 million in 1984.11 Moving on from early industrial cooperation in raw materials extraction heavy industries, Sino–Japanese joint ventures began to shift towards the manufacturing sector and these ventures continue to increase in numbers, e.g. Guangzhou Honda Automobile Co. (a joint venture between Guangzhou Auto Group Corp. and Honda Japan) was established in March 1999 with a production schedule of 59,000 Odyssey minivans and Accord sedans.12 Investments by Japanese companies like Honda in China are not merely restricted to penetrating the Chinese market but conceptualizing China as a massive production base for exports to other regions of the world. One of 10

Newby, L. (1988). p. 27. Newby, L. (1988). p. 29. 12 Japan Times (2002). Honda to Ramp Up Production in China Fourfold, Japan Times Online (dated 19 December 2002) [downloaded on 19 December 2002], available at www.japantimes.co.jp. 11

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the China plant’s eventual roles is to export cars made in the plant to Europe by 2004.13

Japanese Domestic Priorities By the beginning of the 1990s, Sino–Japanese oil diplomacy as the main bulwark of Sino–Japanese economic relations was placed on the backburner. Japan had changed priorities in energy needs. Japan aimed to wean off dependence on oil to less than 50 percent of its overall energy needs. This was in sync with the worldview of the ruling LDP which was also keen to give nuclear energy development the highest priority in alternative energy sources.14 The LDP was determined to ensure that nuclear energy constituted 11 percent of Japan’s primary energy by 1990.15 In conjunction with this, the future mainstay of Japanese energy needs was identified as nuclear power in a White Paper released in 1987.16 At that moment, nuclear power had taken up 28 percent of Japan’s energy industry and looks poised to become Japan’s main energy source.17 The Japanese decision to lessen dependence on overseas oil also added a dampener on Sino–Japanese oil trade.

The Transition to Russian Oil Diplomacy Because of the abovementioned factors, Sino–Japanese political economic ties have moved onto a new plateau with formerly mutually compatible interests in oil and other raw material extraction industries replaced by high value-added manufacturing activities. This makes sense since the raw materials that were much needed by the booming 13 Saporito, B. (2003). Can Wal-Mart Get Any Bigger? TIME Magazine Online, dated 5 January 2003 [downloaded on 5 January 2003], available at www.time.com. 14 Suttmeier, R. P. (1981). The Japanese Nuclear Power Option: Technological Promise and Social Limitations, The Politics of Japan’s Energy Strategy (Berkeley: Institute of East Asian Studies Research Papers and Policy Studies), pp. 132–133. 15 Suttmeier, R. P. (1981). pp. 132–133. 16 Newby, L. (1988). p. 26. 17 Newby, L. (1988). p. 26.

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Japanese economy in the 1970s and 1980s were now needed by the buoyant Chinese economy since the 1990s. Moreover, both countries now have their own respective domestic priorities that are not necessarily compatible with a common interest in China’s raw materials.

Why and How the Chinese Oil Diplomacy Refocused from Japan to Russia? The reasons for Chinese oil diplomatic shift from Japan to Russia can be classified into macro environmental geopolitical factors (end of Cold War), Chinese domestic economic factors (industrialization and the need for oil and geopolitical concerns) as well as Japanese and Russian domestic factors.

Chinese Domestic Factors The significance of why Russia supplanted Japan as China’s most important energy partner lies within the workings of the Chinese economy itself. From 1963 to 1993, China was officially self-reliant on oil and energy with non-existent to negligible to rising but not significant importation of oil. But, by 1993, its industrialization process that began in 1979 when Deng Xiaoping declared the opendoor policy had developed to such an extent that China’s thirst for oil had exceeded its capacity to fulfill the need from its own oilfield. Because of this characteristic, as the 21st century loomed, there was also a shift in status from oil exporter (to Japan) to oil importer (from Russia). Japan which was a net importer of oil from China and having no energy resources of her own naturally became less important consequently in China’s search for more energy. Under a 1978 long-term bilateral trade deal, China had previously agreed to ship at least 6 million tons of crude oil to Japan annually from Daqing, China’s largest oil field in Heilongjiang Province, northeastern China, for five years through 2000. But, starting from 29 June 1999, Japan did not seek the targeted amount of crude oil imports from China’s Daqing oil field, in line with China’s intention to allocate crude oil more for its domestic industries. In any

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case, the two sides were not able to fulfill the target in 1999 as Japan’s crude oil imports from the Daqing oil field have totaled only about 2 million tons by mid-1999 due to Chinese stoppage of crude oil exports from Daqing to Japan in February 1999 to increase oil supply for its domestic industries.18 The Daqing oil field, which was founded in 1959 and China’s biggest, was increasingly exhausted, producing more than 50 million tons of crude oil a year from 1976 through 2002 but in 2003 fell to about 48 million tons and, in 2003, Daqing, which represents onethird of the nation’s oil output, saw its production falling for the first time in 27 years below the benchmark 50 million tons.19 By 2004, China suspended oil exports to Japan due to a stalemate in price and sales volume negotiation, effectively clouding the future of a three-decade long oil shipment program with China. China, which had become the world’s second largest oil importer, outwardly demanded a price increase for its Daqing crude and a cut in volumes to justify exports from its aging Daqing Oilfield; PetroChina also told Japan to cut Daqing supply in 2004 to 500,000 tons from 3 million tons in 2003 as the output of Daqing is declining and it would not be exported to Japan again based on long-term contracts.20

Domestic Japanese Factors The supply of Daqing oil to Japan began after the 1972 normalization of relations between the two countries as a symbol of bilateral friendship but when Japan asked China to ship 1.85 million tons of crude oil annually from the Daqing field in 2004 and 2005, China

18

Kyodo (1999). Japan to Abandon Daqing Oil Import Target, dated 5 July 1999, Asian Economic News website [downloaded on 16 December 2008], available at http://findarticles.com/p/articles/mi_m0WDP/is_/ai_55115618. 19 Kyodo (1999). 20 Xie, Y. (2004). China Suspends Oil Exports to Japan, dated 11 January 2004, China Daily website [downloaded on 16 December 2008], available at http://www. chinadaily.com.cn/en/doc/2004-01/11/content_297859.htm.

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could only export 500,000 tons annually.21 Moreover, by mid-1999, both China and Japan had already drifted far apart on the price for crude oil as China asked Japan to buy the crude oil at prices higher than international standards, saying the Daqing field in the northeastern province of Heilongjiang has been operating in the red.22 China wanted to raise the premium for the crude to US$6.30 a barrel over the average price of Indonesia’s Minas and Cinta crude from a premium of just 45 cents per barrel in 2003.23 In addition, Japanese consumers of Daqing oil had started complaining about its quality since the late 1970s and Japanese electric power companies (e.g. Tokyo Electric Power Co.) which are the major domestic users of Daqing crude could replace the supply with higher-quality crude oil from Indonesia and western Africa without affecting operations.24 By 2004, export from Daqing accounted for only about 1.5 percent of Japan’s crude imports.25

Why Russia Then? If that is the case, then why would Russia be a natural target of focus since Russia is not a major source of oil for China? The answer lies in the golden rule of diversification to reduce the risk of increasing reliance on oil from the Middle East. This diversification exercise is both economic and geopolitical in nature. Most of China’s imported oil (e.g. 61.1 percent in 2005)26 comes from the Middle East, raising

21

Japan Times (2004). Supplies from China’s Daqing Oil Field Halted, dated 12 February 2004, Japan Times website [downloaded on 16 December 2008], available at http://search.japantimes.co.jp/cgi-bin/nn20040212a4.html. 22 Japan Times (2004). 23 Xie, Y. (2004). 24 Japan Times (2004). 25 Xie, Y. (2004). 26 Wu, Z. (2007). SUN WUKONG China Aims to Diversify Oil Sources, dated 28 February 2007, Asia Times website [downloaded on 16 December 2008], available at http://www.atimes.com/atimes/China_Business/IB28Cb02.html.

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worries that if the supply of oil from the Middle East were interrupted, the outcome for China would be disastrous. Interruption could come in the form of long-term exhaustion of oil reserves, unexpected wars but, most importantly for the Chinese strategic thinkers, they realized that the Middle East is under US scrutiny underpinned by her military presence in Iraq in constant tension with Iran and China knows that it is not ready to contest US military strength, certainly not in line with Deng’s diplomatic position of lying low and keeping the head down. China also worries about the stoppage or blockade of Middle Eastern supply in case of a conflict breaking out over the Taiwan Straits. To overcome this handicap, the Chinese are relying on a pluralistic energy strategy that diversifies their oil supplies to other regions such as Africa, Central Asia, Russia, and Latin America in countries such as Angola, Saudi Arabia, Iran, Russia, Oman, Equatorial Guinea, Yemen, Libya, and Venezuela. How does Russia stand out in this Chinese diversification policy compared to other potential oil suppliers? First Russia is strategically located next to China with the possibility of oil supplies going directly overland from Russian to Chinese territory without the need to traverse the Straits of Malacca and Russian. Chinese strategic interests tend to coincide, given their mutual concerns about the intentions of the West, making it a potential partner on certain issues (e.g. Shanghai Cooperation Organization). For example, in April 2006, Russia’s former President Vladimir Putin threatened to shift its supply away from the European Union to Asia’s energy markets (China, Japan, and India primarily) when the West (EU and the US) attempted to curb the entry of Russian companies into the European market. Putin’s threat carried weight as it had demonstrated the precedent of cutting Russian gas supplies to Ukraine as a warning to the incorporation of the latter into NATO’s sphere of influence. Secondly, the economic potential of China’s cooperation with Russia has yet to be fully tapped even though imports from Russia and the former Soviet states have steadily increased in recent years;

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e.g. China’s oil imports from the former Soviet states accounted for about 10 percent of the country’s total imports in 2004, up sharply from the 3.1 percent in 2000 and imports from Russia alone accounted for 8.8 percent of total imports in 2004, up from 2.1 percent in 2000.27 Thus the rate of increase is highly significant. In 2005, China imported 12.78 million tons of oil from Russia, accounting for 10.1 percent of the country’s total oil imports and Vice Minister of Commerce Yu Guangzhou said China’s oil imports from Russia in 2006 reached 15 million tons with more room for growth as Russia is the world’s second-largest oil producer and is in close proximity to China.28

SINO–RUSSIAN OIL RELATIONS With strong economic growth since its open-door policy, China was interested in pursuing investments in Russia. The rate of increase was also remarkable as according to the Russian ministry of economic development and trade, trade volume between the two countries increased by 65.7 percent year-on-year and by the first quarter of 2001 alone, it amounted to US$2.39 billion.29 Sino–Russian economic relations mainly based on trade have steadily built up from the dissolution of the Soviet Union till 2001 and it was felt particularly from the Russian side that time was ripe to upgrade cooperation to include joint ventures and raw materials processing industries.30 From the Chinese side, they were keen to finance a geological survey work for prospective oil and gas in the region to feed their growing need for energy as well as establishing a Sino–Russian bank in Khabarovsk.31 27

Wu, Z. (2007). Wu, Z. (2007). 29 Pravda (2001). Russian–Chinese Trade Volume Amounts to USD 2.39 Billion, English Pravda Online, dated 9 June 2001 [downloaded on 23 May 2003], available at english.pravda.ru. 30 Pravda (2001). 31 Pravda (2001). 28

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The Russians were also aware of competition for Chinese consumption and investment from its former satellite states, e.g. China launched cooperation with Russian Federation Republic such as Sakha Republic (Yakutia) for prospective oil survey and research.32 Oil was a predominant item on China’s wish list in investments within the former Soviet Republics. One of the biggest investments in this area is the pipeline from Kazakhstan to western China. The deal reached without Russian mediation alerted the Russian Federation to the need to capitalize on Chinese investments before they lose it to other independent former Soviet republics.33 Consequently, the Russian Federation has launched a broad array of initiatives to increase oil ties with China. By the 21st century, Sino–Russian cooperation in oil trade had begun to bear fruit. The previously second largest Russian oil trader, Yukos, exported about 3 million tons of oil to China in 2003, accounting for 60 per cent of Russia’s crude exports to China. 34 In February 2004, China National Petroleum Corp. (CNPC), the nation’s largest oil producer, agreed to buy 10 million tons of oil annually from Yukos starting from 2006 for seven years.35 The oil is delivered via the existing railway linking Russia’s Zabaikalsk and the Manzhouli area in China.36 Yukos agreed with Russian Railways (RZD) to increase crude oil shipments to China

32 People’s Daily Online (2004a). Russia Welcomes China to Participate in East Serbia Oil Development, People’s Daily Online, dated 29 March 2004 [downloaded on 29 March 2004], available at english.peopledaily.com.cn. 33 Pravda (2003). Russia to Be Outflanked through Great Silk Way? English Pravda Online, dated 26 December 2003 [downloaded on 23 May 2003], available at english.pravda.ru. 34 People’s Daily Online (2004b). Contract Ensures More Oil Delivery to China, People’s Daily Online, dated 29 March 2004 [downloaded on 29 March 2004], available at english.peopledaily.com.cn. 35 People’s Daily Online (2004b). 36 People’s Daily Online (2004b).

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by five times by 2007.37 RZD agreed to deliver to China 6.4 million tons of Yukos’ crude (128,000 barrels per day (b/d)), 8.5 million tons next year and 15 million tons in 2004, 2005, and 2006, respectively.38

PROBLEMS IN SINO–RUSSIAN OIL DIPLOMACY In March 2003, China and Russia signed a non-binding framework agreement to build an oil pipeline, running from Angarsk in East Siberia to Daqing in Northeast China (again another ironic twist of fate as Daqing, being China’s largest oilfield, was formerly the symbol of post-1949 industrialization success story, Sino–Japanese collaboration in oil, and the largest single source of export oil to Japan).39 This proposed Sino–Russian pipeline would allow China to ship 700 million tons of Russia’s crude through the pipeline to China over the next 25 years.40 The deal, worth US$150 billion in total, would be the largest-ever bilateral trade agreement between the two countries.41 Ironically, China’s increased oil ties with Russia have seen the PRC come up against its former oil trading partner, Japan. Sino–Japanese rivalry in Russian is demonstrated most graphically and dramatically by their competition over access to Siberian oil, pitting the world’s second largest economy against the world’s fastest-growing economy. Unexpectedly, the Chinese pipeline project took a knock after Japan offered a rival pipeline that will bypass China and stretch to Russia’s Far East port of Nakhodka.42 Since then, the project has

37

The Moscow Times (2004). RZD to Rail Five Times More Crude to China RZD to Rail Five Times More Crude to China, The Moscow Times website [downloaded 29 March 2004]. 38 The Moscow Times (2004). 39 People’s Daily Online (2004b). 40 People’s Daily Online (2004b). 41 People’s Daily Online (2004b). 42 People’s Daily Online (2004b).

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vacillated from Russian compromise in building two pipelines (one to China and the other to Japan) to media reports on Russian deference to the Japanese proposal and back to Chinese optimism of securing the deal back from the Japanese. Japan’s sudden and intense lobbying for a Russian pipeline to Russia’s Pacific-coast city of Nakhodka to attract Russian interest away from China started in late 2002 when Japanese VIPs frequented Moscow and Russia’s Far East cities, offering billions of dollars of Japanese credit (including a US$5 billion Japanese financing offer for the construction of the pipeline) and other incentives (e.g. US$1 billion renovation financing) for impoverished cities in Siberia (an additional US$7.5 billion for oil exploitation in East Siberia)43 and the Pacific Coast along the proposed Angarsk–Nakhodka oil pipeline (3,700 km). Former Prime Minister Koizumi Junichiro also traveled twice (January and May 2002) to Russia in five months to win over the Russian pipeline. Dealing a blow to Chinese energy diplomacy, Japanese oil diplomacy with Russia succeeded in 2003 when the latter opted against a plan to build a single pipeline directly to China, choosing instead a 2,500-mile (4,000 km) route that skirted China and remained entirely inside Russian territory all the way to the Pacific port of Nakhodka opposite of Japan.44 What happened? Part of the problem with Sino–Russian oil exchanges and the Russian indecision with pipeline delivery lies in Russia’s protracted feasibility study of a 2,400 km, US$2.5 billion oil pipeline45 from Russia’s Siberia city Angarsk to Daqing in northeastern China (Manchuria) initiated by former Russian President Boris Yeltsin in

43

Yu, B. (2008). The Russian–Chinese Oil Politik, CSIS website [downloaded on 16 Dec 2008], available at www.csis.org/media/csis/pubs/0303qchina_russia.pdf. 44 Thomson Financial (2007). Russia to Begin China Oil Pipeline in 2008 — Minister, dated 9 July 2007, Forbes.com [downloaded on 16 December 2008], available at http://www.forbes.com/markets/feeds/afx/2007/07/09/afx3895290. html. 45 Yu, B. (2007).

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1994 after the Cold War. During this near-decade feasibility study of the pipeline, Putin’s Russia recovered economically with oil as a valuable export of great importance, introducing new dynamics to the Yeltsin–Jiang oil diplomacy since the early 1990s. In addition to leadership changes and new geopolitical dynamics, summit communiqués, bureaucracy papers, oil companies such as those signed by Putin–Jiang in December 2002 and by Putin–Hu in May 2003 are not necessarily binding or final. By 2005, Chinese President Hu Jintao still failed to secure firm Russian commitment to drastically increase oil supplies to China other than a vague joint communique that only said that both sides would “facilitate Russian–Chinese hydrocarbon projects, including the construction of an oil pipeline from Russia to China”, and “instructed enterprises in both countries to carry out concrete consultations on the above projects” although Rosneft agreed to increase oil shipments to China by rail from four million tonnes in 2004 to nine million tonnes in 2005.46 Meanwhile, Chinese oil diplomacy with Russia had stimulated competitive instincts in India which eyed the joint exploration and development of an oil-and-gas block in the Sakhalin-3 project that was the subject of a protocol agreement between China’s Sinopec and Russia’s Rosneft. Russian courtship of China’s Indian and Japanese competitors and the absence of progress on the Siberian pipeline to the PRC began to raise Chinese suspicions that Russia might be playing other Asian powers against her. Energy rebuff, for example, might have reflected Russian displeasure with Beijing’s reluctance to diversify its commodity-dominated imports from Russia to include machines and equipment.47

46

Radyuhin, V. (2005). China Fails to Win Russian Pledge on Oil Pipeline, dated 5 July 2005, The Hindu [downloaded on 16 December 2008], available at http:// www.hindu.com/2005/07/05/stories/2005070506441400.htm. 47 Radyuhin, V. (2005).

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One year later in 2006, the Chinese stepped up its oil diplomacy with Russia again when the then Russian President, Vladimir Putin visited Beijing in March 2006 and oversaw China National signing a memorandum of understanding with the Russian Gazprom to build two natural gas pipelines from Siberia to China to deliver 80 billion cubic meters of natural gas a year to China beginning in 201148 while, simultaneously, the Chinese slipped in an agreement with Russia to work on a technical feasibility study for an oil pipeline from eastern Siberia to China, reviving competition with Japan in the process. With the Russian–Siberian oil promise once again vague, the Chinese tried other means to get a bigger stake to gain more influence over Rosneft’s exploration and production plans on Wednesday 19 July 2006 when China’s biggest oil company openly announced the US$500 million stake (66.22 million shares in its US$10.4 billion initial public offering at the offer price of US$7.55) it bought on Friday 14 July 2006 in the newly-listed Russian petroleum giant, Rosneft. China hoped that this would help its efforts to secure energy (Rosneft’s proven oil reserves of almost 19 billion barrels) for the Chinese market and would “further expand the cooperation and deepen the long-term cooperative relationship”.49 Chinese patience bored fruits in 2007, after losing the Siberian pipeline bid in 2003, when they secured a promise from Energy Minister Viktor Khristenko that construction work will begin in 2008 to deliver crude oil directly from Siberia to China after the first payment for the Chinese branch of a trunk pipeline that links Siberia to Russia’s east coast was received in June 2007. “Construction will begin when the design work is complete”,

48

Lague, D. (2006). China Seeks Oil Security with Stake in Russia Firm, dated 20 July 2006, IHT website [downloaded on 16 December 2008], available at http:// www.iht.com/articles/2006/07/19/business/energy.php. 49 Lague, D. (2006).

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Khristenko was quoted in Beijing by the Interfax and RIA Novosti news agencies as saying, “under the contract this should be completed within 208 days after the first payment is made by the Chinese side to finance the project”.50 In other words, the Chinese would get a portion of the Siberian oil through a branched-off pipeline from the main line. Always making sure that they would keep the Chinese on their toes as the PRC got more and more worried over volatile Middle Eastern supply in the first half of 2008, the Russian Energy Minister added a caveat to their oil delivery: no decision had yet been made on whether the initial 30-million-tonne annual capacity of the Chinese pipeline would eventually be expanded but added that he was “more optimistic than pessimistic” that this would happen.51 Through such an expansion, the Chinese hope for an eventual advantage in their energy rivalry with Japan by expanding the branch pipeline off that main route to China’s oil capital Daqing. By October 2008, Chinese hope seemed to materialize when Chinese state energy major CNPC and Russian state pipeline monopoly Transneft signed the deal to build an annual 15 million tons capacity oil pipeline from the Siberian town of Skovorodino to the Chinese border as a branch of the main East Siberia–Pacific Ocean trunk pipeline in return for Chinese loan of around US$25 billion52 to Russian oil companies as part of a renegotiated supply deal after talks between Prime Minister Wen Jiabao and Russian counterpart Vladimir Putin on Tuesday 28 October 2008. Pressure from the 2008 Global financial crisis and the falling price of oil tilted the advantage to the Chinese as oil supplies were offered at a discount in an effort to secure much-needed funds for infrastructure investment and capital expenditure. 50

Thomson Financial (2007). Thomson Financial (2007). 52 AFP (2008). Russia, China Sign Landmark Oil Pipeline Deal, dated 28 October 2008, China Digital Times [downloaded on 16 December 2008], available at http:// chinadigitaltimes.net/2008/10/russia-china-sign-landmark-oil-pipeline-deal/. 51

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CONCLUSION China and Japan are the two great Northeast Asian powers of the 21st century. Their rivalry and cooperation have and will continue to determine the fate of East Asian integration. Strained relations between the two powerful nations over energy may exacerbate Chinese mistrust dating back to the Sino–Japanese War and World War II and raise Japanese suspicions about China’s meteoric economic rise and voracious appetite for oil and gas. China’s rapid economic growth clashes with Japan’s natural deficiency in having almost no resources of its own and reliant on the Middle East for nearly 90 percent of its oil. Because of these factors, alternative sources of oil like Russia have become even more important for these two Northeast Asian giants. For Japan, it signified a diversification of oil dependence on the Middle East and, for China, an overland oil source that was not vulnerable to the piracy attacks or strategic competitors in the Straits of Malacca or the South China Seas (in case of the outbreak of a Taiwan Straits conflict). Despite Sino–Japanese rivalry for Russian oil resources, for the long-term, resolving their rivalry or restricting it to a friendly form of competition on the energy issue is inevitable as Japan and China have no choice but to work together to contain occasional friction complicated by historical issues and the territorial dispute. Cooperation in Northeast Asia on a whole is important as the region will need to import about 70 percent of its oil from the Middle East in 2020 and it would help for the two to come up with a common front in price negotiations than to compete. A large component of their energy rivalry was situated in Russia from 2003 onwards. Managing this rivalry or restricting it to friendly competition will help to mitigate potential flashpoints in Northeast Asian energy security. In this way, the outcome of Sino–Japanese rivalry over Russian oil resources will determine the shape of East Asian energy outlook for decades to come (Table 2.1).

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Oil and Gas in China Table 2.1.

Year February 1929

1931–1945

January 1933

1936

1939

1940–1941

Chinese oil provision/exports to Japan (planned and actual). Amount According to the Far East Review in February 1929, Fushun’s plants would process 1,250,000 tons of shale oil with an average 4 percent oil content with 5,000 tons of coke, 10,000 tons of crude paraffin and 18,000 tons of ammonia as by-products.53 In total, with these stepped-up efforts between 1931 and 1945, 2.19 million tons of oil extracted in Japaneseoccupied Manchuria.54 In January 1933, both plants in Fushun were upgraded a second time to expand its individual oven’s daily output to 100 tons and the capacity for the by-product output was also increased.55 The output of Japanese oil extraction facilities in China’s Northeast increased rapidly from the 250,000-ton annual output capacity at the Fushun No. 3 plant built in 1936 to the 500,000-ton output capacity of No. 6 plant at Jinzhou built in 1939.56 The output of Japanese oil extraction facilities in China’s Northeast increased rapidly from the 250,000-ton annual output capacity at the Fushun No. 3 plant built in 1936 to the 500,000-ton output capacity of No. 6 plant at Jinzhou built in 1939.57 The Far Eastern Yearbook for 1940–1941 listed the total of amount of oil shale in Manchuria as 7,628 million tons, out of which 5,400 came from Manchuria.58 (Continued)

53 Torgasheff, B. P. (1929). Digest of Coal, Iron & Oil in the Far East (Honolulu: The Institute of Pacific Relations), p. 63. 54 Shen, L. (1988). Zhongguo Shiyou Gongye Fazhan Shi (China: Shiyou Gongye Chubanshe), p. 13. 55 Shen, L. (1988). p. 219. 56 Cheng, C. Y. (1976). China’s Petroleum Industry (New York: Praeger), p. 73. 57 Cheng, C. Y. (1976). p. 73. 58 Fong, H. D. (1942). The Postwar Industrialization of China Planning Pamphlets Nos. 12 and 13 June 1942 (US: National Planning Association), pp. 43–44.

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The Emergence of the Chinese Oil Industry in Northeast Asia 35 Table 2.1.

(Continued)

Year

Amount

1942

The Communist government noted that oil production which reached a production peak of 257,618 tons in 1942 under the Japanese had dropped to a dismal low of 7,973 tons in 1948.59 Eventually, in 1943, at the peak of production, Fushun oil production was large enough to form 70 percent of Japan’s total oil output from the base of China.60 Even the oldest No. 1 refinery was gradually upgraded until it achieved an annual output of 550,000 tons of oil and became the world’s largest oil shale refinery up till 1945.61 Japan’s domestic oil industry was, for intent and purposes, not functioning in the immediate postwar period because the American Occupation forces did not permit oil refining activities in Japan until 1949.62 Even after 1949, only limited resumption of oil refining was allowed under American supervision and the management of Allied companies like Jersey, Socony-Vacuum, Shell, and Gulf.63 For the Fourth Unofficial Sino–Japanese Trade Agreement on 5 March 1958, a non-governmental mission led by a conservative parliamentarian and including some Socialists concluded the agreement for exchanges worth US$196 million.64 Petroleum products were included in Class B exports from the PRC to Japan although the implementation of the Agreement ran into difficulties

1943

1945

1945–1949

After 1949

5 March 1958

(Continued)

59 Pu, Z. G. (1999). Zhonggong Fushun Difang Shi (A Local History of Communist Fushun) (China: Liaoning Minzu Chubanshe), p. 228. 60 Cheng, C. Y. (1976). p. 2. 61 Bartke, W. (1977). Oil in the People’s Republic of China (Montreal: McGill-Queens University Press), p. 101. 62 Yergin, D. (1991). The Prize The Epic Quest for Oil, Money and Power (NY: Simon and Schuster), p. 545. 63 Yergin, D. (1991). p. 545. 64 Cole, A. B., Totten, G. O. and Uyehara, C. H. (1966). Socialist Parties in Postwar Japan (New Haven and London: Yale University Press), p. 64.

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36 Oil and Gas in China Table 2.1. Year

31 July 1963

1963

1972–1974

(Continued) Amount

when dispute arose over the proposed Chinese trade mission’s right to fly the PRC flag in Tokyo65 and other privileges to be enjoyed by the permanent PRC commercial office under a formula proposed by Tokyo66 Kawakami Trading Company of Japan had contracted to import 25,000 tons of heavy oil and oil cakes from the PRC by end August 1963 and, in return, it would provide aircraft fuels to China.67 1963 also saw a Japanese news agency publishing trade index with details on Chinese import and export agencies dealing with petroleum products. Chugoku Sangyou Boeki Souran (An Index of China’s Industries and Trade) published by the Ajia Tsushinsha (Asia News Agency) in 1963 listed contact details and itemized items for trade offered by the China National Chemicals Import and Export Corporation (CNCIEC or Zhongguo Huagong Jingchukou Gongsi).68 Petroleum and petroleum products were prominently listed as two of the principal exports from this agency.69 Under Zhou principles and with the US normalization of relations with China in 1972, trade between Japan and China progressed steadily with the Chinese increasing their oil exports from 29 and 45 tons between 1972 and 1974.70 (Continued)

65 Shao, C. L. (1958). Japan and Communist China (Kyoto: Doshisha University Press), pp. 159 and 164. 66 Cole, A. B., Totten, G. O. and Uyehara, C. H. (1966). p. 64. 67 Jain, R. K. (1977). China and Japan 1949–1976 (India: Humanities Press of New Jersey), p. 71. 68 Tsushinsha, A. (Asia News Agency) (1963). Chugoku Sangyou Boeki Souran (An Index of China’s Industries and Trade) (Japan: Ajia Tsushinsha (Asia News Agency)), p. 349. 69 Tsushinsha, A. (Asia News Agency) (1963). p. 349. 70 Rothenberg, M. (1977). Whither China: The View From the Kremlin, Monographs in International Affairs Center for Advanced International Studies (Washington DC: University of Miami), p. 123.

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The Emergence of the Chinese Oil Industry in Northeast Asia 37 Table 2.1.

(Continued)

Year

Amount

1973

In 1973, China forwarded the first numerically significant shipment (1 million metric tons) of high-quality low sulfur content oil to Japan.71 When Nakasone met Zhou Enlai in 1973, Zhou offered one million metric tons of petroleum for trade with Japan.72 20,000 b/d.73 1 million tons in 1973.74 Initial proposed amounts in this trade was 1 million tons of Chinese oil in 1973 with another 3 million tons planned in 1974.75 80,000 b/d.76 4.9 million tons in 1974.77 A pipeline was also scheduled for construction from Daqing to Dalian (Dairen in Japanese) to pump 3–4 million metric tons of crude oil for export to Japan in 1974.78 162,000 b/d.79

1973 1973 1974

1974 1974

1975

(Continued)

71 Ling, H. C. (1975). The Petroleum Industry of the People’s Republic of China (Stanford: Hoover Institution Press), p. 43. 72 Lieberthal, K. and Oksenberg, M. (1986). Bureaucratic Politics and Chinese Energy Development (Washington: Center for Chinese Studies The University of Michigan Prepared for the Department of Commerce Contract No. 50-SATA-4-16230), p. 180. 73 Hardy, R. W. (1978). China’s Oil Future: A Case of Modest Expectations (Colorado: Westview Press), p. 2. 74 Park, C. H. (1975). Energy Policies of the World: China (Newark Delaware; Center for the Study of Marine Policy), p. 48. 75 US Government Printing Office (1974). (Printed for the use of the Committee on Foreign Affairs), Oil and Asian Rivals, Hearings Before the Submittee on Asian and Pacific Affairs of the Committee on Foreign Affairs House of Representatives 93rd Congress First and Second Sessions, 12 September 1973; 30 January, 6, 20 February, and 6 March 1974 (Washington: US Government Printing Office), p. 45. 76 Hardy, R. W. (1978). p. 2. 77 Park, C. H. (1975). p. 48. 78 Ling, H. C. (1975). p. 2. 79 Hardy, R. W. (1978). p. 2.

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(Continued)

Year

Amount

1976 1977 1985

122,000 b/d.80 132,000 b/d.81 Chinese crude exports to Japan reached a peak in 1985 at 350,000 b/d.82 13,664 million tons.83 6,600 b/d.84 4,700 b/d.85 5,500 b/d.86 2,600 b/d.87 600 b/d.88 —89 1,100 b/d.90 100 b/d.91 Chinese oil exports to Japan tapered off to 230,000 b/d from 1995 to 1997.92 1998 data showed that if China stopped her crude oil exports (including its main customer since the Sino–Japanese oil diplomacy days).93

1990 1990 1991 1992 1993 1994 1995 1996 1997 1995–1997 1998

80

Hardy, R. W. (1978). p. 2. Hardy, R. W. (1978). p. 2. 82 Wong, H. J. (1999). China’s Oil Industry and Market (The Netherlands: Elsevier), p. 25. 83 Lee, T. H. (1995). Politics of Energy Policy in Post-Mao China (Korea: Asiatic Research Center Korea University), p. 272. 84 Wang, H. J. (1999). p. 253. 85 Wang, H. J. (1999). p. 253. 86 Wang, H. J. (1999). p. 253. 87 Wang, H. J. (1999). p. 253. 88 Wang, H. J. (1999). p. 253. 89 Wang, H. J. (1999). p. 253. 90 Wang, H. J. (1999). p. 253. 91 Wang, H. J. (1999). p. 253. 92 Wang, H. J. (1999). p. 253. 93 Thomson, E. (2001). p. 20. 81

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Chapter

3 The Emergence of the Chinese Oil Industry in Southeast Asia: China–ASEAN Sub-Regionalism — Pan Pearl River Delta (PPRD) Regionalism and Cooperation in Oil ENERGY Backdrop The emergence of Chinese economic strength is contributive to the current policies found in many countries of accommodating the rise of China rather than countering it and the Association of Southeast Asian Nations (ASEAN) is no exception. Many are also aware of China’s complex and wide array of domestic issues that needs to be resolved such as income disparity, corruption issues, state-owned enterprises, western China development, SARS, etc. Most would still want to see a stable China as they believe that it is in the region’s best interest for that to happen. Through 39

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WTO, multilateral and bilateral engagements, China has begun to do its part in trying to allay East Asian fears over its rise, given the historical dominance that China had over the rest of East Asia in history. Adding ASEAN petroleum exports into a comprehensive package, the Chinese touted their economic potential to convince ASEAN into forging a stronger partnership with them. They were able to deploy the ASEAN–China Free Trade Agreement (FTA) with its accompanying preferential tariff conditions for ASEAN countries for the first five years as well as its fast-growing market for ASEAN exports for a stronger partnership with the region. For some Southeast Asian states, China also presents itself as an opportunity in terms of raw materials exports, especially for oil-rich states such as Indonesia, Brunei, Malaysia (palm oil), etc. China was able to deploy the same flexible approach in dealing with Vietnam honed by the PRC’s own experiences with Japan.

China Reaches out to the ASEAN Mekong States With the Mekong sub-regionalism as its foundation, China reached out to Indo-Chinese countries within a constructed regional framework. In July 2005, China launched its cooperation with Indo-Chinese states (otherwise known within ASEAN as CLMV (Cambodia, Laos, Myanmar, and Vietnam) + Thailand, or the Greater Mekong Subregion (GMS)) in the areas of trade, agriculture, tourism, and disease control. In the energy sector, the most significant item within the GMS is the establishment of an understanding on cross-border energy transmission,1 something eminently needed if China was to even deploy its plans of transmitting oil through mooted pipelines through Myanmar or Thailand.

1

Oon, C. (2005). China and Mekong Nations to Boost Ties, The Straits Times, 29 June 2005, p. 7.

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PPRD Growing ties with ASEAN has stimulated and motivated the need to institutionalize these ties. China has chosen to lump 11 of its territories in the South, closest geographically to Southeast Asia as its gateway for ASEAN countries to interact and communicate with the mainland, classifying this sub-regionalist conceptual plan as the Pan Pearl River Delta (PPRD) Regionalism. The PPRD is examined in detail below. Geographically, the PPRD makes up about a third of China’s population and covers a geographical area of more than 2 million sq km or almost a fifth of China’s total land area and makes up for about 1/3 of China’s total gross domestic product (GDP).2 The PPRD is sometimes known as 9+2 in China as it comprises the eight provinces of Fujian, Jiangxi, Hunan, Guangdong, Hainan, Sichuan, Guizhou, and Yunnan, the Guangxi Zhuang Autonomous Region as well as the two Special Administrative Regions of Hong Kong and Macau. These provincial economies are already bound by the Regional Cooperation and Development Framework Agreement, or the “9 + 2 Agreement” — a treaty that acts as a precursor to stimulate cooperation in 2004. Hong Kong is taking a lead in connecting the PPRD with its Southeast Asian Indochinese neighbors. Trade between Hong Kong and ASEAN increased 18.2 percent from HK$318.2 billion in 2003 to HK$376.1 billion in 2004. In the same year, ASEAN was Hong Kong’s third largest trading partner, third largest market for domestic exports.3 The Pearl River Delta is the gateway for China (particularly Southern China and its companies) into Southeast Asia. On the mainland, the Guangdong government has been the most active promoter of regional economic drive. It has unveiled plans to turn the 2

Chong, V. (2005). Pearl River Delta Set to be New Growth Story, The Straits Times, 6 August 2005, p. 13. 3 Trade and Industry Dept (TID) of the Hong Kong government, Trade and Industry Department Fact Sheet on ASEAN Countries, TID website [downloaded on 1 September 2005], available at www.tid.gov.hk/print/english/aboutus/ publications/factsheet/asean2004.html.

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Pearl River Delta into a logistics hub that will reach out to the entire Southeast Asia.4

China’s Increasing Need for Southeast Asian Energy — China Reaches Out to PPRD States in the Oil Resource While there are many items and agendas found in the PPRD concept including the need for access to new markets and smoother customs procedures, one of the most important elements of greater China– Southeast Asian cooperation can actually be found in the oil sector. Specific to southern China, because of the large concentration of subcontractors and manufacturers in the PPRD, China’s industrial growth in the Pearl River Delta (PRD) Region is outstripping its oil supply and that it is partnering with ASEAN countries connected to its Pearl River tributaries to form a Pan-region acting both as a conduit for oil supply from other sources as well as the supply source itself. With this demand for energy, oil has come forward to assume a dominant position in the enhanced proposed cooperation between nations within the Pearl River Delta region. Sinopec’s president reiterated this point at the PPRD Regional Cooperation and Development Forum. Sinopec intends to work with other countries in the region to build pipeline networks and, petrochemical processing facilities. The mega-conglomerate of Sinopec has intense links with China’s fledging automobile industry, its already growing automobile markets, industrial complexes (heavy industries like communication and construction infrastructural development) and light manufacturing industries (e.g. plastics, toys, etc). Energy cooperation and oil potential assessments in the PPRD region are not new. In the 1980s, drilling results on the first round contract areas have been mixed at best with the Pearl River Basin area south of HK being the biggest setback to expectations of greater oil 4

The International Air Cargo Association. Pearl River Delta to Become Logistics Hub. International Air Cargo Association (TIACA) website [downloaded on 18 May 2005], available at http://www.tiaca.org/articles/2002/04/03/27D715468E 7947FA8E36D028EC02BEF0.asp.

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potential. Of 20 exploration wells explored by end-1984, only four were considered possibly having commercial potential.5 Three fields have been found by Esso, Phillips, and the ACT (Agip, Chevron– Texaco) consortium and all three are considered small to medium reserves range. In the mid-1980s, because of falling crude oil prices, no further actions were taken on these discoveries.6 Zhang Jiaren, vice president and chief financial officer of the China Petroleum and Chemical Corporation (Sinopec) announced on 3 June 2004 at the second-day meeting of the PPRD Regional Cooperation and Development Forum that “energy development should be given priority in the Pan-Pearl River Delta (PPRD) regional cooperation to form a driving force for the economic growth in the region”.7 The specific plans that Sinopec has in the pipeline are developing petroleum and natural gas resources, building and upgrading large-scale oil refining and chemical industrial facilities and accelerating the construction of pipeline networks and marketing networks in southwest China and the PPRD region.8 The strategy to tackle these broad array plans was to “strengthen the cooperation of communication, energy, logistics and other infrastructure construction in the region”.9 Sinopec, ranked 70 among the world’s top 500 enterprises by Fortune Magazine in 2002, already has a number of oilfields and oil refining and chemical industrial enterprises in place in the PPRD region.10 In addition, Sinopec has industrial experience in the region with automobile, communication, appliances, construction materials, 5 Woodard, K. and Davenport, A. (1986). China and the Development of South China Sea Resources, in Energy, Security and Economic Development in East Asia, ed. Keith, R. C. (NY: St. Martin’s Press), pp. 254–255. 6 Woodard, K. and Davenport, A. (1986). pp. 254–255. 7 People’s Daily Online (2004). Energy Cooperation to Drive Pan-Pearl River Delta Economic Growth, dated 3 June 2004, People’s Daily Online website [downloaded on 18 May 2005], available at http://english.people.com.cn/200406/03/eng2004 0603_145193.html. 8 People’s Daily Online (2004). 9 People’s Daily Online (2004). 10 People’s Daily Online (2004).

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costumes, and toy enterprises11 and the necessary network to kickstart the project. Complementary to China’s energy outreach, ASEAN oil security and emergency preparedness is also high on the agenda of energy policy makers in ASEAN. The 1986 ASEAN Petroleum Security Agreement (APSA) is a treaty level agreement binding all 10 ASEAN nations to provide oil to a member country in times of shortfall. However, its review and revision appears to be proceeding slowly. Nevertheless, in view of the fact that both China and ASEAN are facing fast-growing demand for petroleum and the potential impact of an oil supply crisis on their economic resilience, ASEAN countries and China found convergence interest in joining hands to explore measures that impact on energy security and supply over the longer term.

ASEAN Energy Supply and Projects in the Pipeline ASEAN has already become an important exporter of energy to the PPRD. The PPRD purchased refined oil, liquefied petroleum gas and coal valued at US$530 million, US$160 million, and US$150 million, respectively, in the first half of 2005.12 To make its supplies more efficient, China toyed with a US$20 billion proposal to build a canal across Thailand’s Kra Isthmus to transport petroleum from Thailand to southern China13 and/or building oil pipelines originating in Myanmar and Thailand and ending up in Yunnan so that oil tankers need only to unload in the Myanmarese and Thai ports without having to traverse through the Straits of Malacca. In this manner, China gets its oil-tankered Middle Eastern and African oil faster. Chinese oil relations with some of the key ASEAN PPRD states will 11

People’s Daily Online (2004). Zheng, C. (2005). Trade Robust in Pearl River Delta Economies, China Daily Business Section, 26 July 2005, p. 9. 13 Seapsnet, (2007). Southeast Asia’s Resource Supply and Competition — Fuelling Insecurity? dated 25 August 2007, Singapore Institute of International Affairs (SIIA) website [downloaded on 1 November 2007], available at http://www.siiaonline. org/news_highlights?wid=171&func=viewSubmission&sid=884. 12

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be crucial for such plans and they are discussed below as individual case studies.

The Myanmar Equation — Charm Diplomacy China is a major ally of the regime in Myanmar and a major arms exporter there. There are reports that Myanmar is also hosting some Chinese military installations as well in exchange for close Chinese friendship. China has also patiently practised quiet diplomacy with Myanmar. During the incident of the arrest of Aung San Suu Kyi in 2003 and subsequent rise of tension between Myanmar and the West, China has shown patience and tolerance with the political situation in Myanmar. Since then, China has intensified its relations with Myanmar. Amongst the ten 2004 proposals on strategies to ensure China’s energy supplies, China plans to build a pipeline that runs from Myanmar to China. The motivating factor behind this 2004 pipeline proposal was one of the most serious Chinese oil shortages in recent memory since China first became an oil importing country in 1993. The 2004 Chinese summer saw drastic measures like dimming street lamps, energy rationing to reduce energy use, and worst of all from the Chinese planners’ perspective, thousands of factories and industries were asked to halt production for two days a week, shift work to non-peak hours or take mandatory week-long holidays.14 These are luxuries, which China cannot afford as it needs to create 24 million jobs a year15 to keep unemployment socially acceptable and to absorb laid off workers from State-owned Enterprises (SOEs). Over 54 percent of the economy is reliant on energy-intensive manufacturing. Against this backdrop, analysts see the Myanmarese pipeline standing out for two reasons. First, it reduces Chinese overdependence on oil in Middle Eastern oil.16 In addition, it relieves pressure off China 14

Phar, K. B. (2004). China Mulls Oil Pipelines in Myanmar Thailand, dated 23 September 2004, Asia Times Online [downloaded on 18 May 2004], available at http://www.energybulletin.net/2255.html. 15 Phar, K. B. (2004). 16 Phar, K. B. (2004).

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in an already overcrowded Straits of Malacca with the presence of the navies of the big powers and their complex interests in the area.17 The Straits also underlines China’s oil vulnerabilities because 60 percent of China’s oil imports are transmitted through it.18 Consequently, the Chinese looked at building a pipeline from Myanmar’s western deepwater port of Sittwe to the city of Kunming, the capital city of Yunnan province in southwest China.19 Discussions were carried out at the highest levels between Chinese Premier Wen Jiabao and former Myanmar Prime Minister Khin Nyunt meeting on 11 July 2004 in Beijing. The project when completed would change the geopolitical picture of oil distribution in Southeast Asia with a reduction of the oil route by 1,820 sea miles compared with the Malacca route.20 The China National United Oil Corporation (CNUOC), Daewoo International Group Corporation (with partners South Korea Gas Corporation (10 percent), India’s ONGC Videsh Ltd (20 percent), and Gas Authority of India Ltd (GAIL, 10 percent), and Myanmar signed a 30-year gas pact involving the Shwe Project on 24 December 2008, Wednesday. The natural gas deposits Shwe gas project (composing of Shwe and Shwephyu fields) located at A-1 block and block A-3 (Mya field) in Myanmar’s Rakhine offshore area were developed and exploited by the Daewoo consortium (60 percent stake in the project) and the 24 December 2008 pact concluded the sale and transport of natural gas from offshore blocks A-1 and A-3.21 17

Phar, K. B. (2004). Phar, K. B. (2004). 19 Phar, K. B. (2004). 20 Phar, K. B. (2004). 21 Einnews, (2008). Companies from China, Myanmar, S. Korea Sign Gas Pact in Myanmar, 25 December 2008, EIN news website [downloaded on 30 December 2008], available at www.einnews.com/thailand/newsfeed-thailand-energy; Wai, M. (2008). China Signs Burmese Gas Deal for 30-Year Supply, 28 December 2008, Irrawaddy/Sanooaung website [downloaded on 30 December 2008], available at http://sanooaung.wordpress.com/2008/12/28/china-signs-burmese-gas-dealfor-30-year-supply/; Xinhua (2008). Companies from China, Myanmar, S. Korea Sign Gas Pact in Myanmar, 25 December 2008, People’s Daily website [downloaded on 30 December 2008], available at http://english.people.com.cn/90001/90778/ 90858/90863/6561510.html. 18

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The Shwe field is estimated to contain a gas reserve of 4 to 6 trillion cubic-feet (TCF) or 113.2 to 170 billion cubic-meters (BCM), while the Shwephyu 5 TCF and the Mya 2 TCF have a combined proven reserve of 5.7 to 10 TCF of gas.22 Myanmar is rich in natural gas offshore deposits with three main large offshore oil and gas fields and 19 onshore ones and recoverable reserve of 18.012 TCF or 510 BCM out of 89.722 TCF or 2.54 trillion cubic-meters (TCM) estimated reserve of offshore and onshore gas (in addition to 3.2 billion barrels of recoverable crude oil reserve) and according to the Central Statistical Organization, in the fiscal year 2007–2008, Myanmar produced 7.62 million barrels of crude oil and 13.393 BCM of gas and had drawn in 3.243 billion dollars in 85 projects as of the end of 2007 ever since the country opened to such investment in late 1988.23 Its gas industry now stands the second in the country’s foreign investment sectorally after electric power. In early 2009, China will begin construction of oil and gas pipelines from the Kyaukpyu port on the Bay of Bengal in proximity to the Yunnan Province, a US$2.5 billion project that was an inked pipeline project in November 2008. Kyaukpyu Port is part of China’s two-ocean strategy in geopolitics, involving the extension of its influence in both the Pacific and India oceans which reduces China’s dependence on the Straits of Malacca.

The Thai Connection Complementary region-wide plans include building other pipelines to China from Asian countries like Thailand, Pakistan, and Bangladesh. Plans previously studied include building ports on both sides of the Isthmus of Kra, which allow tankers to deposit oil on the one side of the Thai Isthmus of Kra, bypassing the waterways of the Straits of Malacca and transporting that oil through

22 23

Einnews (2008); Wai, M. (2008); Xinhua (2008). Einnews (2008); Wai, M. (2008); Xinhua (2008).

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either railway or oil trucks connecting to the port on the other side of the Isthmus, facilitating deliveries carried forth by Chinese tankers waiting on the other end. Thailand’s state energy conglomerate PTT and China’s giant oil major Sinopec also mooted the possibility of a new pipeline so that oil tankers from the Middle East can bypass the Malacca Strait, saving nearly one week’s voyage time for crude to reach China, Japan, South Korea, or the Philippines.24 Initial studies by PTT estimated that the new pipeline could cost US$880 million, including procurement of oil pipeline, tank storage, and tanker terminals on both the west and east coasts of Thailand’s Kra Isthmus.25 If completed, the project would need to transit a minimum of 1.5 million barrels per day (b/d) to avoid being in the red.26 Suggested end points of the pipeline include starting at the north of Phuket Island on the west coast and transporting the oil across the Peninsula to a terminal in the East for trans-shipment to tankers sailing to China and Japan.27 What really remains to be worked out in greater details is the cost of overcoming physical barriers as the main obstacle for the concept of regional oil supply. Physical barriers include the long distance of potential pipelines through Myanmar and Thailand, travel cost from the place of origin to the destination, the apportionment of costs for the railways delivering oil supplies and the security costs for the pipelines.

UTILIZING THE MEKONG As China becomes worried about the congested and narrow Straits of Malacca, it is trying to find alternative routes for its oil transportation. Therefore, other than pipelines for Middle Eastern oil, China is

24

Phar, K. B. (2004). Phar, K. B. (2004). 36 Phar, K. B. (2004). 27 Phar, K. B. (2004). 25

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working with its Mekong neighbors for deliveries of oil through the Mekong waterway. With a firm ally by its side, Myanmar, China is cooperating with Thailand and Laos for a secure route for its oil supplies through the Mekong. This remains an experiment because there are physical constraints that limit the amount of oil that can filter to China through this route due to the makeup of the Mekong. Physical barriers and geographical difficulties make the transportation more costly. Others are more concerned about the environmental impact since the same river supplies water for the daily lives of millions who lived along or near it. The Mekong itself is a valuable water supply for many countries, which it runs through and it cannot afford to have pollution from oil tankers affecting the potable source. To placate this, Thai and Chinese authorities have set up a task force to monitor as well as respond to crises and emergencies like oil spills. In the meantime, China is also attracting its Indo-Chinese partners to this venture with promises of other benefits. China seems determined to make this experiment succeed because other than strategic concerns, it is keen to avoid piracy and terrorism, which have added to the congestion of the waterway by great powers. The agreement to make this experimental route possible starts with Laos, Myanmar, and Thailand planning to implement a trial program of processed oil shipping. The cooperation framework for the Greater Mekong Subregion (GMS) allows a monthly quota of 1,200 tons of oil to be shipped on the river, said Qiao Xinmin, director of the Maritime Affairs Bureau of the Lancang River. Even if it cannot be a main route of oil supply for China, the Mekong can certainly be an emergency route for Beijing’s strategic needs.

Reaching Out to Oil-Rich Brunei Further away from Mekong, another Southeast Asian country has captured the attention of the Chinese. With an output of about 200,000 barrels of oil a day, Brunei is the third largest oil producer in

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the Southeast Asian region after Indonesia and Malaysia.28 Oil had also become China’s largest imports from Brunei.29 In November 2000, the Chinese and Bruneian Governments signed the Agreement on Investment Mutual Encouragement and Mutual Protection, and China International Petroleum and Chemical Industries Joint Company and Brunei’s Shell Petroleum Company signed the LongTerm Contract on Champion Crude Oil.30 In the first China–ASEAN meeting, China met with Brunei’s private sector oil and gas representatives.31 Brunei is also aware of projections by the International Energy Agency that China will need more than 10 million daily barrels of oil in 2030 up from 6.3 million b/d in 2004. Brunei may benefit from China’s diversification policy as an alternative source from Middle Eastern oil, which China sees as potentially problematic with issues of piracy due to the need to pass through the Straits of Malacca and strategic competition with other Pacific powers. Brunei may also benefit from Chinese enthusiasm and partnership to explore and develop oil and gas resources. This generated interest from the private sector with multinationals like HSBC, BearingPoint and others organizing a forum on the topic of the Chinese oil market32 and marked the beginning of institutional

28

Straits Times (2004). Oil Rich Brunei Signals Intent to Compete, 27 September 2004, The Straits Times (Singapore: SPH). 29 FMPRC, China and Brunei, FMPRC website [downloaded on 16 December 2004], available at http://66.102.7.104/search?q=cache:IADV03ivD_cJ:www.fmprc.gov. cn/eng/wjb/zzjg/yzs/gjlb/2691/t15855.htm+Brunei+China+Oil&hl=en. 30 FMPRC, China and Brunei, FMPRC website [downloaded on 16 December 2004], available at http://66.102.7.104/search?q=cache:IADV03ivD_cJ:www.fmprc.gov. cn/eng/wjb/zzjg/yzs/gjlb/2691/t15855.htm+Brunei+China+Oil&hl=en. 31 Mahmod, C. T. Hj., Brunei’s Role in China’s Oil Market, Bruneidirect.com website [downloaded on 16 December 2004], available at http://www.brudirect.com/ DailyInfo/News/Archive/Nov04/111104/nite04.htm. 32 Mahmod, C. T. Hj., Brunei’s Role in China’s Oil Market, Bruneidirect.com website [downloaded on 16 December 2004], available at http://www.brudirect.com/ DailyInfo/News/Archive/Nov04/111104/nite04.htm.

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private sector involvement in Brunei’s oil market. Such cooperation had obtained the seal of approval on the Chinese side from the National People’s Congress (NPC) and powerful personalities like Wu Bangguo.33 From the Bruneian side, such exploratory ventures have also obtained the grace of the Sultan of Brunei. The Chinese is also practicing skilful diplomacy in this area. The two sides expressed their objections to the linkage of terrorism to a certain ethnic group or religion.34 (China was sensitive to Southeast Asian Muslim countries, which were especially sensitive towards the US War on Terror, War on Iraq, intervention in Afghanistan and its post-911 pre-emptive doctrine during the Bush administration.) The importance of oil in Sino–Bruneian newfound warm ties is accentuated by the fact that, immediately after visiting the Great Hall of the People, the Sultan visited the Research and Development Centre of China National Petroleum Corporation (CNPC) in Xicheng district.35 According to Brunei’s state media, CNPC is one of the world’s leading integrated energy companies. Its operations cover a broad spectrum of upstream and downstream activities, field operations and technical services as well as equipment manufacturing and supply and it serves as China’s largest producer and supplier of crude oil and natural gas, holding a dominant position in domestic petroleum production, processing, and marketing sectors.36 33

Xinhua, China, Brunei to Cooperate More in Oil Exploitation, Chinadaily.com website [downloaded on 16 December 2004], available at http://www.chinadaily. com.cn/english/doc/2004-09/23/content_377190.htm. 34 Brunei Direct.com, China to Explore Oil and Gas in Brunei, Bruneidirect.com website [downloaded on 1 September 2005], available at http://www.brudirect. com/DailyInfo/News/Archive/Sept04/230904/nite01.htm. 35 Brunei Direct.com, China to Explore Oil and Gas in Brunei, Bruneidirect.com website [downloaded on 1 September 2005], available at http://www.brudirect. com/DailyInfo/News/Archive/Sept04/230904/nite01.htm. 36 Brunei Direct.com, China to Explore Oil and Gas in Brunei, Bruneidirect.com website [downloaded on 1 September 2005], available at http://www.brudirect. com/DailyInfo/News/Archive/Sept04/230904/nite01.htm.

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Cambodia — The New Indo-Chinese Frontier China pledged US$600 million (S$960 million) in aid to Cambodia when Chinese Premier Wen Jiabao visited Prime Minister Hun Sen on 8 April 2006.37 The high-level visit oversaw the signing of 11 agreements on various issues including health, telecommunications and transnational crime and other events was seen as a symbol of China’s deepening influence in Cambodia. “It opens a new chapter in the Cambodian– Chinese relationship…after this we believe the Chinese will bring more investment and aid to Cambodia for development,” said the then Cambodian Foreign Minister Hor Namhong after Wen’s arrival.38 Cambodia in turn praised the achievements made by China in its reform, opening up and modernization drives and reaffirmed its commitment to the one-China policy. “China is a powerful country, especially in economics, and it also plays a big role as a member of the UN,” said government spokesman Khieu Kanharith.39 PM Hun Sen also told the reporters that “Cambodia will benefit greatly from this visit.”40 Premier Wen was the most senior Chinese leader to visit Cambodia since Beijing’s leadership change in 2003 signaling the close strategic relationship between the two. Through the visit, the Chinese government showed that it attached great importance to its relations with Cambodia and its desire to promote bilateral exchanges and cooperation in all fields. Mr Wen congratulated the people of Cambodia on the remarkable achievements they had made in achieving political stability and economic growth and stressed that China supported the integration process of ASEAN and backed ASEAN in playing a leading role in the process of East Asian cooperation.41 37 Seapsnet (2006). Great Leap Forward for China–Cambodia Relations with New Aid, dated April 2006, Singapore Institute of International Affairs (SIIA) website [downloaded on 1 November 2007], available at http://www.siiaonline.org/news_ highlights?func=viewSubmission&sid=681&wid=171. 38 Seapsnet (2006). 39 Seapsnet (2006). 40 Seapsnet (2006). 41 Seapsnet (2006).

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Skeptical analysts have interpreted Beijing’s move as a desire to negotiate deep sea-ports as part of its strategic ambitions in Southeast Asia, which is seen as its main fuel gateway. “It’s working the turf to establish a Chinese presence. It’s broadening out from the political and economic and cultural and scientific dimensions to the military,” said Carl Thayer, University of New South Wales, Canberra.42 From the Chinese perspective, its Cambodian trip was a precursor to the China–ASEAN summit marking the 15th anniversary of ASEAN–China Dialogue Relations, which took place in Nanning, China, in October 2006.43 China also made a public announcement to pledge its support for Cambodia’s accession to Asia Pacific Economic Cooperation (APEC).

ECONOMIC MUTUALISM The PPRD gateway for Sino–ASEAN ties is bilaterally two-way and not unilateral one-way. There are in fact projects that attempt to attract Southeast Asian investors to join in as joint ventures partners. For example, China National Offshore Oil Company (CNOOC) offered 10 offshore oil and gas blocks for exploration and development to foreign companies in 2005.44 The blocks cover a total area of more than 66,666 square kilometres in Bohai Bay, the Yellow Sea, East China Sea, and South China Sea, with water depths ranging from 10–200 m. Guangzhou and Zhanjiang in the southern province of Guangdong are clearing houses for approvals for collaborations on these projects. The CNOOC is currently the largest offshore oil producer in China and has exclusive rights for exploring China’s offshore oil, said to be the next frontier for Chinese oil energy sources, in 42

Seapsnet (2006). Seapsnet (2006). 44 Petromin (2005). CNOOC Offers Oil and Gas Blocks, dated 20 April 2005, Petromin website [downloaded on 18 May 2005], available at http://www.petromin. safan.com/news.htm. 43

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co-operation with foreign firms. Big MNCs have already joined hands with Royal Dutch/Shell, Kerr-McGee Corp, and ConocoPhillips.45

The Case Study of Malaysia As early as 1995, Petronas (Malaysia’s national oil company) had already inked plans to export more crude petroleum and petrochemical-related products to China.46 Even then, the conception of oil trade with China was not restricted to sales of raw commodities like oil, Malaysia had hoped to tap into China’s market with plans to set up oil refineries — a higher-valued added item.47 Petronas, for example, is known to be a proactive, new oil firm competing for lucrative contracts in the region and has set up a subsidiary, Petronas Marketing China Company Ltd (PMCCL), in southern China with a capital of US$20.4 million.48 Petronas is eyeing the large car industry in China and its surge in demand for high-end lubricant with Shenzhen as a springboard into China.49 Petronas is an old hand in China having entered the Chinese market since 1991 in exploratory collaboration. According to company records, Petronas sale of crude oil to China has totaled 26.133 million barrels from April 2003 to January 2004.50

CONCLUSION The PPRD is likely to become an important component of China’s overarching trade framework with ASEAN. China has a comprehensive FTA with ASEAN with a scheduled mechanism that gives 45

Petromin (2005). Ho, K. L. (1995). Recent Developments in the Political Economy of China– Malaysia Relations, Southeast Asian Chinese and China the Politico-Economic Dimension, Leo Suraydinata (ed.) (Singapore: Times Academic Press), p. 242. 47 Ho, K. L. (1995). p. 242. 48 People’s Daily Online (2004). Malaysian Top Firm Sets Up Subsidiary, dated 5 July 2004, People’s Daily website [downloaded on 18 May 2005], available at http://english.people.com.cn/200407/05/eng20040705_148491.html. 49 People’s Daily Online (2004). 50 People’s Daily Online (2004). 46

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advantages to ASEAN countries by granting favorable export conditions for their exports to China for a few years before full implementation of the ASEAN–China FTA. A possible future limitation on ASEAN–China energy trade could ironically be China’s own energy diversification policy, which has been a push factor for the PPRD sub-regionalism itself. This could see other regions competing with ASEAN countries to be China’s energy supplier. Malaysia, for example, is facing strong competition from Australia over LNG deals with China. Australia secured its largest single trade deal in exporting LNG to China for 25 years in 2007.51

51 Seapsnet (2007). Southeast Asia’s Resource Supply and Competition — Fuelling Insecurity? dated 25 August 2007, Singapore Institute of International Affairs (SIIA) website [downloaded on 1 November 2007], available at http://www.siiaonline. org/news_highlights?wid=171&func=viewSubmission&sid=884.

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Chapter

4 The Emergence of the Chinese Oil Industry and Potential Flashpoints? In 1966, the Economic Commission for Asia and the Far East (ESCAFE), a United Nations outfit situated in Bangkok, carried out major efforts to evaluate potential mineral resources in the East Asian seabed. Contracted by ESCAFE’s multinational committee, the United States Navy conducted airborne and seaborne surveys of the continental shelf in 1968.1 Their report concluded, “A high probability exists that the continental shelf between Taiwan and Japan may be one of the most prolific oil reservoirs in the world”.2 Another US team surveyed the South China Sea and the Gulf of Thailand in 1969 and reported that one of the most promising areas for maritime oil was located in the shallow waters continental shelf of China from the southern tip of Taiwan to Hainan Island.3 1 Lieberthal, K. and Oksenberg, M. (1986). Bureaucratic Politics and Chinese Energy Development (Washington: Center for Chinese Studies, The University of Michigan Prepared for the Department of Commerce Contract No. 50-SATA-4-16230), p. 176. 2 Lieberthal, K. and Oksenberg, M. (1986). p. 176. 3 Lieberthal, K. and Oksenberg, M. (1986). p. 176.

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As the economies of both East Asian giants China and Japan became oil-starved, maritime sources of oil became increasingly important and contentious. Chinese determination in seizing and defining their oil territory came from a long bitter experience with losing their oil to foreign imperialism. Territorial conceptualizations of Chinese oil resources were augmented progressively from the prewar to wartime and early postwar years, resulting in her hardening determination of not yielding any exploitable oil resource to foreign entities. This was entrenched as postwar assertion of oil legitimacy by Chinese regimes. Because of its prewar and wartime traumatic experience of having Japan dominate its northeast oil resources followed by a Japanese naval embargo during the Pacific War that drained Chinese wartime oil supplies, postwar China adopted a comprehensive territorial definition of oil resources, which has reverberations later in regional conflicts like the constant clashes over the Diaoyu (Senkaku) islands (following claims of oil potentiality by the United Nations ECAFE) and politicizing oil in her exchanges with Japan.

SENKAKU AS A CASE STUDY A prominent maritime oil dispute, which involved China and Japan, was the Senkaku islands, a group of five islets and three barren rocks that lie between Taiwan and the Japanese island of Okinawa known as the Pinnacle Islands in English, Diaoyu Islands to the Chinese and Diaoyutai to the Taiwanese. Japan annexed the islands in 1895 but after WWII, they came under US occupation before they were handed over to the Japanese rule in 1972 along with Okinawa.4 Signs of differences over the ownership of offshore resources between China and Japan emerged early with the resumption of ties between the two states.

4

Kyodo (2003). China Lodges Protest over Senkaku Lease, dated 6 January 2003, Japan Times [downloaded on 6 January 2003], available at www.japantime.com.

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In 1978, when a rightwing organization, the Japan Youth Federation, erected the first Japanese lighthouse in the Senkaku Islands, it started a contentious issue in Sino–Japanese relations since the resumption of ties.5 More than 100 Chinese fishing boats sailed round the islands as a sign of protest.6 According to Doak Barnett’s account, these fishing vessels were not strictly trawlers but were armed and putting a limited show of force and therefore Beijing’s arguments that the transgression incident was accidental were not convincing to the Japanese.7 In 1978, as a pragmatic gesture, Deng Xiaoping (then Vice premier) proposed shelving the dispute in favor of more extensive cooperation during his visit to Japan.8 He also deflected questions from the media about the islands by responding that it should be “handled better by the next generation.”9 In 1981, Japanese plans to develop the potentially oil-rich islands were dropped following complaints from the Chinese Ministry of Foreign Affairs.10 In 1985, a plan by the 11th Maritime Headquarters in Okinawa to have a presence in the Senkaku Islands was ignored.11 Because of such diplomatic pragmatism, the Senkaku Islands were untouched for virtually 10 years from 1978–1988.12 Next generation arrived early as the PRC National People’s Congress passed the Law of the People’s Republic of China (PRC) 5

Kristof, N. D. (1996). Gang Ties Are Behind Japan’s Furor over Tiny Isles, dated 10 October 1996, New York Times [downloaded on 1 January 2003], available at www.nytimes.com. 6 Zhao, Q. S. (1996). Interpreting Chinese Foreign Policy (Hong Kong: Oxford University Press), p. 193. 7 Barnett, D. A. (1981). China’s Economy in Global Perspective (Washington DC: The Brookings Institution), pp. 489–490. 8 People’s Daily Online (2003). To Occupy China’s Diaoyu Islands, Japan’s Fond Dream for Long, dated 9 January 2003, People’s Daily Online [downloaded on 9 January 2003], available at english.peopledaily.com.cn. 9 Zhao, Q. S. (1996). Interpreting Chinese Foreign Policy (Hong Kong: Oxford University Press), p. 194. 10 Newby, L. (1988). Sino–Japanese Relations (London: Routledge), p. 87. 11 Newby, L. (1988). p. 87. 12 Newby, L. (1988). p. 87.

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on its Territorial Waters and Contiguous Areas in 1992 to embed its claims over the islands in legislations. The Senkaku island dispute resurfaced as a hot issue in the 1990s when a second lighthouse was erected in July 1996.13 When it was repaired in September 1996, it sparked off huge protests from the Hong Kongers and Taiwanese. Subsequently, a protest group from Taiwan and Hong Kong broke through a protective line of 50 Japanese coastguard vessels around the Senkakus and planted Taiwanese and Chinese flags before withdrawing.14 The issue only cooled a little in October 1996 when the Japanese government postponed indefinitely an application by rightwing organizations for the new lighthouse to be officially recognized on navigation charts.15 Barely four years later, however, another group of rightwinger led by Nishimura Yabuki of Liberal Democratic Party (LDP) landed on the islands to stake claims over it.16 Further south, when the former President of Taiwan, Lee Teng Hui backed up the Japanese claim in an interview with the Japanese press, it caused a wave of indignation across the Straits.17 Hotspots like these still sizzle now and then. Any Japanese military review will be taking into account such territorial disputes with her neighbors. In this aspect,

13

Kristof, N. D. (1996). Gang Ties Are Behind Japan’s Furor over Tiny Isles, dated 10 October 1996, New York Times [downloaded on 1 January 2003], available at www.nytimes.com. 14 Kristof, N. D. (1996). Gang Ties Are Behind Japan’s Furor over Tiny Isles, dated 10 October 1996, New York Times [downloaded on 1 January 2003], available at www.nytimes.com. 15 Kristof, N. D. (1996). Gang Ties Are Behind Japan’s Furor over Tiny Isles, dated 10 October 1996, New York Times [downloaded on 1 January 2003], available at www.nytimes.com 16 People’s Daily Online (2003). To Occupy China’s Diaoyu Islands, Japan’s Fond Dream for Long, dated 9 January 2003, People’s Daily Online [downloaded on 9 January 2003], available at english.peopledaily.com.cn. 17 People’s Daily Online (2003). Diaoyu Islands China’s Territory: FM Spokeswoman, dated 3 January 2003, People’s Daily Online [downloaded on 1 January 2004], available at english.peopledaily.com.cn.

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the Japanese navy’s “island protection unit” may have been set up as a reaction to such disputes, targeted at Chinese naval activities around the territorial seas of Japan. The islands continue to be patrolled by Japanese coast guards and it can be expected that these patrols will be augmented in the near future. In September 2003, when organized mainland Chinese groups planned a landing on the Diaoyu or Senkaku Island, they were confronted by a flotilla of 30–40 Japanese warships.18 On 9 October, when the Chinese activists tried a landing on the disputed islands, at a distance of 200 m away from the islands, eight Japanese warships, three helicopters and two warplanes besieged them and forced them to retreat.19 They then dispatched another 10 pneumatic boats to prevent the Chinese activists from swimming ashore.20 The issue heated up when the Japanese government leased lands on three of the five Senkaku Islands to one private individual (according to registration records in Japan) in 2002.21 The Japanese government officially registered its one-year lease of Uotsurishima, Minami-Kojima, and Kita-Kojima islands in October retroactively from 1 April 2002.22 The government also had intentions to renew a 22 million yen contract in 2003 on the pretext of “effective use of national land.”23 From the Chinese perspective, such incidents and Japan’s regular coastguard presence around the islands were precursors to Japan’s initiation of offshore and submarine survey of potentially reachable underwater oil resources.24 The Ministry of Foreign Affairs in China then summoned Japan’s ambassador to China at that time, Koreshige Anami, to protest against the move. China’s vice-Foreign Minister Wang Yi urged 18 People’s Daily Online (2003). Reclaiming Diaoyu Island a Volunteer’s Memoir, dated 13 November 2003, People’s Daily Online [downloaded on 1 January 2004], available at english.peopledaily.com.cn. 19 People’s Daily Online (2003). 20 People’s Daily Online (2003). 21 Kyodo (2003). 22 Kyodo (2003). 23 Kyodo (2003). 24 People’s Daily Online (2003).

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Ambassador Anami to rectify what China perceived as illegal unilateralism. Cheng Yonghua (deputy director general of the Asian Affairs Department in the Chinese Foreign Ministry) also filed a protest note with the Japanese Embassy in Beijing.25 Ambassador Anami then responded by declaring that the Senkaku Islands were Japanese territory and that China’s claims are groundless, and therefore Japan cannot accede to the Chinese request.26 Predictably, this sparked protests from China, Taiwan, and Hong Kong. The entire issue was also complicated by the involvement of the Japanese underworld, the yakuza in the rightwing groups. One of its leaders Toyohisa Etoh claimed that they had spent more than US$1 million to build the lighthouses on the islands over the years based on Japan’s claim to these islands.27 Japan Youth Federation, which has been involved in such activities, was founded by the wellknown gangster, Kusuo Kobayashi, who died in 1990.28 It may be unlikely that the Senkaku or Diaoyu islands would cease to be an issue as, despite Chinese governmental condemnation and Japanese government restraints, Japanese government reiterated that Japanese citizens were free to travel anywhere in the territory of Japan, including the Senkakus and that the Japanese government cannot interfere with people’s rights.29

CHUNXIAO Besides the Senkakus/Diaoyu islands, other areas in East China Sea are believed to be rich in oil and natural gas. China National Petroleum Corp. (CNPC) has proceeded with explorations in this region, making it a pioneer amongst China’s oil giants to take a concrete step in evaluating oil and gas content of the seabed in these highly contested areas. The ruling LDP in Japan repeatedly 25

Kyodo (2003). Kyodo (2003). 27 Kristof, N. D. (1996). 28 Kristof, N. D. (1996). 29 Kristof, N. D. (1996). 26

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requested for data on Chinese drilling in the East China Sea but did not get a response from the Chinese side, the main reason being that China had a different idea about the location of its territorial line. Moreover, Chinese companies had already begun working on the oil and gas deposits in 2003 when it catalyzed a number of gas exploration projects several kilometers inside the median line, including the development of the Chunxiao gas field. The big scare on the Japanese side is that the Chinese may extract Japanese shares of the energy raw materials in East China Sea through legal extraction on Chinese territorial waters since these pockets of oil and gas are inter-connected. Beijing refused to budge on greater release of data on the fields while Tokyo is obstinate to the Chinese proposal of joint development. By 2006, however, there were signs that China and Japan were closing in on a compromise in the long-term interest of bilateral relations. When Chinese maritime authorities posted a notice that all unauthorized ship traffic would be banned around the Pinghu field from 1 March to 30 September 2006, both Japan and China responded calmly to the crisis. China very quickly ended the dispute between Japan and China when Beijing informed Tokyo it would revise its ban on maritime traffic in contested gas-rich waters in the East China Sea. The Chinese foreign ministry informed the Japanese government that there had been a “technical mistake” in the delineation of the no-sail zone. According to the Chinese foreign ministry’s explanation, the country’s maritime authorities mistakenly defined the range as “from 27.7 to 29.4 north latitude”, although it should have been “from 29.7 to 29.4 north latitude”. The Chinese Maritime Safety Administration then released a statement that it intends to only keep the no-sail zone within its own territorial waters.30 The de-escalation 30 Channelnewsasia (2006). Japan–China Dispute in East China Sea Ends as Beijing Revises Ban, dated 18 April 2006, Channelnewsasia (Singapore: Channelnewsasia); Straits Times (2006). China Tells Japan Sea Traffic Ban Zone Revised, The Straits Times (Singapore: Straits Times); The Daily Yomiuri (2006). China Corrects Shipping Ban in East China Sea, dated 19 April 2006, The Daily Yomiuri (Japan: Daily Yomiuri).

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of tensions over the dispute islets cumulated in a surprising turn of events in 2008, China and Japan reached a compromise over the joint development of Chunxiao.

SPORADIC TENSIONS TO NAVAL CONFLICT? On 23 May 2002, a suspected Chinese spy ship passed through the Tsugaru Straits separating Hokkaido from Honshu Japan — the first time that Japan alleged a Chinese spy ship had passed through Japanese waters so close to the Honshu island.31 The Yanbing class Chinese icebreaker spy ship was first spotted on 14 May 2002 off Tsushima Island and remained in Kyushu waters until 21 May 2002 when it moved toward main island Japan itself.32 The ship did not violate Japanese waters passing through Tsugaru Straits but drew a very strong response from the Japanese.33 Japanese destroyer Hatsuyuki and an anti-sub helicopter were immediately dispatched to monitor the Chinese vessel.34 According to the Japanese government, 31 Chinese ships were spotted in this manner in seven separate incidents in 2002.35 In 2004, a number of startling events took place to bring Sino–Japanese energy rivalry to new heights and some say with the incorporation of a military dimension. The intrusion of a Chinese nuclear submarine into Japanese waters was by far the most provocative incident that drew the attention of the Japanese side and an expression of regret from the Chinese. The Japanese made the rare move of scrambling their maritime planes and destroyers to chase the submarine in a strong and rare resolve to stand up to China. The waters that the submarine violated are regarded by some to be

31

Baker, R. (2001). Japan, China Both Newly Ambitious in Asian Waters, dated 5 April 2001, ABC News.com [downloaded on 1 January 2004], available at abcnews. go.com/sections/world/DailyNews/stratfor_000602.html. 32 Baker, R. (2001). 33 Baker, R. (2001). 34 Baker, R. (2001). 35 Baker, R. (2001).

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within the vicinity of Sino–Japanese underwater oil contestation. Chinese digging in what Japan considers its own exclusive economic zone heightened Japanese suspicions of Chinese intentions in the submarine intrusion. These disputed territories include the longdisputed islands of Diaoyu (in Chinese) and Senkaku (in Japanese).

NAVAL ARMS RACE? Because of China’s island disputes with Japan and other neighboring countries, its naval capabilities are under intense scrutiny. The People’s Liberation Army Navy (PLAN)’s plans to build an aircraft carrier alternates between being shelved and being pursued aggressively. The original strategy, stated in a National People’s Congress report, was to build two 48,000-ton aircraft carriers with 40 combat aircraft each by 2005, but parts of this idea have been deferred.36 The PLAN’s first evidence of putting this strategy into action was procuring a decommissioned aircraft carrier that was intended to be stripped down in Australia before being studied extensively by the Chinese.37 The second evidence was the PLAN’s purchase of an ex-Ukrainian aircraft carrier and converting it into an amusement park in Shenzhen — but not without extensive studies of its layout.38 And, although China purchased fleets of modern fighters, such as the SU-27s, it does not have its own versions of F-14 Tomcats armed with phoenix missiles, STOL (Short Take-Off and Landing) fighters such as F-18s, which are carrier adaptable or even VTOL (Vertical Take-Off and Landing) fighter like the British/American Harriers or the Russian YAK 141 Multipurpose fighter.39 Developing a suitable fighter to accompany any would-be purchases of aircraft carriers

36

Ashcroft, J. (1997). Chinese Military Expansion and U.S. National Security, dated 9 July 1997, FAS [accessed 1 December 2002], available at http://www.fas.org/. 37 Lim, T. W. (2002). Analysis of China’s Strategic Power, Globalsecurity.org [accessed December 2002], available at http://www.globalsecurity.org/. 38 Lim, T. W. (2002). 39 Lim, T. W. (2002).

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would also add on to the costs involved, another deterring factor to purchasing aircraft carriers. China’s southernmost naval base is Hainan. Hainan Island is used for deploying regional naval forces to potential conflicts nearby, such as in Taiwan or the disputed Diaoyu Islands. The US probably recognizes the strategic value of these islands when its EP-3 spy plane was intercepted near the vicinity and later made to land in Hainan naval base itself. One possible weakness of Hainan Island, however, in geographical terms, is that it is too far to project the PLAN’s power into Southeast Asia, especially to islands claimed by China and Southeast Asian countries (for example, the potentially oil-rich Spratlys or gas-rich Natunas). Although the Japanese Imperial Army managed to use Hainan as a stepping stone to enter Southeast Asia during WWII, they had to depend on the neutrality of Thailand for a suitable platform to attack southwards from Hainan. Moreover, WWII was quite some time back when the Japanese only had to deal with weakly coordinated colonial armies in Southeast Asia that were distracted by the war in Europe. Southeast Asian countries enmeshed in security alliances with powers like the US as well as collective defense exchanges within Association of Southeast Asian Nations (ASEAN) are not as defenseless as before. Collectively, the US Pacific fleet and its staunch allies in Australia (hosting US forces at Shoalwater Bay and coordinated exercises), Thailand (Cobra Gold, military exercises meant to enhance the Thai Army’s military capabilities through US training, the US also gains simulated combat experience in Southeast Asian tropical environs through such exercises), and the Philippines may also limit the Chinese navy’s reach. However, China’s navy is still sufficiently powerful and is rivaled only by the US Pacific Seventh Fleet and the Japanese Self-Defense Force (SDF). The SDF is known as such because as Japan is not allowed by Article 9 of its Constitution to possess a military for the purpose of making war, its military is constituted as a “defense force”

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although the SDF is one of the most modern and well-equipped military force in the world. The PLAN is becoming familiar with the region’s coastal routes through more port-calls, perhaps the greatest efforts to do so since the Ming dynasty’s Admiral Cheng Ho (Zheng He) journeys. In 1993, China also carried out unprecedented military exercises in its southern coastal region that showed their determination to drill and to familiarize themselves with the operational procedures of its airborne troops and amphibious marines. 40 China is also seeking partners for confidence-building measures (CBMs) as well as naval exercises (e.g. with France in March 2004). Such exercises allow the PLAN to familiarize itself with foreign navies and armed forces but at the same time, allow regional and foreign powers to observe the capabilities of the PLAN firsthand. China is also diversifying its training partners to include more Western countries. The 2004 Sino–French Maritime drills are indicative of this. Held off the coast of Qingdao on 18 March 2004, the drills were the largest of its kind and meant to reflect the “understanding and friendship between the two navies”.41 Besides increasing navigational experience, the PLAN is also upgrading its technology. This upgrading seems to be driven mainly by what the PLAN sees as possible localized conflicts (for example, Taiwan and maritime disputed islands) rather than power posturing. PLAN wants to be seen as a modern force especially when it comes to posturing in the periodic skirmishes that flare up between China and Japan or other regional states.42 Such incidents

40

Swaine, M. D. (1994). The Modernization of the Chinese People’s Liberation Army: Prospects and Implications for Northeast Asia, Analysis 5(3): 14. 41 People’s Daily Online (2004). China, France Kick off Maritime Drills, People’s Daily Online [accessed 17 March 2004], available at http://english.peopledaily. com.cn/200403/16/eng20040316_137652.shtml. 42 Kristof, N. D. (1996).

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Items Naval vessels Destroyers Frigates/corvettes Subs Patrol vessels Mine warfare Amphibious Support vessels

Comparative strengths of major navies in the region. China

India

Japan

South Korea

Taiwan

63 21 42 69 331 34 50 163

25 8 16 16 42 18 7 32

54 45 9 16 9 31 8 28

39 6 33 20 84 15 12 14

32 11 21 4 59 12 18 20

Source: The Military Balance: International Institute for Strategic Studies 2004/ 2005 includes one aircraft carrier.

provide motivation for China to upgrade in order to deter tensions. Table 4.1 indicates the comparative strengths of major navies in the region.

JAPAN’S DEFENSE PREPAREDNESS At the beginning of 2005, Japanese Defence Agency defined Tokyo’s immediate objective as that of blocking a potential enemy’s invasion of the “southwest territory,” especially the disputed Diaoyutai islands. The financially and technologically powerful but numerically weak Japanese SDF needs to work with regional forces to uphold the peace in the region. She also may have to install CBM by building ties with regional powers like Indonesia.

MARITIME DISPUTES WITH SOUTHEAST ASIA Maritime energy disputes also features in China’s energy relations with Southeast Asia. The Continental Shelf of the South China Sea and the Yellow Sea were conceived by China and other East Asian states as valuable sources of oil resource for future generations after

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ECAFE’s findings. As the economy of China becomes oil-starved, maritime sources of oil became increasingly important and contentious. China is moving from its own coastal areas like the Gulf of Chihli off Northeastern China into deeper waters in the South China Sea.43 A maritime clash between the PRC and a Southeast Asian country first occurred on 20 January 1974 in the form of a Sino–Vietnamese naval engagement in which the Chinese seized the Paracel Islands from South Vietnam garrison. In 1988, Vietnamese assertions of the rights of sovereignty over the oil-potential Spratlys islands motivated them to take on the regional power of China, an entity many times their size. The Chinese responded by opening fire on Vietnamese freighters attempting to deliver vital supplies to their outpost on the islands.44 China is still vigilant in monitoring oil moves by other countries like Vietnam. Vietnamese-owned PetroVietnam’s as well as Vietnam Oil and Gas Company’s unilateral calls for tender in oil exploration within the disputed South China Sea region where the Spratlys are located have drawn heavy criticisms from the Chinese side, viewing it as a contravention of Declaration of the Conduct of Parties in the South China Sea. China also criticized Vietnamese decision to allow tourists to visit that area. Other Southeast Asian states have also tested the limits of China’s assertion of maritime energy sovereignty. In March 2003, the Filipino navy arrested 62 Chinese fishermen and two fishing trawlers for allegedly straying into Filipino territory.45 Indonesia have also been placed on alert after Chinese drew the Natuna islands into their territorial maps and Malaysian naval vessels have also fired at Chinese 43

Klare, M. (2001). Resource Wars (New York: Metropolitan Books), p. 116. Whiting, D. (2003). The Spratlys Islands Dispute and the Law of the Sea, Denver Journal of International Law and Policy (from University of Denver College of Law), dated 19 August 2003 [downloaded on 10 May 2004], available at www.law.du. edu/ilj/online_issues_folder/whiting.pdf, p. 105. 45 Whiting, D. (2003). p. 115. 44

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vessels south of the Spratlys near the coast of the Malaysian state of Sarawak.46

LIMITING MARITIME CONFLICTS Despite regional energy competition, there seems to be space for cooperation as well. Inter-woven interests and moderates on both sides are cooling down political rhetoric. Some are even calling for cooperation, not competition, in the field of oil extraction. Interwoven interests also impede the outbreak of military confrontations. There is also international pressure to jointly cooperate on energy resources, given the shortage of it at the moment and that competition only leads to higher oil prices for each other. Ironically, it was rising oil prices in the first half of 2008 that forced Asian energy rivals to work closer together. Besides improving its regional image and soft power potential, China is also fostering a stable regional environment for energy cooperation by creating conducive conditions for other energy-related disputes, e.g. Spratlys (again underwater energy potential), Natuna Islands (gas deposits), Diaoyu islands (Senkaku in Japanese), Kuriles (between Japan and Russia), etc. A stable regional environment by itself can be a platform for stable oil prices. For example, military conflicts between China and Japan seem distant for the foreseeable future. Japan now sells more of its products to China than the US and this serves to restrain any Japanese moves to turn up the temperature. Japanese conglomerates like Mitsubishi also benefit from selling raw materials like oil to China. The most optimistic of this group of moderates and entities drawing benefits from cooperation have focused on joint development as an alternative to conflict. The possibility of warfare seems to be within a moderately low possibility. It made little sense for Beijing to behave aggressively with

46

Whiting, D. (2003). p. 116.

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Tokyo as it only ensures that China will have a hostile neighbor, one with an economy that is still four times its size. Well aware of this, China is keen to avoid conflict with Japan. That is why China has avoided sending warships to the Senkaku Islands (known as Diaoyutai or Diaoyu islands in Chinese), which are effectively controlled by Japan. It has also apologized when its submarine wandered into Japanese territorial waters in 2004 and cited technical error as the reason for closing waters around the Chunxiao oilfields to foreign ships. Perhaps, most importantly, China also fears a Japan that will actively support Taiwanese defence. Under any circumstances, China would try not to engage in warfare with Japan. It does harm to both sides and probably hurts China more than it hurts Japan. Japan is more technologically advanced than China, its small defense force (small by Chinese numerical standards) is technologically advanced, well-trained and organized. Strength of numbers may have worked in Korea or Vietnam but is unlikely to work with a prolonged conflict with Japan. Guerilla warfare is no longer an option in Chinese military strategies. It may need time to build up its asymmetric warfare techniques for it to be a form of deterrence, much less as an offensive weapon. China’s energy squeeze may be another reason for one of the most surprising compromises in Sino–Japanese bilateral relations, supporting and backing up regional incentives in oil cooperation. China and Japan have agreed to jointly develop natural gas fields in the East China Sea with Japanese companies investing in a Chinesemanaged project to exploit underwater natural gas deposit and an underexplored and undeveloped gas bloc (Longjing/Asunaro). Additional areas (such as an unnamed area of 2,700 square kilometers is just south of Longjing/Asunaro) will be considered for exploratory drilling. Japanese companies can profit from existing operations at the Chunxiao (Shirakaba in Japanese) natural gas field where China has already begun drilling. China in return will enjoy Japanese technological and financial support. This deal is significant since both China and Japan are East Asia’s largest consumers of oil

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and wipes away years of political animosity created by energy-related issues. After the settlement of Chunxiao dispute between China and Japan, other disputes can now be placed on the table for discussion, such as possible joint development of offshore gas reserves at the Senkaku Islands (or Diaoyu in Chinese). With its Southeast Asian neighbors, China has also begun to practice pragmatic diplomacy to minimize conflicts. In March 2005, oil companies from China, Vietnam, and the Philippines signed a tripartite agreement to jointly prospect oil and gas resources in the disputed South China Sea, a follow-up from the 2002 ASEAN–China Declaration on the Conduct of Parties in the South China Sea. According to the agreement, companies from the three states would jointly conduct seismic surveys around the 143,000 km sea area, collecting and sharing data and information of the potential oil and gas reserves in the region — a process that would last three years and budgeted for US$15 million.47 “Local environmental protection, weather situation, fishing and other relevant issues” are also part of the package in this spirit of cooperation. For other Southeast Asian states, China presents itself as an opportunity in terms of raw materials exports, especially for oil-rich states like Indonesia, Brunei, Malaysia (palm oil), etc. Vietnam’s softening of its hardline stance over maritime boundary disputes probably contributed to the compromise in which it agreed to institute joint patrols of sections of the South China Sea with China. The navies of China and Vietnam instituted a joint patrol in the Beibu Gulf (known as Beibu Wan in Chinese and Gulf of Tonkin to the Vietnamese and the West) in the South China Sea on Thursday 27 April 2006. A squadron of People’s Republic of China Navy (PLAN) vessels was dispatched to pair up with its Vietnamese naval counterparts. This is a follow-up from the

47

People’s Daily (2005). Commentary: Turning “Sea of Disputes” into “Sea of Cooperation”, dated 16 March 2005, The People’s Daily, available at http://english. people.com.cn//200503/16/eng20050316_177021.html.

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agreement between Chinese Defence Minister Cao Gangchuan and his Vietnamese counterpart Pham Van Tra dating back to 26 October 2005. The joint patrol has made history in China because it is also the first time for the Chinese navy to patrol jointly with a foreign counterpart. The joint patrols aimed to maintain the stability of the fishing industry and oil exploration in Beibu Wan, which lies between China and Vietnam and is shallow (less than 60 m deep). Previously considered as the northwestern arm of the South China Sea or a branch of the Pacific Ocean, the Chinese stepped back from this designation due to accusations in the past that China has treated the South China Sea in a literal manner as a Chinese lake. The joint patrols cannot be more significant because Vietnam is the only country to have fought naval warfare with the PRC back in 1974 over the Paracel Islands. Vietnam has also one of the toughest stances against China over the multi-nation Spratlys dispute. Even as late as 8 January 2006, Chinese naval patrol police fired upon, injured, and captured many Vietnamese fishermen and called them pirates. This interpretation was rejected by the Vietnamese foreign ministry. The ministry asserted that the Vietnamese who were attacked, killed, injured, and captured by the Chinese naval patrol police were fishermen fishing in the western side of the Tonkin Gulf delimitation line in the common fishing area. The Vietnamese Ministry also considered the use of weapons by Chinese naval patrol police to kill innocent Vietnamese as a serious violation of international laws. Such maritime conflicts between the two neighbors were exacerbated by the Beibu Gulf ’s abundant natural resources including oil, natural gas, and various minerals on top of being a fertile fishing ground both nations. And it was precisely for the avoidance of such skirmishes that both countries signed the Agreement on the Delimitation of the Tonkin Gulf, the Vietnam–China Fishery Cooperation Agreement and agreements by high-level leaders of the two countries to promote friendship between the two states.

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Going beyond mere agreements, the joint patrol gives China and Vietnam a chance to avoid a repeat of an escalated naval clash like the 1974 Paracel incident. And, given the good headstart of the joint patrol in promoting greater understanding between the two countries, the Chinese foreign ministry declared that it will further the friendly cooperation between the military forces of the two countries and will maintain the order and stability in the Beibu Gulf. If this is sustainable, it could signal the heralding of an upturn in good maritime relations between the two countries. By 27 October 2008, Vietnam and China had begun to move beyond joint patrols to the starting stages of joint cooperative projects. China and Vietnam pledged to turn their border areas (1350 km in length) with longstanding disputes into showcases of economic growth and jointly explore oil-rich offshore areas during a visit by Vietnamese Prime Minister Nguyen Tan Dung to Beijing on 27 October 2008. Top on the Sino–Viet agenda was their disagreement over the Spratly islands in the South China Sea, which have oil and gas potential and also the ownership of the Paracel islands currently occupied by China. Both sides agreed to start a joint survey in the waters outside the mouth of Beibu Bay (Gulf of Tonkin) and gradually advance the negotiations on demarcation of these maritime zones to jointly exploit the zones. This also serves to prevent clashes between both navies of fishing vessels in the gulf of Tonkin. More specifically, both sides looked forward to collaborate on oceanic research, environmental protection, meteorological and hydrological forecasts, oil exploration and information exchanges by the two armed forces. Details on the hot issue of ownership of the Spratlys was, however, vague in details. Nevertheless, the data and information released in October 2008 so far was already an achievement in itself given the history of this difficult dispute between the two countries as Chinese naval ships had clashed with Vietnamese fishing boats before incurring Vietnamese wrath amongst its people. It was an

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important step in the direction of CBMs and reversed recent rising temperatures between Hanoi and Beijing over this issue, considering earlier in 2008, a potential flashpoint occurred when Beijing angered Hanoi by warning a US oil giant that it would be barred from operating in China unless it pulled out of a joint exploration deal with Vietnam. Other Sino–Viet energy deals were expected to follow from this rapprochement. Dung and Chinese premier Wen Jiabao signed a pact between state-run China National Offshore Oil Corp. and PetroVietnam. Infrastructure projects were also on the table. North Vietnam and its Haiphong seaport will be linked by new road and rail to Yunnan and Guangxi Chinese provinces, augmenting yearly annual bilateral trade to a targeted $25 billion by 2010 from $16 billion in 2007. Dung visited China’s southernmost Hainan province to foster closer shipping links with Vietnam and seal a $200-million joint industrial zone in Haiphong and a light-rail project in the capital Hanoi. The emergence of Chinese economic strength is contributive to the current policies found in many countries of accommodating the rise of China. Many are also aware of China’s complex and wide array of domestic issues that needs to be resolved such as income disparity, corruption issues, state-owned enterprises, western China development, SARS, etc. Most would still want to see a stable China as they believe that it is in the region’s best interest for that to happen. Through WTO, multilateral, and bilateral engagements, China has begun to do its part in trying to allay East Asian fears over its rise, given the historical dominance that China had over the rest of East Asia in history. The Chinese outreach strategy also outlined their focus on issues that are relatively non-contentious but extremely important to capacity-building in the region. Former Foreign Minister Li said “the Chinese side will actively support and participate in new 10-Plus-Three cooperation areas such as women affairs, poverty alleviation and rural development, disaster reduction and relief and development of mineral

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resources”.48 Visibly omitted from this July 2006 declaration were issues on terrorism, Myanmar and piracy — all sticking points with other big powers in the region whereas mineral resources development is on the table. Overall, from ASEAN’s point of view, they have to deal with the simultaneous presence of two increasingly assertive regional powers, a Japan that is still the world’s second largest economy and a China that is becoming a formidable economic force in East Asia. The economic pact that Indonesia signed with Japan on 23 August 2007 was viewed by some as a trade-for-energy deal to help resource-hungry Japan secure energy supplies. In exchange for allowing Indonesian semi-professional workers to work in Japan under the EPA, Japan’s offer of technical assistance, acceptance of Indonesian nurses and caretakers, the possibility of energy investments and reduction of tariffs on many Indonesian commodities to zero, the then Indonesian Trade Minister Mari Elka Pengestu said that the Japanese indicated that a stable supply of liquefied natural gas (LNG) would be the foundation for cooperation. Indonesian state oil firm Pertamina then signed a US$1 billion (S$1.53 billion) deal with Mitsubishi Corp. to build an LNG plant on Sulawesi to meet Japanese energy needs while Marubeni Corp. signed a contract with Indonesia’s state-run power firm to supply electricity in western Java, including Jakarta, for 30 years. A year later, Indonesia and China inked US$4 billion worth of trade deals during the third Indonesia–China Energy forum (ICEF) held as part of the Chinese First Vice Premier Li Keqiang’s four-day official visit to Jakarta. These deals included the construction of three coal-fired power plants in Indonesia, which include a 48

Seapsnet (2007). Booming Sino–ASEAN Ties and More, dated 28 July 2007, Singapore Institute of International Affairs (SIIA) website [downloaded on 1 November 2007], available at http://www.siiaonline.org/news_highlights?wid= 171&func=viewSubmission&sid=839.

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US$482 million loan by the Export–Import (EXIM) Bank of China for the plant in Pelabuhan Ratu West Java, another US$293 million loan for another one in Pacitan East Java (both managed and initiated by Indonesian state power company PT PLN) and the third plant (660 MW) costing US$605 million will be constructed by China National Technical Import and Export Corporation (CNTIE) and Shanghai Electric Group Company Ltd in Adipala, Cilacap Central Java. Pelabuhan Ratu’s power plant will have a total capacity of 1,050 MW and Pacitan’s power plant 630 MW, to be operational by 2010. For the Central Java plant, the two Chinese companies would work with local partners to realize the eventual state power company PT PLN vision of 10,000 MW coal-fired accelerated power production program. The Indonesian media reported even more projects in the pipeline as a form of collaboration between the two countries: one oil and gas project, one biodiesel development project, two coal mining projects and four power plant projects. The oil and gas contract in the Madura Strait, East Java, is run by China’s CNOOC and Canada’s Husky and they will be joined by Indonesia’s upstream oil and gas regulator BPMigas. Another component of these eight projects would be a joint venture between state mining company PT Tambang Batubara Bukit Asam and China’s Huadian Corporation. The deal to develop biodiesel plants in Jambi and South Sumatra was also signed. PLN also signed the agreement for a fourth power plant with (IPP) PT GH EMM Indonesia, a subsidiary of a China-based power producer to construct a 227 MW coal-fired power plant in Simpang Belimbing, Muara Enim, South Sumatra. The energy deals would add a projected 32,000 new jobs for the Indonesian economy, according to the local media. In addition to the energy deals, Indonesia will also borrow US$1 billion to buy Chinese industrial goods like machinery and steel. Despite the economic power of Japan and the eagerness of China to pursue energy ties, ASEAN as a grouping wants to achieve

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equilibrium in its ties with both China and Japan and treat its relations with both of them in a neutral manner. At the same time as ASEAN wants to maintain economic ties with the Japanese, some leaders prefer to see the Chinese card as an option to place less reliance on the developed West in terms of trade. All these factors lay the foundation for a pan-East Asian energy framework that can help to mitigate energy tensions, crises, and conflicts in the future. With this in mind, the second ASEAN, China, Japan, and South Korea Ministers on Energy Meeting (AMEM+3) was held in Siem Reap with the theme “Promoting Greater Energy Stability, Security and Sustainability through ASEAN+3 Energy Partnership”.49 The countries in question agreed to react to soaring oil prices by conducting joint study on oil market and trading in the ASEAN+3 countries. They also confirmed the significance/importance of oil stockpiling and to enhance understanding through dialogue with the Middle East and other oil producing countries.50 With the setting up of the ASEAN+3 Energy Security Communication System, the ministers believe that the East Asian capacity for timely emergency response will be strengthened.51

MUTUAL INTERESTS IN THE ISSUE OF PIRACY Coastal security can also be an avenue for cooperation for both China and Japan, especially in the vital but what is perceived to be the inadequately policed sea-lanes of the Straits of Malacca. Because Japan lacks oil, it has to import oil mainly from the Middle East and this oil inevitably has to pass through the Straits of Malacca. With a greater desire to bolster ASEAN’s efforts in combating piracy within their own territory, Japan announced its intentions to send

49 People’s Daily Online (2005). ASEAN, China, Japan, South Korea to Enhance Energy Cooperation, dated 14 July 2005, People’s Daily Online [downloaded on 30 August 2005], available at http://english.people.com.cn/200507/14/eng2005 0714_196017.html. 50 People’s Daily Online (2005). 51 People’s Daily Online (2005).

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Coastguard vessels to Southeast Asia to conduct joint patrol exercises with ASEAN nations. Similarly, the Chinese navy has recently conducted exercises in the Straits to combat piracy and familiarize themselves with the waters in the Straits’ sea-lanes that connects the South China Sea to the Indian Ocean. The Chinese has been interested in warship guided missile warfare since 2002, with its comprehensive depot ship “Taicang” conducting such exercises when covering the 600-nautical-mile Malacca Straits on Tuesday 28 May 2002.52 The Chinese navy has also recently conducted exercises there to combat piracy and familiarize themselves with the waters in the Straits’ sea-lanes that connect the South China Sea to the Indian Ocean. Both Japan and China face piracy endangering oil transshipment to Japan and China and increased insurance costs for merchant shipping. Here they have a common interest to cooperate.

52

People’s Daily Online (2005). Taicang Conducts Anti-Pirate Exercises at Malacca Straits, People’s Daily Online [downloaded on 1 September 2005], available at http://english.people.com.cn/200205/29/eng20020529_96696.shtml.

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Chapter

5 Seeking Energy Security: Cooperation and Competition between China, Japan, and India Theoretical frameworks have often defined the debates in the field of international relations (IR). The two major IR theories include realism and idealism. Realism is associated with the exercise of power by states and places overwhelming premium on the concept of power which is a measure of influence of a state. Idealism emphasizes the workings of international laws and regimes, morality as well as international institutions as factors of constraint on the exercise of raw power. In the realist perspective, energy security balancing and buffering is not new. There is also a tendency for any power to try to reshape any international environment that it regards as threatening its basic interests. China in the 1970s attracted Japan to buy Daqing crude to prevent warmer relations between Japan and the Soviet Union (then China’s number one nemesis). The same goes for Japan. In the wartime period (WWII), Japan turned to annexing China and Southeast Asia to provide energy security in the face of a US oil 81

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embargo. In the postwar years, Japan also placed great emphasis on two great sources of oil within East Asia, Indonesia’s minas crude and China’s post-1978 Daqing crude, both countries were consequently and competitively the largest recipients of Japanese overseas development aid (ODA). Similarly, for India, defining itself as a fiercely non-aligned country in the Cold War, it was able to rely on Soviet experts to help them prospect for oil, drill wells, and produce it, and build the Indian power industry infrastructure after gaining independence in 1947 when it was badly in need of energy. But at the same time, it continued to work closely with British energy entities on the other side of the Cold War divide; on 18 February 1959, Oil India Private Limited was incorporated to expand and develop the newly-discovered oil fields of Naharkatiya and Moran in the Indian North East and, by 1961, it became a joint venture company between the Indian Government and Burmah Oil Company Limited, UK. All these initiatives reflected the normative need to achieve equilibrium in the regional order, especially balancing one strong external power against another using energy as a balancing commodity. However, this is probably the first time in postwar history that all the three Asian giants of India, China, and Japan are major world importers of energy. It was possible in the past to depend on Cold War balancing in energy needs but, with the change of geopolitical circumstances brought about by a rising India and China as well as an increasingly autonomous Japanese energy diplomacy, a new regional energy security dynamics has emerged. With the relative gap in power between the Asian powers and the West closing up and the emergence of Asian powers growing stronger, how would the Asian powers, specially the giants of India, China, and Japan, configure themselves in relations to each other in the absence of a unipolar Pax Americana or a bipolar US/Soviet confrontation? With Japan as the odd one out, being a mature developed country instead of a rapidly developing one and an entity associated with the West than with the BRIC economies, how would it react and would it be possible for Japan to balance India and China in the energy sphere?

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Japan’s trump card in energy diplomacy is its capabilities in efficient and clean energy technologies. On 18 September 2008, during the third ministerial meeting of energy policy dialogue between the two countries, Economy, Trade and Industry Minister Toshihiro Nikai agreed with India’s Planning Commission Deputy Chairman Montek Singh Ahluwalia that Japan will support New Delhi’s initiative of setting up energy efficiency centers and offered training programs and expertise for the setup as well as carry out a wide range of model projects in key energy consuming industries, including the power and coal sectors.1 China’s advantage in this three-way Asian race for energy is its newfound wealth. China is ahead of India in acquiring new sources of energy, e.g. SINOPEC, China’s leading energy conglomerate, has invested approximately US$45 billion dollars in an effort to establish new energy partnerships but Oil and Natural Gas Corporation (ONGC), India’s leading government-controlled energy company, has invested US$3.5 billion dollars in global energy partnerships in comparison.2 India’s comparative strength may be its geopolitical position. Thus it is leveraging on that strength to carve out an energy niche for itself. India’s private sector lobby, the Confederation of Indian Industries (CII), has a strategic roadmap of the country’s geopolitical future. The Confederation’s study in 2005 indicated that India intends to be “the most important Asian oil junction”3 through 1

BBC Monitoring Asia Pacific (2008). Japan, India Agree to Strengthen Cooperation on Energy Saving, dated 18 September 2008, Department of Climate Change, National Development and Reform Commission website [downloaded on 9 Jan 2009], available at http://www.ccchina.gov.cn/en/NewsInfo.asp?NewsId= 14430. 2 Schaffer, T. and Vibhuti, H. (2007). India, China and Japan, dated 3 January 2007, No. 102, Center for Strategic and International Studies website [downloaded on 9 Jan 2009], available at http://www.csis.org/media/csis/pubs/january2007_indiachina-japan.pdf. 3 Sharma, D. (2005). India Steps Up Energy Diplomacy, dated 1 June 2005, Bangkok Post [downloaded on 9 January 2009], available at http://www.sudantribune. com/spip.php?article9882.

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alliances with both major oil importing powers of China and Japan. In other words, India sees itself as the buffer between the two giants since it lies in the geopolitical pipeline junction of Asia with oil and natural gas pipelines branching to Burma, Thailand, and Bangladesh in the east, China in the north, and Iran, Turkmenistan, and other Central Asian republics in the west and northwest. Perhaps symbolic of this special geopolitical location is its highly visible and successful diplomacy with the other two great Asian powers — the fact that the Chinese President Hu Jintao visited India in November 2006, and Indian Prime Minister Manmohan Singh visited Japan in December 2006, underlined India’s increasing economic and political prominence in Asia. India seems poised to be a balancer between the two East Asian energy giants as its economic relations with China are developing faster than those with Japan while its strategic connections with Japan are stronger, and lack the element of rivalry present in Sino–Japanese ties.

POSSIBLE CONFLICT OF INTERESTS AND AREAS OF COOPERATION Sino–Indian As much as 80 percent of China’s oil imports flow through the 630 mile-long Straits of Malacca, which is just 1.5 miles wide at its narrowest point4 and this supply route can be easily disrupted by an accident or terrorist attack along the Malacca Straits or a naval blockade during a conflict over Taiwan. Therefore, China is also looking into the possibility of bypassing the Straits with discussions for a pipeline to Myanmar, as well as possibly Bangladesh, Pakistan or Thailand but Pakistan looks like an unlikely candidate given the threat of terrorist attacks on pipelines traversing its territory while a pipeline through Bangladesh would have to cross the territory of

4

Bajpaee, C. (2005a). China Fuels Energy Cold War, dated 2 March 2005, Asia Times website [downloaded on 9 January 2009], available at http://www.atimes. com/atimes/China/GC02Ad07.html.

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strategic competitor India and this quest for an alternative may thus bring China into the Indian sphere of influence. Even without directly entering India’s South Asia sphere of influence, Myanmar with its close relationship with China hosting a 1,250-km pipeline from the deepwater port of Sittwe on the Bay of Bengal to Kunming in Yunnan province may itself become a site of Sino–Indian competition due to India’s desire to access energy resources within Myanmar and Myanmar’s proximity to India’s troubled northeast insurgencies. Myanmar is crucial to China as building oil pipelines originating in Myanmar and ending up in Yunnan would enable Chinese oil tankers to unload in the Myanmarese and Thai ports without having to traverse through the waters in the Straits of Malacca. In cooperating with the Myanmarese, China invested 8 billion yuan (US$1.04 billion) in a 2,380-km gas pipeline between the two countries despite initial uncertainty about who will get the gas from some of Myanmar’s largest offshore deposits and Beijing also offered to build pipelines for free as part of its price negotiations and, even within China itself, intra-provincial competition has seen the Chongqing municipality lobbying to have the pipeline extended to supply feedstock for a planned new refinery in competition with the main pipeline to Yunnan.5 But Sino–Indian quests for oil need not result in zero-sum competition. Sino–Indian cooperation has manifested in the energy sphere, with the chairman of Xinjiang autonomous region, Ismail Tiliwandi, making a trip to India in October 2004 to discuss transport links and a Sino–Indian natural gas pipeline project and India and China are already collaborating in the energy sphere, with India holding a 20 percent stake and China a 50 percent stake in the development of the Yahavaran oil field in Iran while China Gas Holdings established an alliance with India’s largest energy conglomerate, Gail.6 5

Reuters (2007). China–Myanmar Oil Pipe Work to Begin This Year, dated 22 April 2007, ASEAN Energy News Service website [downloaded on 1 January 2009], available at http://aseanenergy.org/news/?p=859. 6 Bajpaee, C. (2005a).

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Even in Myanmar, trilateral cooperation between China, Korea, and India have helped to provide a win–win situation. The China National United Oil Corporation (CNUOC), Daewoo International Group Corporation [with partners South Korea Gas Corporation (10 percent), India’s ONGC Videsh Ltd (20 percent), and Gas Authority of India Ltd (GAIL, 10 percent)] and Myanmar signed a 30-year gas pact involving the Shwe Project on Wednesday, 24 December 2008. This is seen as a victory for Asian energy diplomacy in the Indo–China region as Myanmar’s three large natural gasfields had been the subject of a geopolitical tug-of-war between nearby China, India, and Thailand as well as potential LNG buyers South Korea and Japan. By cooperating, a potential source of conflict is resolved. The natural gas deposits of Shwe gas project (comprising of Shwe and Shwephyu fields located at block A-1 and block A-3, Mya field) in Myanmar’s Rakhine offshore area was developed and exploited by the Daewoo consortium (60 percent stake in the project) and the 24 December 2008 pact concluded the sale and transport of natural gas from offshore blocks A-1 and A-3.7 The Shwe field is estimated to contain a gas reserve of 4–6 trillion cubicfeet (TCF) or 113.2–170 billion cubic-meters (BCM), while the Shwephyu 5 TCF and the Mya 2 TCF have a combined proven reserve of 5.7–10 TCF of gas.8

7

Einnews (2008). Companies from China, Myanmar, S. Korea Sign Gas Pact in Myanmar, dated 25 December 2008, EIN news website [downloaded on 30 December 2008], available at www.einnews.com/thailand/newsfeed-thailandenergy; Wai, M. (2008). China Signs Burmese Gas Deal for 30-Year Supply, dated 28 December 2008, Irrawaddy/Sanooaung website [downloaded on 30 December 2008], available at http://sanooaung.wordpress.com/2008/12/28/china-signsburmese-gas-deal-for-30-year-supply/and Xinhua (2008) Companies from China, Myanmar, S. Korea Sign Gas Pact in Myanmar, dated 25 December 2008, People’s Daily website [downloaded on 30 December 2008], available at http://english. people.com.cn/90001/90778/90858/90863/6561510.html. 8 Einnews (2008).

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Myanmar is rich in natural gas offshore deposits with three main large offshore oil and gas fields and 19 onshore ones and recoverable reserve of 18.012 TCF or 510 BCM out of 89.722 TCF or 2.54 trillion cubic-meters (TCM) of estimated reserve of offshore and onshore gas (in addition to 3.2 billion barrels of recoverable crude oil reserve) and according to the Central Statistical Organization, in the fiscal year 2007–2008, Myanmar produced 7.62 million barrels of crude oil and 13.393 BCM of gas and had drawn in 3.243 billion dollars in 85 projects as of the end of 2007 ever since the country opened to such investment in late 1988.9 Its gas industry now stands the second in the country’s foreign investment sectorally after electric power. In early 2009, China will begin construction of oil and gas pipelines from the Kyaukpyu port on the Bay of Bengal in proximity to the Yunnan Province, a US$2.5 billion pipeline project that was inked in November 2008. Kyaukpyu Port is part of China’s twoocean strategy in geopolitics, involving the extension of its influence in both the Pacific and Indian oceans, which reduces China’s dependence on the Straits of Malacca.

India–Japan In 2005, India’s ONGC announced that it formed a consortium with the Russian state-run oil company Rosneft to launch the Sakhalin-III oil field development and the company has already financed 20 percent of the development of Sakhalin-I, and is slated to produce natural gas but this brings India’s initiatives into contact with Japanese conglomerates which have paid a great deal of efforts in the Sakhalin oil fields since the early 1990s in order to lower its oil dependency on Middle East regions.10 9

Einnews (2008). Park, W. J. (2005). India Steps Up in the Competition for Russian Oil, dated 4 February 2005, Energy Bulletin website [downloaded on 9 January 2009], available at http://www.energybulletin.net/node/4246.

10

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In 2008, bilaterally, both sides began cooperative initiatives in this area. Japan Oil, Gas and Metals National Corp., or Jogmec, agreed to explore possibilities with ONGC Videsh Ltd, or OVL, the overseas arm of Oil and Natural Gas Corp. Ltd, for swapping or selling gas from its blocks in Sakhalin-I; in return for its US$1.7 billion investment (Rs 6,732 crore) in the Sakhalin-I project, OVL is expecting 2–4 million tonnes of crude oil annually and 5–8 million cu. m of gas per day.11 Under this deal, Japan would swap gas that it sources from West Asia with the supplies obtained by India off the Russian coastline; Jogmec’s role is to secure a stable supply of oil and natural gas, nonferrous metal, and mineral resources for Japan and Hiraku Tomofumi, director general at natural resources and energy policy, Ministry of Economy, Trade and Industry (METI) of Japan has confirmed that Japan has a need for the LNG in this swap and that this arrangement will also substantially reduce transportation costs and price of gas to both countries.12

Offshore Resources China and Japan have their own issues over gas fields in the East China Sea called Tianwaitian in Chinese and Kashi in Japanese; Japan protested that China was unilaterally developing the Tianwaitian field even though both sides had agreed to negotiate its status under a 2008 agreement while China argued that the field is in its territorial waters. But it need not be a case of conflict too. Japan and China struck a deal in June 2008 to end the long-running dispute over gas fields in the East China Sea by jointly developing one of them and holding talks on the others. To resolve such energy issues and other 11

Bhaskar, U. (2008). Japan Ready to Begin Dialogue with India on Sakhalin Gas Swap, dated 10 February 2008, Wall Street Journal/Livemint website [downloaded on 9 January 2009], available at http://www.livemint.com/2008/02/10231441/ Japan-ready-to-begin-dialogue.html. 12 Bhaskar, U. (2008).

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pressing matters, strategic dialogues have been held between Japan and China since 2006.

CONCLUSION It is likely that India and China will continue to be both competitors and partners on energy since both countries are embarking on a diversification exercise to derive their energy from a variety of sources through business and political diplomacy. Even though both countries have signed a cooperation agreement for joint projects, they have not hesitated to compete and outbid against each other whenever it suits their purpose. The emerging energy school of balance of power is not the same as the creation of 19th century European military alliances and instead, relies on the utilization of multilateral institutions to underpin its diplomacy. Instead of military conflicts, energy balancing and security in South and East Asia are reflected in a competitive pattern of regional alignments and the avoidance of military conflicts or confrontations is dependent on prudence by major powers that constrain the use of military means traditionally associated with the practice of the balance of power as a policy of states. There is a need for the existence of a stable structure of regional inter-governmental relationships informed by common assumptions about the bases of inter-state conduct. In the balance of power, each state has to be conscious of the common interest and that a regional order may not privilege equality. A stable order has to precede multilateralism and an operating norm amongst states in the region (whether institutionalized or non-institutionalized) has to exist such that each constituent adhere to some common code of conduct and expectations. India, China, and Japan will have to accommodate this through being principally focused on order and based on the belief that states are constantly looking for some measures of regularity in their international activities by creating stable mechanism of habits and practices that ensure survival. For example, Beijing will want a peaceful international environment and constructive relations with its

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neighbors and as China emerges as a great power, Asia–Pacific countries have the common interest to keep China peacefully engaged with other countries in the region that will give China a deep and enduring interest in maintaining international order. There is great potential and utility in political engagement with the big Asian powers, especially if it could be located within regional institutions and initiatives. A multilateral regional energy institution will enhance the interactions and interdependence of great powers and build up a regional framework of normative behavior. By integrating the big Asian powers into the family of nations through the construction of multilateral institutions, these powers will have to learn to play by the international rules and to act responsibly. Countries in Asia and the Pacific already consume around three times more oil than they produce, and consumption is increasing twice as fast in the region as in the world as a whole and, with less than 4 percent of the world’s proven oil reserves, the region has few options to increase or even maintain current levels of domestic production, and efforts to diversify to other types of energy, such as natural gas or renewable energy, have achieved only limited success.13 There is in fact greater incentive to cooperate rather than to compete. Three areas can be identified for institutionalized cooperation. First, according to 2007 data by the International Energy Agency of 2005, Japan is the world’s fourth-biggest carbon dioxide emitter after the United States, China, and Russia as of 2005 and India, the world’s fifth-largest emitter, expected to become the third largest by around 2015.14 Thus the three giants of India, China, and Japan make up three of the top five carbon emitters on earth. It therefore makes sense for all three to cooperate in cutting down carbon and Japan with its expertise in this field leads the way. The Japan Bank for International Cooperation will increase yen loans and 13

Wu, K., Fesharaki, F., Westley, S. B. and Prawiraatmadja, W. (2007). Six Steps Toward Increased Energy Security in the Asia Pacific Region, dated 25 August 2007 [downloaded on 1 January 2009], available at http://www.eastwestcenter.org/ index.php?id=3820&print=1. 14 BBC Monitoring Asia Pacific (2008).

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investment in clean-energy technology to help cut greenhouse emissions in China and India, Asia’s two economic powerhouses as part of the US$12 billion in loans and grants that former Prime Minister Yasuo Fukuda has promised to spend in five years to tackle climate change.15 Japan, together with the World Bank, the US, and the UK plans to raise a US$5.5 billion fund to help poor nations develop clean technology, find ways to convince developing countries to agree to emissions targets and utilize multi-governmental funds as a tool to mitigate investment risks in developing countries and boost capital spending by private companies on clean projects.16 Takashi Hongo, director-general of environment finance at JBIC named carbon-capture-and-storage technology, in which carbondioxide is caught in the air and stored underground, as “the key’’ to reaching the emissions-cutting goal.17 Japan’s technology can also help to make oilfield extraction more efficient. Other than clean energy, efficiency is just as important. China and Japan said they would cooperate in using the technology to inject carbon dioxide into oil wells to both store the gas and to make the crude more viscous, so it can be pumped faster. The countries are expected to use the method at China’s Daqing offshore oil field.18 The second area is in either joint or coordinated oil storage and reserves. This plan is developed further in East than in South Asia. A future pan-East Asian joint oil stockpiling has been proposed by Japan as early as 2002. On 22 September 2002, Japan’s METI recommended encouraging stockpile build-up initiatives by China and the ASEAN members through the ASEAN+3 format and through a series of Oil Security Workshops in the interest of Northeast Asian energy cooperation.

15 Sato, S. and Firn, M. (Bloomberg) (2008). Japan to Boost Spending on China, India Clean-Energy Projects, dated 4 July 2008, China Climate Change Info-Net website [downloaded on 9 January 2009], available at http://www.ccchina.gov.cn/ en/NewsInfo.asp?NewsId=13142. 16 Sato, S. and Firn, M. (Bloomberg) (2008). 17 Sato, S. and Firn, M. (Bloomberg) (2008). 18 Sato, S. and Firn, M. (Bloomberg) (2008).

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In the Second Meeting of the Asia Cooperation Dialogue (ACD) Energy Working Group held in Manila, Philippines on 19–20 May 2004 to explore possibilities of creating cooperation within the energy sector (member countries include China, India, and Japan), ACD members agreed to study the possibility of joint stockpiling as one of the measures in ensuring the reliable supply of oil and formed a seven-member panel to examine the possibility of joint stockpiling among interested member countries. In the ASEAN+3 Ministers Meeting, held in Manila, Philippines on 9 June 2004, the ASEAN+3 consists of the 10 ASEAN countries — Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam — and Japan, China, and South Korea saw the need for a joint oil stockpile in the region, saying the move will ensure “greater energy security and sustainability” in a region expected to become the largest energy consuming area in the world with the Philippine Energy Secretary proposing the former US naval base at Subic Bay north of Manila as a storage facility for Libyan oil for distribution in Asia.19 During the First Roundtable of Asian and Middle East Ministers on Regional Oil and Gas Cooperation, New Delhi, India, 6 January 2005, India’s Petroleum Minister proposed that “Asia should build a joint oil storage facility for an emergency stockpile to enjoy uninterrupted supply. The storage depots would give both sellers and buyers security of supply and demand” and South Korean officials proposed the idea of creating a joint stockpile for Asia, storing supplies in countries where facilities are available.20 In one of the latest East Asian initiative, on Thursday, 4 September 2008, South Korea launched an ambitious project to become Northeast Asia’s oil storage hub with a joint venture contract 19

Shin, E. S. (2005). Joint Stockpiling and Emergency Sharing of Oil: Update on the Situations in the ROK and on Arrangements for Regional Cooperation in Northeast Asia Asian Energy Security Workshop, 13–16 May 2005, Beijing, China, dated June 2005, Nautilus website [downloaded on 9 January 2009], available at www.nautilus.org/aesnet/2005/JUN2205/Shin_Stockpile.ppt. 20 Shin, E. S. (2005).

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signed by state-run Korea National Oil Corp. (KNOC), SK Energy, GS-Caltex, Oiltanking Asia Pacific, and Glencore to invest US$320 million to increase storage at the southern port of Yeosu to six million barrels by 2011 as the first pilot project which has been launched as part of the government’s drive to establish a Northeast Asia oil hub as South Korea sits astride the main North Pacific shipping route, with Yeosu and Ulsan possessing deep water ports and proximity to Chinese and Japanese industrial centers.21 Whichever form the Asian joint stockpiling or storage takes in the future, it would be impossible to leave out India as a partner or an ally in any joint strategic reserves or storage initiatives in East Asia. The third area is institutionalized coordination to regulate pricing issues in the regional energy industry. To ensure no surprises in sudden price increases, Japan’s METI proposed a network among the Energy Ministers of Japan, China, Korea, and ASEAN to allow timely information-sharing in response to emergencies as information-sharing through this network will open the way for a coordinated response, contributing to the stability of the regional energy market and this would go a long way in addressing oil price mechanisms in the Asian market (including addressing the so-called “Asia Premium” issue). One of the practical ways to cooperate is to coordinate the maintenance of emergency stockpiles among countries in the region as the benefits of a coordinated effort may justify establishing a mechanism for more-affluent countries in the region to provide some initial financial assistance to their less-affluent neighbors and another potential area of cooperation is collective bargaining to obtain lower prices and better terms on oil imports from the Middle East; this concept has been widely discussed, but no collective-bargaining arrangement has yet been formulated because of concerns about a negative response from oil-exporting nations.22 21

The China Post (2008). S. Korea Launches Project to Become Asian Oil Storage Hub, dated 5 September 2008 [downloaded on 9 January 2008], available at http://www.chinapost.com.tw/business/asia/korea/2008/09/05/173293/S.Korea.htm. 22 Wu, K., Fesharaki, F., Westley, S. B. and Prawiraatmadja, W. (2007).

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Chapter

6 Year 2004: China’s Landmark Energy Crisis The words of Edward Morse: “Petroleum has proven to be the most versatile fuel sources ever discovered, situated at the core of the modern industrial economy”.1 In China’s case, oil reliance and its absolute essentiality to industrial development highlighted the weakness of Chinese economic development as “each increment of foreign oil only deepens the country’s vulnerability to economic and political disruptions in the oil-producing regions”.2 The year 2004 marked China’s own energy crisis when central government planners underestimated the country’s electricity needs. China’s planners should have realized the inadequacy of energy supply based on 2003’s usage. China used about 250 million tons of crude oil in 2003, including 91.12 million imported, a year-on-year increase of 10 percent.3 In the same year, China replaced Japan as the 1

Klare, M. (2004). Blood and Oil (New York: Metropolitan Books), p. 7. Klare, M. (2004). p. 167. 3 People’s Daily Online (2004). Russia Welcomes China to Participate in East Serbia Oil Development, People’s Daily Online, dated 29 March 2004 [downloaded on 29 March 2004], available at english.peopledaily.com.cn. 2

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world’s second largest user of petroleum4 and the International Energy Agency (IEA) had also warned that Chinese imports would double to some 4 million barrels per day (b/d) by 2010 and, by 2030, importing about 10 million (b/d), equalizing their import volume with that of US.5 All these developments should have been the warning signs for the Chinese government for impending problems in 2004. Despite the significant increase in fuel usage in 2003, Chinese technocrats shifted most of the burden to shoulder energy shortage to the manufacturing sector in China until new power plants were completed in mid-2006.6 Consequently, China’s industries faced production delays and rising costs with some opting to carry out production in the night when electricity demand dipped.7 China’s main manufacturing centers are in the coastal south and therefore some of them had to slow production in order to compensate for energy use. The State Electricity Regulatory Commission projected a loss of 360 billion yuan (US$43.5 billion) from the shortage of 60 billion kw h in 2004 with the government working hard to keep electricity going to the residential areas.8 On occasions, the authorities even had to choose between cities for energy rationing. For example, Beijing, being a capital city, was specially selected for insulation from power shortage in China. To prevent wastage, some Chinese cities began to install monitoring devices to track power consumption, e.g. Wuhan has placed remote-control gadgets to track the power usage of 700 hotels, restaurants and factories.9 If a heavy load was detected

4 Wonacott, P., Whalen, J. and Bahree, B. (2003). Balance of Power China’s Growing Thirst for Oil Remakes the Global Market, The Wall Street Journal, Vol. CCXLII, No. 109, 1. 5 Wonacott, P., Whalen, J. and Bahree, B. (2003). 6 Pottinger, M. (2004). China Sweats Out Power Shortages, The Wall Street Journal, A11. 7 Pottinger, M. (2004). 8 Pottinger, M. (2004). 9 Pottinger, M. (2004).

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on the electricity grid, the utilities company would send signals to green boxes hanging on the walls of businesses and firms, instructing them to limit their consumption, a heavy burden on the service sector which was sometimes given only 10 minutes to react.10 While China produced 145 million tons of crude oil in the 10 months before November 2004, up 2.9 percent year-on-year,11 because China Petroleum Corporation and China Petro-Chemical Corp. reached their refining capacity limit, China had to import 85.80 million tons of crude oil to make up for domestic shortage, up 36.2 percent in the same period.12 Because of this situation, 2004 became the starting point for China’s embarkation of a global quest for energy resources. Continentally, its presence could be felt in Africa and Central Asia. In these regions, China sponsored road and port construction projects in exchange for access to oil. Cooperating and sponsoring oil exploration and drilling projects can also clock in political mileage that can facilitate access to oil. The energy deals sought by China are unprecedented in its character. Guided by the need to secure their own interests, they seem to cut across traditional geopolitical alliances or political concerns in the West. China’s arm supplies to Kyrgyzstan and Iran in exchange for energy resources is reflective of this.13 In Africa, for example, Sudan has become China’s largest oil supplier in the continent. Chinese presence in Sudan is also said to be viewed negatively by Western competitors and governmental circles due to the issue of human rights. China has also worked on Nigeria, Gabon, Cameroon, and Angola, extending loans to some of these countries in exchange for oil commitments.

10

Pottinger, M. (2004). People’s Daily (2004b). China Still in Urgent Need of Energy, Transport: Official, People’s Daily, dated 14 November 2004, available at english.peopledaily. com.cn. 12 People’s Daily (2004b). 13 Klare, M. (2004). p. 147. 11

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In Oceania, China has purchased Australia’s Northwest Shelf project, edging out Japanese companies like Mitsui. In the first half of 2008, Venezuela chose to boost more oil shipments to China and lesser volumes to the US (some say at the latter’s expense). Venezuela is attempting to reduce overdependence on the US as a main customer, turning instead to new emerging oil consuming giants like China and India. Closer to the Asian continent, China’s global footprints in their pursuit of oil resources has come up against other regional powers in India and Japan. One of the sites for India’s energy competition with China is Myanmar as it carried the geopolitical energy potential with the 11 January 2006 discovery of “massive” gas reserves (between 2.9 and 3.5 trillion cubic feet (TCF)) off the northwestern coast. India and China immediately became two attractive candidates for this energy resource. India’s Memorandum of Understanding with the Myanmar junta on 9 March 2006 in the form of a US$1 billion Myanmar–Bangladesh–India gas pipeline at stake was viewed as a victory from a year before in late 2005 when it was outbidded by the Chinese for the purchase of 6.5 TCF of gas from Myanmar. On Monday, 27 March 2006, state-run Gail India announced an international energy consortium bid to transport compressed natural gas (CNG) from Myanmar to India, and become the world’s first CNG shipping time chartering service. Yet, despite Sino–Indian rivalry in Myanmar, there were also signs of cooperation between the two giants. In December 2005, India and China won a joint bid to buy PetroCanada’s 37 percent stake in Syrian oilfields for US$573 million. Hindustan Petroleum Corp. Ltd and China’s Sinopec Corp. signed a preliminary agreement for joint projects in the two countries. Business deals in the renewable energy sector also hold great potential as the two economic giants display greater energy interdependency in fossil fuels. Rising oil prices provided the rationale for China to cooperate with India and regional countries in general to manage oil price fluctuations. In 2005, 300 CEOs from top Indian companies with membership in the industry body Assocham lobbied the Indian government to take up an initiative to establish an organization of

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oil-consuming countries (including Asian countries like China and Japan) to fight for better and more affordable prices and to narrow fluctuations to a certain band width. This comes at a time when India suffocated under international oil prices that once reached US$145 per barrel. The Indian private sector saw this price hike as a reflection of speculative activity. Such proposals by the Indians are likely to draw interest from Malaysia and Indonesia, which were hit by political instability that arise from a reduction of oil subsidies in those respective countries. This created pressures for a regional approach to cooperation in the energy field. Collectively, Japan and China along with Southeast Asia and Korea also made efforts towards solving their energy tensions. Amongst the regions in China’s international energy outreach, Central Asia is probably one of the most important strategically. Oil was a predominant item on China’s wish list in investments within the former Soviet Republics in Central Asia. One of the biggest investments in this area is the pipeline from Kazakhstan to western China. The Chinese will funnel this oil to its own East coast, which is the main engine of Chinese economic development. China National Petroleum Corporation (CNPC) became a majority shareholder in Aktobemuniagaz, which controls several large oilfields in the Aktobinsk area and owns Uzen, Kazakhstan’s second largest oilfield.14 In his first trip overseas, President Hu Jintao went to Kazakhstan in June 2003 and declared to reporters that “China places great attention and importance on developing friendly relations with Kazakhstan”.15 That the Sino–Kazakh deal reached without Russian mediation alerted the Russians to the need to capitalize on Chinese investments before they lose it to other independent former Soviet republics.16 Consequently, Russia has launched a broad array of initiatives to increase oil ties with China. 14

Klare, M. (2004). p. 170. Klare, M. (2004). p. 170. 16 Pravda (2003). Russia to be Outflanked Through Great Silk Way? English Pravda Online, dated 26 December 2003 [downloaded on 23 May 2003], available at english.pravda.ru. 15

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China is also avoiding directing strong criticisms at Iran’s nuclear efforts in order to secure political support from Iran for its use of oil from that country. China has also said publicly that it did not wish to see Iran being dragged up to the UN Security Council for questioning over its nuclear program, although it was careful not to mention anything about using a veto. Iran has reciprocated these Chinese diplomatic gestures, indicating that it had no difficulties with China in the purchase of Iranian oil. China’s policy of pursuing what the West considers as “rogue state” is reflective of its pragmatic stance. China’s oil moves in Central Asia stimulated Japan’s energy interests in the region. Japanese Foreign Minister Yoriko Kawaguchi visited the four Central Asian states of Uzbekistan, Kazakhstan, Tajikistan, and Kyrgyzstan in late August 2004 and spearheaded the creation of the “Central Asia Plus Japan” in rivaling Chinese influence in the Shanghai Five arrangement (Shanghai Cooperation Organization (SCO) brings together China, Russia, and four Central Asian states under China’s initiative). Observers within Japan coined this initiative as Japan’s “Eurasian diplomacy”. Japan’s strongest aspect in the region is its official development assistance (ODA). Japan in fact is already a big player in this area with a total allocation of 260 billion yen in bilateral ODA for capacity building in Central Asia.17 In Uzbekistan, Japan concluded an aid project to build a 220-km railway in southern Uzbekistan.18 Afghanistan is also picked out by the Japanese as another Central Asian gateway for future capacity-building activities and thus the Japanese government has provided US$800 million in reconstruction aid to Afghanistan since 9/11.19 In late April 2007, Japan’s Minister of Economy, Trade and Industry Akira Amari (accompanied by top executives from 29 Japanese companies, 150-member strong including public servants) and Kazakh 17

Nabeshima, K. (2004). Japan’s Diplomatic Might, The Japan Times, dated 20 September 2004 [downloaded on 20 September 2004], available at www.japantimes. co.jp. 18 Nabeshima, K. (2004). 19 Nabeshima, K. (2004).

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Prime Minister Karim Masimov issued a joint statement aimed at increasing Kazakhstan’s uranium supply to Japan. Under the proposed arrangement, 24 deals were signed and Kazakhstan’s share of Japan’s uranium imports could increase exponentially to 30–40 percent, up from the current 1 percent while Kazakhstan secured Toshiba’s help in building nuclear power plants. Kazakhstan has the world’s second-largest uranium reserves after Australia and is tipped to replace Australia (33 percent of Japan’s market share) and Canada (27 percent of Japan’s market share) as Japan’s largest supplier of uranium. Both countries have been the focus of raw materials procurement by East Asian giants China and Japan. After the Kazakh energy diplomatic energy offensive, Amari left Japan for Uzbekistan, Saudi Arabia, and Brunei, all of which are energy-rich countries. While Kazakhstan may be important for uranium diplomacy, Saudi Arabia is crucial as a partner for oil cooperation. Former Japanese PM Shinzo Abe’s Middle Eastern diplomacy started from Saturday 28 April 2007. Abe’s trip to Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, and Egypt marked his first visit to the oilrich Middle East since assuming office and it also marked the first visit to Kuwait by a Japanese prime minister. Symbolisms were rich in the trip. Abe’s visit featured a morale booster for Japan’s 200 Air Self-Defense Force personnel stationed at the Ali Al Salem Air Base in Kuwait. The Japan Business Federation, the nation’s most influential business lobby known as Nippon Keidanren also sent a large 175-member delegation to accompany Abe as a “symbolic gesture” to the people in the Middle East to show that Japan’s relationship with the region is “widening and broadening in scope and coverage.” It broke the tradition of hiding business interests in the background as Deputy Press Secretary Tomohiko Taniguchi reiterated Tokyo was no longer shy in addressing business interests which made up a very important element of Japan’s national interest, marking its ascendancy as an economic power in its own right. However, the weakness of Japan’s presence in Central Asia is that it has much less vested interests in Central Asia compared to China.

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The latter, for example, is able to collaborate on issues of antiterrorism, fostering a much more multi-faceted relationship with the region. In the words of some Central Asian countries, Japan is viewed more as an additional economic option rather than a countervailing geopolitically strategic alternative influence or what the Central Asians themselves termed as “balanced diplomacy.”20 Central Asian countries are aware of the courtship by Chinese and Japanese strategic power with one of them (Turkmenistan) choosing to thread on a policy of neutrality by opting out of Central Asia Plus Japan. From the Chinese perspective, Japan is rivalling China’s influence in the region by setting up an alternative discussion forum. In 2004, Foreign Minister Yoriko Kawaguchi instituted the “Central Asia plus Japan Dialogue,” holding a round of talks on economic and security ties as an alternative to the China-initiated Shanghai Five round of talks or the SCO. To Chinese analysts, energy is not the only item on Japan’s Central Asian agenda. The Chinese media noted that Japan has been stockpiling rare metals and petroleum in recent years. However, the Chinese remain confident of the SCO formed in 2001 which had since taken off with remarkable speed and scope of influence. Simply put, China has a headstart on collaborating with the region. In 2005, Chinese state oil company CNPC purchased Canada-based PetroKazakhstan and in December of the same year, the PRC completed a 1,000-km long (620 mile) pipeline supplying Kazakh oil to western China. Beijing has also signed a gas deal with Turkmenistan. Besides energy cooperation, China has already instituted military cooperation. Recently, Kazakhstan and China jointly staged a mock anti-terrorism battle under the umbrella of the SCO. To the Chinese, the SCO is more of a diplomatic mechanism than a military organization and it is used to further Chinese energy interests and also foster a peaceful environment in an area flanking its vast territory in line with its philosophy of peaceful development. Overall, however, it is unlikely that diplomatic priority would overtake economic ones in the near future for the Chinese in the SCO. Economic and energy diplomacy are still on the top of the list for them. 20

Nabeshima, K. (2004).

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Strategic imperatives more often focus on such economic mutualism than military alliances. Whether it is Central Asia or other regions of the world, China’s global outreach for oil may be just beginning. IEA couched their studies of Chinese oil demand in bleak language, indicating that “at the least, China will import more oil than the OECD Pacific Region countries (Japan, Australia, and New Zealand) together” and this is the best case scenario.21 Such figures have since been quoted in other Sino–Japanese relations studies on the aspect of security.22 IEA’s own projections are that China will see the share of oil in final commercial energy consumption in 1996 at 20 percent rising to 26 percent by 2020 with 8 million barrels of oil imported daily, which will be four times the amount of Chinese domestic production in that year.23 In another study, the National Geographic Study went further by five more years and predicted 10 million barrels a day by 2025.24 See Tables 6.1–6.3 at the end of this chapter for figures on Chinese oil importation throughout modern history. Because of surging demand for oil, resource writer Michael Klare debunked the myth that peace was achievable with the end of the Cold War by pointing out renewed conflicts in the arena of the oil resource. Instead of a clash of civilization, it was conceptualized as a clash of oil needs. The same technological materialism that US had enjoyed in modernity seems to be desired by the Chinese as well. The US National Intelligence Council (NIC) drew up the report “Global Trends 2025: A Transformed World” which effectively acknowledged that by 2025 the current unipolar system will be transformed into a multi-polar one with the rise of China and India. Its economic and military power would have eroded by then. By 2025, the report states that China will be the 21

International Energy Agency (2000). China’s Worldwide Quest for Energy Security (France: International Energy Agency), p. 71. 22 Drifte, R. (2003). Japan’s Security Relations with China Since 1989 From Balancing to Bandwagoning? (London and New York: Nissan Institute/RoutledgeCurzon), p. 49. 23 International Energy Agency (2000). China’s Worldwide Quest for Energy Security (France: International Energy Agency), p. 22. 24 Appenzeller, T. (2004). The End of Cheap Oil, National Geographic, June 2004, (Washington: National Geographic Society), p. 89.

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world’s second largest economy, a major military power and the largest importer of natural resources and a major polluter. A preview of possible Sino–US clash in oil needs can already be detected. China’s (world’s second largest oil-consuming country after the US) fuel subsidies have been blamed for promoting environmental damage, wasteful consumption (e.g. indirect encouragement of vehicular use), and inefficient industries (particularly state enterprises). The most damning charge of all is that it is directly related to increasing oil prices for regional countries. Former American Treasury Secretary Henry Paulson persuaded China to abandon its state interventions in the energy industry which may distort bilateral trade. 16 Democratic senators also submitted a letter to George W. Bush’s administration that cited China’s controls on oil prices as a reason for globally high oil prices and urged the administration to approach Beijing for this issue. China’s controls on oil prices have sporadically created minienergy crises in the country. On 28 April 2008, an oil crisis in the south, especially across the southern province of Guangdong, forced drivers to queue for hours to fill their tanks and highways were turned into parking lots by those waiting in line. China’s efforts to raise fuel prices since late March 2006 remained insufficient to satisfy refiners serving the domestic market. Rising oil prices have made gasoline, diesel, and electricity subsidies more expensive such that sustained further subsidies may prove impossible. The strains are there, however, and on 20 June 2008 at US$130 plus a barrel, the Chinese government announced price hikes and subsidy reductions for oil products and electricity and re-established price caps on thermal coal that had earlier been freed from government control. The new hikes are the biggest in four years, pushing the base prices up by 17 percent for gasoline and by 18 percent for diesel, according to the National Development and Reform Commission. With the end of oil subsidies, companies that are unable to increase their fuel efficiency, productivity or profitability without oil subsidies would be weeded out by market factors. Trucks (sales jumped 25 percent in 2008) and heavy industries have been the central components of rising fuel (in the case of trucks, diesel demand).

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Oil price hikes have a history of causing social unrest. In end October/early November 2007, China’s state-owned oil companies blamed a scarcity of refining capacity due to price controls although members of the consuming public as well as some members of the Chinese media accused Chinese oil companies of fixing a phony crisis to force regulators to raise retail prices. Soaring oil prices forced many independent oil retail companies out of the market. The burden of making up the difference fell on the state-owned companies. Chinese oil refiners lost money due to government controls that have frozen the retail price of gasoline and diesel, preventing them from passing on soaring crude costs to consumers while authorities on the other hand rejected appeals from oil companies to raise retail prices, saying they want to avoid hurting China’s poor. Under extreme pressure from the public and the government regulator, China’s No. 2 oil company defended its efforts to meet the booming economy’s fuel needs even as diesel shortages led to rationing, public criticism of suppliers, and a gas station brawl where one man was beaten to death after cutting queue to purchase gas in Henan (a sign of growing social disorder). Worse still, shortages caused long lines at filling stations and disrupted trucking in export-driven coastal provinces. Trucking companies complained that the rationing has raised costs and delayed deliveries. But the state oil companies fought back quietly to counter Beijing’s central government pressures. Perhaps, the most important priority for the Chinese government in dealing with the aftermath of oil subsidies is the preservation of social order. Subsidy reduction transfers higher energy prices to Chinese consumers and push up costs for Chinese businesses (and many say prices of Chinese-manufactured goods exported to the global market), all of which coincides with rising inflation. Retail prices had hitherto been capped to contain inflation (more than 8 percent in China, highest in a decade) which is essential for combating social disorder. The government is also focusing on social programs to help the poor cope with the price hikes. One major way in which the working class could be served is by improving China’s public transportation system, especially in densely-populated cities; consumers

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need to be given more choices, more rail lines, more diesel engines, more hybrids. So far, because Chinese refiners had to purchase crude oil at market prices and sell their refined products at controlled state prices, the companies remained unprofitable, thus causing them to pull back from the market resulting in oil shortages. Power plants are also suffering heavy losses to burn market-price coal to generate low-priced electricity mandated by state price control creating widespread power shortages. Given the rising importance of China as an oil consumer, its increasing global impact on the energy industry and diversion of traditional sources of oil energy from the US to China, accurate information about its consumption is extremely important for foreign governments. For example, US government agencies that rely on official Chinese government statistics and GDP estimates to evaluate and predict oil demand are now demanding greater transparency. The US and the world are also trying very hard to evaluate the impact of China’s freak snow storms, the 12 May 2008 Sichuan earthquake and the 2008 Summer Olympics on China’s oil supply needs, e.g. after the Sichuan earthquake the Chinese authorities released oil from its own strategic reserves to aid in rescue efforts. Events in China can affect the world’s oil supply and its pricing. For example, to reduce pollution in Beijing in preparations for the Olympic Games 45 days before the commencement, China has turned to backup power generators that run on diesel instead of coal, driving diesel prices up. Another Olympic fallout on oil prices is also affected by the decision from China to stockpile adequate supplies of oil for the games. Very little is known about China’s strategic reserve mechanism. In February 2008, China had quietly stocked up on the first of four planned above-ground storage tanks in Zhejiang province with a reported 32 million barrels of oil. How many more storage facilities is China building exactly? Is China going to stock up no matter what the oil prices are like? Is China afraid that the West would abuse its strategic oil reserve data for military purposes? The problem, from the US perspective, is that China does not provide enough information for them to gauge China’s needs. For example, two of the biggest oil energy companies in China,

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PetroChina and Sinopec, do not disclose their corporate inventory data and stockpile priorities. Transparency is likely to be a US demand from the Chinese oil industry for years to come, just as China scrambles to cope with its own priority of maintaining social order when there are extreme oil price hikes.

APPENDIX A Table 6.1.

China’s oil import.

Year

Import (million tons)

1880 1885 1905 1920 1924 1925

0.01525 0.08326 0.40027 0.60028 (including Hong Kong, the figure is 0.700) 0.80029 1.00030 (Continued)

25 The University of California Press (2005). Sherman Cochran Encountering Chinese Networks, University of California Press website [downloaded on 1 May 2005], available at http://www.ucpress.edu/books/pages/8307/8307.ch02.html, quoting Sherman Cochran’s Encountering Chinese Networks. Almost all supplies came from Standard Oil and were mostly kerosene for oil lamps. 26 The University of California Press (2005). 27 Sherman, C. (2000). Only Kerosene for Lamp Fuel. Encountering Chinese Network (Berkeley and LA: University of California Press), p. 14. Conversion carried out using Process Associates of America, Crude Oil & Products Volume/Weight/Flowrate Conversion Factors, Process Associates of America website [downloaded on 1 May 2005], available at http://www.processassociates.com/process/basics/oil_vw.htm. 28 Sherman, C. (2000). Only Kerosene for Lamp Fuel. 29 Chen, H. (1931). Shijie de Shiyou Zhanzheng (The World Oil War) (Shanghai: The Commercial Press Industrial Series), p. 179. Includes industrial lubricants and all fuels in total. Breakdown not available. Generic term of fuel is used. Conversion carried out using Process Associates of America, Crude Oil & Products Volume/Weight/Flowrate Conversion Factors, Process Associates of America website [downloaded on 1 May 2005], available at http://www.processassociates.com/process/basics/oil_vw.htm. 30 Chen, H. (1931).

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Oil and Gas in China Table 6.1. Year 1926 1928 1929 1930 1931 Mid-1930s 1935 1936 1937 1949 1950 1951 1952 1953 1954

(Continued) Import (million tons)

0.90031 8 728 thousands of barrels of 42 US Gallons 8 360 thousands of barrels of 42 US Gallons 6 712 thousands of barrels of 42 US Gallons 6 523 thousands of barrels of 42 US Gallons 0.90032 1.00033 1.00034 1.00035 0.143 0.281 0.729 0.608 0.834 0.904 (Continued)

31

Chen, H. (1931). Xingzhengyuan Xinwenju Yinhang, Shiyou. (China: Xingzhengyuan Shinwenju), (undated) p. 10. Conversion done using Process Associates of America, Crude Oil & Products Volume/Weight/Flowrate Conversion Factors, Process Associates of America website [downloaded on 1 May 2005], available at http://www.processassociates.com/process/basics/oil_vw.htm. 33 Xingzhengyuan Xinwenju Yinhang, Shiyou. (China: Xingzhengyuan Shinwenju), (undated) p. 10. Conversion done using Process Associates of America, Crude Oil & Products Volume/Weight/Flowrate Conversion Factors, Process Associates of America website [downloaded on 1 May 2005], available at http://www.processassociates.com/process/basics/oil_vw.htm. 34 Xingzhengyuan Xinwenju Yinhang, Shiyou. (undated). Conversion done using Process Associates of America, Crude Oil & Products Volume/Weight/Flowrate Conversion Factors, Process Associates of America website [downloaded on 1 May 2005], available at http://www.processassociates.com/process/basics/oil_vw.htm. 35 Xingzhengyuan Xinwenju Yinhang, Shiyou. (undated). Conversion done using Process Associates of America, Crude Oil & Products Volume/Weight/Flowrate Conversion Factors, Process Associates of America website [downloaded on 1 May 2005], available at http://www.processassociates.com/process/basics/oil_vw.htm. 32

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Year 2004: China’s Landmark Energy Crisis 109 Table 6.1. Year 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986

(Continued) Import (million tons)

1.858 or alternative figure 0.95 1.732 or alternative figure 1.09 1.803 or alternative figure 1.80 3.259 or alternative figure 2.51 3.048 or alternative figure 3.05 3.867 or alternative figure 3.29 3.406 or alternative figure 3.60 3.061 or alternative figure 2.85 2.987 or alternative figure 2.71 2.294 or alternative figure 2.01 1.005 or alternative figure 0.04 0.474 0.007 0.001 0.010 0 0.0536 0 0 0 0 0 0.55 0.77 0.27 0.38 0.05 0.71 0.38 0.27 0.27 0.49 (Continued)

36 Wang, H. J. (1999). China’s Oil Industry and Market (The Netherlands: Elsevier), p. 230.

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Oil and Gas in China Table 6.1. Year 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 2000 2001 2002 2003

(Continued) Import (million tons)

0.55 0.93 3.62 3.18 6.53 12.46 17.23 (alternative figure: 10.0037) 13.56 18.77 24.57 38.97 (alternative figure: 36.0038) 70.0039 58.8640 69.4141 119.3642 (Continued)

37 Researchandmarkets (2005). Construction of the Sino–Kazakistan Oil Pipeline and Petroleum Market of Western China, Researchandmarkets website [downloaded on 1 May 2005], available at www.researchandmarkets.com/reports/220283/220283.htm. 38 Researchandmarkets (2005). 39 Researchandmarkets (2005). 40 Beijing Review (2005). Chinese Lawmakers, Political Advisors Concerned With Oil Security, Beijing Review website [downloaded on 1 May 2005], available at www.bjreview.com.cn/lh2003/0310-53.htm. 41 Beijing Review (2005). 42 Kwan, C. H. (2005). How to Overcome the Oil Crisis — Energy Conservation Efforts are the Key, Research Institute of Economy, Trade and Industry (RIETI) [downloaded on 1 March 2005], available at www.rieti.go.jp/en/china/04100101. html. Xinhua, China’s Oil Imports to Rise Record High, China Daily website [downloaded on 8 May 2005], available at http://www2.chinadaily.com.cn/english/doc/ 2004-11/23/content_394067.htm lists it as 23.79 million tons. http://www.bjreview.com.cn/200450/Cover-200450(B).htm gives the figure of 91 million tons. This figure includes 91.12 million tons of crude oil and 28.24 million tons of refined oil (source: http://english.sina.com/business/1/2005/0125/19113.html).

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Year 2004: China’s Landmark Energy Crisis 111 Table 6.1. Year 2004 2005

2010 2015

(Continued) Import (million tons)

110.00043 or 122.72044 148.18745 or 140.00046 126.0047 or 100.0048 439.10049 (Continued)

43

BBC News (2005). China Reports Soaring Oil Imports, BBC News website [downloaded on 1 May 2005], available at http://news.bbc.co.uk/1/hi/ business/3654060.stm. Ding Zhitao, The Weight of Black Gold, Beijing Review website [downloaded on 1 May 2005], available at http://www. bjreview.com.cn/200450/Cover-200450(B).htm projected 120 million tons for this year. 44 Guo, S. Z. (2005). Oil Refining Business in China, The Institute of Energy Economics Journal, April 2005 (Japan: IEEJ), p. 9 and Xinhua English, China’s Import of Crude Oil in 2004 Hits 122.72 Million Tons, Sina English website [downloaded on 1 May 2005], available at http://english.sina.com/business/ 1/2005/0125/19113.html. 45 Wu, K. (2005). Energy and Economic Developments in China presented at the Workshop on Implications on China’s Energy Search on 23 March 2005 at Washington DC, Center for Strategic and International Studies (CSIS) website, available at http://www.csis.org/energy/050323_ChinaEnergyWu.pdf, p. 16. Conversion done using Process Associates of America, Crude Oil & Products Volume/Weight/Flowrate Conversion Factors, Process Associates of America website [downloaded on 1 May 2005], available at http://www.processassociates.com/ process/basics/oil_vw.htm. 46 Guo, S. Z. (2005). Oil Refining Business in China, The Institute of Energy Economics Journal, April 2005 (Japan: IEEJ), p. 9. 47 Researchandmarkets (2005). 48 Zhou, Y. G. (2005). Gulf Crisis Challenges China’s Oil Strategy, Sinopolis.com website [downloaded on 1 May 2005], available at www.sinopolis.com/Archives/ TOPSTORY/ts_030227_01.htm. 49 Down, E. S. (2000). Project Air Force China’s Quest for Energy Security Prepared for the US Air Force (California and Virginia: RAND), p. 8.

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(Continued) Import (million tons)

600.00050 515.90051

Note: Conversion for 000 barrels per day (000 b/d), Henry W. H. (1999). China’s Oil Industry and Market (The Netherlands: Elsevier), p. 230, is done using this conversion website: Process Associates of America, Crude Oil & Products Volume/Weight/Flowrate Conversion Factors, Process Associates of America website [downloaded on 1 May 2005], available at http://www.processassociates.com/process/basics/oil_vw.htm. Figures for 1928–1931 come from Heroy, W. B. (1933). Petroleum, Ores and Industry in the Far East, Bain, H. F. (author) (New York: Council on Foreign Relations), p. 133. Figures for 1971–1997 comes from Henry, W. H. (1999). China’s Oil Industry and Market (The Netherlands: Elsevier), p. 230. Wang obtained his figures from International Energy Agency, OECD and Chinese Customs. Figures for 1952–1968 comes from Bartke, W. (1977). Oil in the People’s Republic of China (Montreal: McGill). Alternative figures for 1955–1965 provided by Ling, H. C. (1975). The Petroleum Industry of the People’s Republic of China (Stanford: Hoover), p. 32. Figures for 1949–1951 and 1969–1970 comes from Smil, V. (1976). China’s Energy (NY, Washington and London: Praeger), p. 119. Smil’s figures also matches Wang in the years 1952–1954, 1956–57, 1959. His figures for 1955, 1958, 1960–1970 are as follows:

50 Ding, Z. T. (2005). The Weight of Black Gold, Beijing Review website [downloaded on 1 May 2005], available at http://www.bjreview.com.cn/200450/ Cover-200450(B).htm. 51 Energy Information Administration (EIA) (2005). Energy Infocard — United States, EIA website [downloaded on 1 May 2005], available at www.eia.doe. gov/kids/infocardnew.html. Conversion done using Process Associates of America, Crude Oil & Products Volume/Weight/Flowrate Conversion Factors, Process Associates of America website [downloaded on 1 May 2005], available at http:// www.processassociates.com/process/basics/oil_vw.htm.

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Year 2004: China’s Landmark Energy Crisis 113 Table 6.2. tons).

Vaclav Smil’s alternative figures (in million

1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970

0.143 0.281 0.729 0.608 0.834 0.904 1.589 1.732 1.803 2.507 3.048 2.963 2.928 1.856 1.408 0.505 0.038 0.040 0.007 0.001 0.010 0

Source: From Smil, V. (1976). China’s Energy (NY, Washington and London: Praeger), p. 119.

Table 6.3. Year 1949 1950 1951 1952 1953 1954. 1955 1956 1957 1958 1959 1960

Chinese oil demand. Demand (million tons) 0.26 0.48 1.04 1.05 1.45 1.69 1.82 or 2.84 2.10 or 3.89 2.27 or 4.16 3.08 or 5.50 4.22 or 7.63 4.95 or 9.08 (Continued)

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Chinese oil demand. Demand (million tons) 8.7852 9.00 10.00 10.81 11.31 13.08 14.30 15.90 17.60 25.80 35.90 30.9653 or 41.70 51.54 43.7 or 58.60 49.7 56.4 64.1 72.8 82.6 93.9 106.7 121.2 137.7 156.3 177.7 154.000 153.950 163.940 172.610 190.390 179.910 203.126 209.493 217.615 221.018 228.757 240.502 or 270.00054 or 314.00055 (Continued)

52

From Smil, V. (1976). China’s Energy (NY, Washington and London: Praeger), p. 138. Ling, H. C. (1975). The Petroleum Industry of the People’s Republic of China (Stanford: Hoover), p. 44. 54 www.nuclear.com/nation-by-nation/China_news.html derived from http:// english.people.com.cn/200403/24/eng20040324_138304.shtml. 55 Guo, S. Z. (2005). Oil Refining Business in China, The Institute of Energy Economics Journal, April 2005 (Japan: IEEJ), p. 9. 53

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(Continued)

Year

Demand (million tons)

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2020 2025 2026 2027

246.155 or 320.0056 384.189 411.631 439.073 455.538 472.003 or alternative figure 320.00057 482.980 515.911 537.865 548.841 658.610 817.77358 or 450.0059 658.600 (approx)60 or 702.50061 669.600 (approx)62 686.100 (approx)63 (Continued)

56

Guo, S. Z. (2005). www.bjreview.com.cn/200422/Business-200422(C).htm. 58 Wu, K. (2005). p. 13. 59 www.garnertedarmstrong.ws/Mark_Wordfroms/manews0018.shtml. 60 www.iea.org/textbase/speech/2005/jl_china.pdf (Conversion done using http:// www.processassociates.com/process/basics/oil_vw.htm), Rough estimate read off an imprecise chart. 61 www.eia.doe.gov/emeu/cabs/china.html. Conversion done using Process Associates of America, Crude Oil & Products Volume/Weight/Flowrate Conversion Factors, Process Associates of America website [downloaded on 1 May 2005], available at http://www.processassociates.com/process/basics/oil_vw.htm. 62 www.iea.org/textbase/speech/2005/jl_china.pdf (Conversion done using Process Associates of America, Crude Oil & Products Volume/Weight/Flowrate Conversion Factors, Process Associates of America website [downloaded on 1 May 2005], available at http://www.processassociates.com/process/basics/oil_vw.htm), Rough estimate read off an imprecise chart. 63 www.iea.org/textbase/speech/2005/jl_china.pdf (Conversion done using Process Associates of America, Crude Oil & Products Volume/Weight/Flowrate Conversion Factors, Process Associates of America website [downloaded on 1 May 2005], available at http://www.processassociates.com/process/basics/oil_vw.htm), Rough estimate read off an imprecise chart. 57

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(Continued) Demand (million tons)

713.500 (approx)64 724.500 (approx)65 740.900 (approx)66 or 548.80067

Source: Henry, W. H. (1999). China’s Oil Industry and Market (The Netherlands: Elsevier), p. 270. 1993–1997 are actual figures. 1998–2005 are forecast figures. Figures for 1955–1962 come from Chu-yuan, C. (1976). China’s Petroleum Industry (New York, Washington and London: Praeger), p. 179. Figures for 1974–1985 come from Chu-yuan, C. (1976). China’s Petroleum Industry (New York, Washington and London: Praeger), p. 187. Figures given for this period are in millions of metric tons. Figures for 2006–2015 are read off the charts approx and they are from Wu, K. Energy and Economic Developments in China presented at the Workshop on Implications on China’s Energy Search on 23 March 2005 at Washington DC, Center for Strategic and International Studies (CSIS) website, available at http://www.csis.org/energy/050323_ChinaEnergyWu.pdf, p. 9. Conversion done using Process Associates of America, Crude Oil & Products Volume/ Weight/Flowrate Conversion Factors, Process Associates of America website [downloaded on 1 May 2005], available at http://www.processassociates.com/ process/basics/oil_vw.htm. Alternative figures for 1955–1960, 1963–1971, 1974 are provided by Smil, V. (1976). China’s Energy (NY, Washington and London: Praeger), p. 138. Figure for 1961 and 1973 provided by Smil, V. (1976). China’s Energy (NY, Washington and London: Praeger), p. 138. Smil is in agreement with Cheng Chu-yuan on the figure for 1962.

64 Logan, J. (2005). Hearing on EIA’s Annual Energy Outlook for 2005 Committee on Energy and Natural Resources U.S. Senate 3 February 2005. Testimony of Jeffrey Logan, Senior Energy Analyst and China Program Manager. International Energy Agency Energy Outlook for China: Focus on Oil and Gas, International Energy Agency (IEA) website [downloaded on 1 May 2005], available at www.iea.org/ textbase/speech/2005/jl_china.pdf (Conversion done using Process Associates of America, Crude Oil & Products Volume/Weight/Flowrate Conversion Factors, Process Associates of America website [downloaded on 1 May 2005], available at http://www.processassociates.com/process/basics/oil_vw.htm), Rough estimate read off an imprecise chart. 65 Logan, J. (2005). 66 Logan, J. (2005). 67 Staffer, Z. O. (2005). China to Challenge World Energy Market in the Energybulletin website [downloaded on 1 May 2005], available at www.energybulletin.net/3811.htm.

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Chapter

7 The New Energy Superpower’s Internal Debates: Development or Environmentalism? The negative effects and byproducts caused by energy consumption, which it has created in terms of smog, air pollutants, acid rain, depletion, and global climate change and the threat that it presents to future generations of Mankind have seen the rise of the post-industrial bloc with its focus on environmentalism, changing mindsets, and cultural shifts away from industrial/modernization lifestyles. Daniel Yergin argues that the oil industry which had been “proud of its technological prowess and its contribution to shaping the modern world, finds itself on the defensive”.1 Other than the focus on the damage created by industrialization to the environment, the post-industrial movement also focuses on conservation, to use resources like oil, wisely, and not waste them,

1 Yergin, D. (1991). The Prize The Epic Quest for Oil, Money and Power (NY: Simon and Schuster), p. 15.

117

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so that there will be enough for economic growth.2 Vaclav Smil’s works fall into this category with his landmark publication The Bad Earth, a cautionary tale that pointed out the tendency for “foreign enthusiasts, admirers, fellow travelers, and naïve visitors”3 to be disappointed with [former] Communist societies in its introduction. This writing on deforestation and environmentalism complements his other works on the Chinese oil industry. In The Bad Earth, Smil also points to the heightened increase of motor vehicles causing pollution with “millions of new vehicles of all sorts will be added before the year 2000” and “tens of millions of Chinese city dwellers will continue to suffer from excessive concentrations of hydrocarbons, nitrogen oxides, ozone, and oxidants”.4 China, to Smil, was a post-industrial environmental nightmare. In his updated book published in 2004, Chinese energy critic Smil sounds a little more conciliatory. While he acknowledges Chinese efforts in cutting down pollution such as Beijing’s conversion to leadfree gasoline and its proliferation to all major cities in China by 2000,5 Smil continues to detect problems and pinpoints faults with Chinese energy consumption. Smil argues that China is using too much energy to satisfy its current demand and cited Staliniststyle enterprises with little concern for optimizing energy use 6 as well as ground level details like the lack of adequate household insulation and double-glazed windows.7 The difference in energy worldview between developed Western nations like the US and a rapidly developing country like China is partly due to their differing stages of development and economic priorities. Modernization advocates tend to view environmental 2 Dryzek, J. S. (2005). The Politics of the Earth (New York: Oxford University Press), p. 14. 3 Smil, V. (1984). The Bad Earth: Environmental Degradation in China (Great Britain: ME Sharpe Inc Zed Press), pp. xi–xii. 4 Smil, V. (1984). p. 126. 5 Smil, V. (2004). China’s Past, China’s Future Energy, Food, Environment (London: RoutledgeCurzon), p. 21. 6 Smil, V. (2004). p. 23. 7 Smil, V. (2004). p. 24.

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concerns as functionally distinct and separate from industrial development. Many Chinese writers, on the other hand, are more focused on quantitative modernization. They argue that China needs to enjoy the fruits of modernization first while trying to cater as far as they can to issues like environmentalism. It is not that the latter does not exist in modernization theorist planning but industrialization needs to be completed first before post-industrial concerns can be addressed fully and adequately. When China embarked on its reforms after the 1972 Nixon rapprochement, it was impressed by the management and technological advancements of Western countries, including Japan, and was convinced that continuation of modernization priorities like industrialization, albeit an export-oriented one with selective technological transfers, was the direction that the country should adopt. China was keen on a new and leaner model of development to supplant hitherto Stalinist heavy industrialization. In other words, while Western countries and Japan were just embarking on notions of postwar deconstructionist notions, China’s exposure to Japanese and Western technologies and economic development served to reinforce their faith in modernist goals. They were determined to catch up with Japan and the West. At the start of the post-1979 modernization process, postindustrial concerns like the environment are few and far in the study of the Chinese oil industry. Many made a passing remark by including some statistics on carbon emissions or other scant references to the environment. Part of the reason for this tokenism is simply the inadequate facilities to make the analyses. As a late entrant into the global market economy with its recent emergence out of isolationism, the development of the Chinese oil industry did not parallel these developments in the advanced market economies and societies. In the 1970s, the Chinese oil industry was barely adjusting to limited international trade and turnkey projects in industrialization while in the 1980s, reforms were just beginning to adapt the industry to market competition and privatization. For example, when the Club of Rome, an international organization made up of industrialists, politicians, and academics, came up with a set of projections churned

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out by computers on the future of the globe in 1972 in the international bestseller The Limits to Growth,8 China was only just being reintroduced into the world community and had to wait until Dengist reforms almost a decade later for its rudimentary introduction into the global market economy. Thereafter, by the mid-1980s, the post-industrial environmental discourse in the West, particularly in leading European nations like Germany, was already highly-developed, evolving into a doctrine harmonized with economic development as opposed to their dichotomous binary in the 1970s. A popular dominant environmental discourse that arose in the first half of the 1980s was “ecological modernization” which postulates that environmental degradation is seen as a structural problem that requires a reorganization of the economy with conscious and coordinated efforts to bring about reforms and the restructuring of the capitalist economy.9 While German environmentalists were arguing for state intervention and coordination in environmental protection, the Chinese oil industry reformers were arguing for privatization, market-orientation, and further high-speed economic growth at the same time. Such efforts on high-speed growth sustained themselves even a decade later in the 1990s when the focus on Chinese industrial development remained predominantly on economic and material growth and the uplifting of people’s well-being, very much industrialist in outlook. In the 1990s, reforms in the Chinese economy were beginning to bear fruit as the country experienced rapid economic growth and Chinese people were beginning to enjoy higher incomes and material comfort. Consequently, modernization theory and values were being validated. In the West, however, environmental discourses became increasingly radicalized with the industrial society and modernization reconstructed as being only “semi-modern”, satisfying only the criteria of rational social development and other redistributive issues but faulted for failing to take into account environmental risks.10 In other 8

Dryzek, J. S. (2005). p. 25. Dryzek, J. S. (2005). p. 167. 10 Dryzek, J. S. (2005). p. 175. 9

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words, there was chronological dissonance between prioritized development in China and societal/civil movements in the West and the divergence has widened considerably since the 1970s. Quantifiable developmentalism remained very important for China, and in the words of a contributor to the PRC oil literature, Zhongguo Teda Qiye Zhuanlue (A Brief Biography of China’s Extra Large Enterprises) published by the Guojia Tongjiju Gongjiaoshi (National Statistical Bureau) and the Xinhuashe Guoneibu Gongye Bianjishi (Xinhua News Agency National Industries Editorial Department) in 1990, the positive numbers of large enterprise development like Daqing “rouses people (lingren zhenfen de shuzi).”11 Most Nationalist and PRC literature showed a preference towards using Tayloristic, rationalistic (helihua), and Fordist approaches in conceptualizing Chinese oil industrial development and achievements. Even socialist doctrines and tenets are tapped to enhance industrial rationalism.

POST-INDUSTRIALISM On the other side of the development/modernization theorists divide were the advocates of post-industrial values. For most of the century, oil and the industrial progress that it brought has almost been universally celebrated as a sign of civilization and industrialization, one of the main pillars fuelling modernization theories. There seems to be two main angles in pursuing post-industrial concerns that may be relevant to the Chinese oil industry, the post-industrial technological bent and the environmental shift away from unmitigated materialism. Post-industrial technologists like Daniel Bell visualized sunrise cutting-edge industries as distinct from heavy extractive industries like the oil industry. He characterized new modes of production as 11

Guojia Tongjiju Gongjianshi (National Statistical Bureau) and Xinhuashe Guoneibu Gongye Bianjishi (Xinhua News Agency National Industries Editorial Department) (1990). Zhongguo Teda Qiye Zhuanlue (A Brief Biography of China’s Extra Large Enterprises) (China: Hualingchubanshe), p. 2.

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having four characteristics: a shift away from mechanical to electronic mode of production, miniaturization or shrinkage of machine parts, digitalization or the representation of information by digits, and software-orientation or a move away from stand-alone machines units to computer-language driven processing functions.12 All four transformations alienated industrial modernity and modernization which had driven China’s quest for self-reliance and institutionalization from prewar to wartime to postwar Nationalist and Communist regimes for most of the 20th century. Interestingly, when Bell’s book came up in 1973 and was exposed to intense debate in the developed West, post-Cultural Revolution China was just discovering a market-driven production view of modernity and modernization. Post-industrialism is concerned with conflict management and sustainability of resources and its anxieties are pinned to population growth and industrial development consuming more resources like oil far more than what the environment can provide. It is also concerned with alternative fuels, and cooperation between people to use what is left of the world’s resources efficiently, equitably, and rationally. Perhaps, one of the most important focus of post-industrial advocates is ethical consciousness that warns all options for combating scarcity of resources would not be adequate unless there is a change of thinking. Bio consciousness is in fact already a well-developed doctrine in environmental discourses with an emphasis on individuals learning to become “respectful citizens of an ecological place, rather than transforming the place to suit themselves” and display sensitivity towards other species as well as future generations of Mankind.13 Another source of intense post-industrial environmental study on China’s oil industry comes from the Western media which are concerned with the scale of China’s industrialization and its impact on the global environment. These journalistic writings are usually filled with doomsday scenarios and impressionable comparisons.

12

Bell, D. (1999). The Coming of Post-Industrial Society (NY: Basic Books), p. xxxiv–xxxvi. 13 Dryzek, J. S. (2005). The Politics of the Earth (New York: Oxford University Press), p. 189.

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In addition to highlighting China’s increases in oil consumption in quantitative terms, international media also focuses on the inefficiency in Chinese consumption of oil. An example is The New York Times report on Chinese energy consumption dated 14 March 2004, the article appearing in the year delineating China’s energy crisis. In the report, Scott Roberts, chief representative in the Beijing office of the Cambridge Energy Associates, pointed out that the worst Chinese offenders in terms of inefficient energy consumption wasted 70 percent more energy than their counterparts in the US and that China’s consumption of electricity grew by 15 percent in 2003, an increase in consumption equivalent to the total power consumption in Brazil.14 Using the language of comparison now popular amongst Sinologists, Roberts added that China was “adding a middle-sized country every two years in terms of energy consumption”.15 By the time post-industrialism had been accepted as a main discourse in the West, China was only beginning to make spectacular progress in production-based materialist modernization and industrialization. There was dissonance in developmental expectations of both societies. The ordering of knowledge and facts into distinct comprehensible packages and the attack on the status quo and preexisting structures of economic indicators and industrial benchmarks have dichotomized Chinese and Western industrial worldviews. According to Bell, it is possible to trace and chart the development of technologies and classify them into a gradualist evolutionary hierarchy of industrial evolution in technologies. It starts from resource base (agrarian and extractive industries) and goes on to light manufacturing (e.g. textiles and shoes), to heavy industries (e.g. steel, shipbuilding, automobile, and engineering) and on to high-tech (e.g. instruments, optics, micro-electronics, computers, and telecommunications), and then the future (science-based biotechnology, materials science, space stations, and satellites).16 14 Yardley, J. (2004). China’s Economic Engine Needs Power (Lots of It), The New York Times, 14 March 2004, p. 3. 15 Yardley, J. (2004). 16 Bell, D. (1999). p. lxxiii.

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Bell argues that the developed world had entered the high-tech stage with Japan and the US leading in the information age17 towards the futuristic technologies while the rest of the world were still in agriculture, light manufacturing, and heavy industries. To the post-industrialists, the factors needed for China to move up the technological hierarchy were absent when the West embarked on a post-industrial world.18 The first ingredient needed to become a post-industrial society was domestic peace and stability for investors to anticipate and expect rewards for their entrepreneurial ventures. This was not possible in early reformist China whose pre-reform era political stability was undermined by massive campaigns like the Cultural Revolution. The second factor was a large entrepreneurial, engineering, technical, and skilled worker class to create and manufacture products, something difficult with pre-1979 state-ownership of the economic superstructure which did not allow private ownership by entrepreneurs. The Chinese entrepreneur class was just slowly emerging in the 1980s and 1990s and had not formed a definitive social class with its own resources. The third feature was a quality educational system to train individuals in literacy and numeracy for the understanding of new technologies. In China, exposure to new technologies was limited due to American embargo until 1972 and Soviet hostilities in most of the Cold War period. As such, the catchup period in China and its oil industry were stunted in the pre-21st century scenario. Thus, in the early post-industrial society in the West, China was still caught up in a heavy Stalinist industrial stage as compared to developed countries which had gone through the evolutionary process in the technological hierarchy. In fact, societies with mainly extractive mode of production (e.g. mining) were still classified as “pre-industrial” although “created energy” in the form of oil was classified under industrial fabrication.19 17

Bell, D. (1999). p. lxxii–lxxiii. Bell, D. (1999). p. lxxiii. 19 Bell, D. (1999). p. lxxxv and lxxxvii. 18

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In the other interpretation of the industrial–post-industrial divide, environmental discourses are said to have arisen from industrial society within the context of the dominant discourse of industrial society known as industrialism.20 Industrialization shows an “overarching commitment to growth in the quantity of goods and services produced and to the material well-being that growth brings”.21 The consumption patterns of the Chinese middle class have symbolized their increased ownership of products of modernity like the color television which rose from one urban Chinese household in five owning a set in 1985 to more than one in each average home in China.22 The Chinese economy expanded by 93 percent between 1990 and 1996, producing an explosive demand for automobiles, home appliances, and other consumer products.23 Monitoring China’s electrical appliances consumption as an indication of the country’s energy use is not new and has been employed by world organizations like the UN. A UN-affiliated study on China’s energy industry indicated that “since 1980, the number of electrical appliances has skyrocketed: the average number of electric fans per 100 households increased from 6.4 in 1981 to 42.6 in 1984; of washing machines from 6.3 to 40.1; of refrigerators from 0.22 to 3.2”.24 One common concern (and often used as a benchmark) for China’s energy consumption is automobile usage. In market reformist China, with its economy opening up, vehicle ownership increased dramatically, one of the most dramatic change in numbers was 89,000 trucks in 1983 compared to 17,000 in the 20

Dryzek, J. S. (2005). p. 13. Dryzek, J. S. (2005). p. 13. 22 Klare, M. (2001). Resource Wars (New York: Metropolitan Books), p. 16. 23 Klare, M. (2001). p. 16. 24 Mao, Y. S. (1990). Economic Reform: Effects on Energy, Energy in China, Ashok, V. D. (ed.), (New Delhi: International Development Research Centre and United Nations University), p. 55. 25 Zhu, Y. Z. (1990). Demand, Supply and Economics of Energy in China, Energy in China, Ashok, V. D. (ed.) (New Delhi: International Development Research Centre and United Nations University), p. 13. 21

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previous year.25 A decade later, in a UN-affiliated report published in 1990, it was noted that freight traffic increased by 15 times from 1953 and passenger traffic by 10 times.26 In the same report, energy efficiency also became an issue. For example, commercial vehicles such as truck fleets are 89 percent owned by individual enterprises with the rest by transportation firms.27 The concern was that those owned by individual firms which showed the fastest growth were using petroleum less efficiently than those belonging to transportation firms due to reasons of bad maintenance.28 In 1990, the problem is compounded by the fact that the government was under pressure to allocate more trucks to the individual firms due to shortage in supply from the transportation companies.29 Other factors have also contributed to the inefficient use of energy, including the quality of highways and roads. As late as 1990, less than 20 percent of China’s roads were paved with asphalt and were poor in quality affecting the efficient use of fuel by cars using these roads.30 The problem was that the price of asphalt was kept artificially low to promote road construction but this faced opposition from the refineries who would rather sell asphalt as boiler fuel than sell it for road construction at the prices kept low by the authorities. Such concerns written in UN-affiliated reports by Chinese academicians intimate with the Chinese oil industry reflected post-modernist ponderings. Another source of fuel inefficiency related to the transportation sector up to the 1990s was that gasoline rations tied to car registration was encouraging people to keep old cars because of their privileged ratio of gasoline and discouraging the use of newer cars

26

Zhu, Y. J. (1990). p. 12. Mao, Y. S. (1990). Economic Reform: Effects on Energy, Energy in China, Ashok V. Desai (ed.) (New Delhi: International Development Research Centre and United Nations University), p. 58. 28 Mao, Y. S. (1990). p. 58. 29 Mao, Y. S. (1990). p. 58. 30 Mao, Y. S. (1990). p. 58. 27

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that are more fuel efficient.31 But, 1990 was just the tip of the iceberg as the retention of old cars was compounded with new car consumption, with three times more cars in 1997 at 1.6 million vehicles than the level in 1990.32 The real crunch will come in the early 21st century when 300 million Chinese reach the level of earning more than USD$2000 per year, sparking off car-buying as a symbol of economic prosperity.33 This is expected to increase fuel consumption by vehicles. Other analysts, however, mitigate this view by arguing that an ordinary Chinese owning a car was difficult in the late 1990s where, even in 1997, buying an ordinary domestically-made car would cost them 25–50 years’ worth of income.34 With the rise of the environmental movement, the merits of industrialization and modernization have been increasingly questioned and criticized. Industrialism, modernity, and conceptualizations of energy underpinning progress are seen by postindustrialists as still being primarily concerned with the distribution of material rewards rather than about equitable allocation and distribution of risks. The underlying assumption behind post-industrialism depicting China as the “world’s fast-growing economy”35 and its voracious appetite for electrical appliances is that China may potentially upset the existing world energy system. On the other hand, modernists note that rapid economic development raised the standards of living in Chinese coastal cities and generated a middle class in China who desire the same material benefits as the middle class of any developed nations.

31

Mao, Y. S. (1990). p. 59. Wang, H. J. (1999). China’s Oil Industry and Market (The Netherlands: Elsevier), p. 171. 33 Klare, M. (2004). Blood and Oil (New York: Metropolitan Books), p. 167. 34 Wang, H. J. (1999). p. 173. 35 Klare, M. (2004). p. xv. 32

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8 Conclusion — Alternative Energy Trends, Conservation, and Renewing Old Resources? The idea of associating shortage with environmentalism really only arose in the 21st century in China with the rise of its fourth generation of leaders under the leadership of President Hu Jintao. This new generation of technocratically-oriented leaders generated the profound debate about future path for Chinese development initiated in 2003 by the fourth generation of leaders based on the concept of “jieyue shehui ” (conservation-minded society), which is the energy and resources leg of the broader “kexue fazhanguan” (scientific development concept).1 Even as late as 2000, the International Energy Agency (IEA) corroborates the view that China’s energy policies are output-oriented in

1

Constantin, C. (2005). China’s Conception of Energy Security: Sources and International Impacts, dated March 2005, Working Paper No. 43, University of British Columbia Center of International Relations website [downloaded on 10 July 2006], available at www.iir.ubc.ca/Papers/Constantin-WP43.pdf, p. 6. 129

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its report titled China’s Worldwide Quest for Energy Security. The report noted “the national government does not trumpet its environmental concerns in its dialogue with the outside world” and “Beijing is sensitive to foreign criticism of its environmental policies”.2 The report seems to suggest that environmentalism is usually in the form of political rhetoric: “Official pronouncements and documents on energy policy now almost always contain some words about environmental impacts.”3 Commentators like Christian Constantin argue that the paradigm shift within the Chinese top leadership in managing the Chinese oil industry arose from the ideational and formative experiences of the fourth generation Chinese leaders: “They are not expected to adhere strongly to ideological formulas because of the political disillusionment engendered by their participation in the Cultural Revolution”4 and this resulted in “in a flurry of state-sponsored narrative on sustainability ”.5

This was contrasted with third generation leaders who were inculcated with Daqing-ism and the sense of extreme crisis within the industry from wartime Yumen to postwar Daqing: “In contrast, many members of the third generation had their formative experiences during the 1970s and 1980s in the centralized energy sector and remained close to the three major state-owned oil enterprises (SOOE), the power industry companies and coastal regions that have benefited the most from the 1990s’ growth-oriented development.”6

Because of these environmental factors, Constantin argues that the fourth generation of Chinese leaders under President Hu opted

2

International Energy Agency (2000). China’s Worldwide Quest for Energy Security (France: International Energy Agency), p. 27. 3 International Energy Agency (2000). p. 27. 4 Constantin, C. (2005). p. 9. 5 Constantin, C. (2005). p. 16. 6 Constantin, C. (2005). p. 9.

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for sustainable development of resources rather than the emphasis on raw output under a pure self-reliance, self-sufficiency doctrine: “As a result they are seen as likely to be more open-minded and while they might be supportive of market oriented reforms, they will remain cautious, in part because of their experience with the plight of poor, rural areas. This formative experience might account for the emphasis on sustainable or “balanced” development that the new leadership has adopted as its economic creed.”7

Ma Kai — the PRC State Council’s Minister of the National Development and Reform Commission — China’s top planner, is representative of the technocratic fourth generation leaders in China. In a speech to the Chinese National Assembly Ma Kai stressed the importance of the construction of a “conservation-minded society” as the way to sustainable, scientific development.8 Although this term had been used before in the Tenth Five-Year Plan, it proliferated only after this speech and the numerous articles dedicated to the concept published in the People’s Daily at end 2003.9 Constantin lays out the new environmental paradigm of sustainability: “According to this new policy, energy security means guaranteeing access to the energy resources needed for economically and socially sustainable development while ensuring that the production and use of these resources do not impact negatively on the environment. For instance a “Staff Commentator” article written in the People’s Daily argued that enhancing energy conservation and improving the energy structure of the Chinese economy are not only the best ways to decrease energy consumption, protect energy security, increase economic returns and protect the environment but they represent the only possible way to realize the construction of a well-off society by 2020. In order to reach this ideal, this approach calls for the government (1) to encourage the propagation of a sense of conservation (jieyue yizhi), (2) to reinforce its planning and macroinstruments, (3) to perfect the related legal standards, regulations and overseeing system, (4) to accelerate the adjustment of the energy structure, (5) to accelerate 7

Constantin, C. (2005). p. 9. Constantin, C. (2005). p. 17. 9 Constantin, C. (2005). p. 17. 8

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Oil and Gas in China technological innovation, (6) to foster political and systemic innovation, and (7) to push forward the objective of a “circular economy” (xunhuan jingji)”.10

He adds: “In addition, it stresses the need for an adjustment and an optimization of the energy structure, calls for more geographic rationalization and coordination among energy projects, emphasizes the need for China to use domestic resources as well as those offered on the international market, recommends that supplies should further rely on energy-related technological innovations, calls for the state to enhance environmental protection, suggests that energy security be ensured through the diversification of supplies, and pushes for market mechanisms to be fully used through further reform of the energy sector. Along this perspective, even oil security acquires a new sense since it must be viewed in terms of sustainable development, substitution fuels, and conservation in addition to the traditional concerns with supplies”.11

In other words, this is a more comprehensive conception of energy security as it attends to supply, production, and waste and places oil in a larger energy perspective. In fact, according to the China Daily, “the ultimate goal is to replace fossil fuels with recycled energy”. Constantin also compares the “China’s Medium and Long-Term Energy Development Plan, 2004–2020” approved on 30 June 2004 and the “Tenth Five-Year Plan” of 2001 and pointed out the stark difference between the two with the former plan reflecting the new aims of the fourth generation leadership of sustainability/environmentalism/conservation and the latter plan focusing on output and oil supply.12 Despite the divergence in emphasis, Constantin argues that the Chinese planners were still able to reconcile conversation/ sustainability with the age-old self-reliance and self-dependency doctrine: “For the new leaders, this “non-traditional” conception of energy security has some obvious advantages over the former, “strategic” conception of the 10

Constantin, C. (2005). p. 17. Constantin, C. (2005). p. 18. 12 Constantin, C. (2005). p. 18. 11

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1990s. First, it dovetails with the priority given to decreasing reliance on the international energy markets whereas the Go-Out and energy diplomacy tactics entailed reliance on seemingly unsafe sea lines of communication and on unstable governments. It also allows Party theoreticians to locate it in a larger body of knowledge and theory that stress the importance of national self-reliance”.13

Self-reliance/self-dependency is not the only age-old element that will be reconciled with ideas of environmentalism in the oil industry. The traditional state-centeredness and centralization feature of the Chinese oil industry is also subsumed within this concept. Constantin highlighted: “The last aspect of the traditional approach to energy security, the central position given to the state still holds true. Given China’s regime type, the continuing extensive economic role of the state and the intimate relationship between the state and the country’s biggest oil corporations, it would be surprising to see energy supplies completely left to the market in China. Indeed, the ambitious economic re-engineering plan set up by the new leadership team calls for the use of all the state instruments — propaganda, taxes, regulations, etc. — available to gear the economy toward more energy conservation and efficiency. Without state involvement this strategy cannot succeed. In fact, it is likely that if left to the market China’s energy mix would just follow the patterns of more liberalized economies and go for the cheapest fuel, which means, in China, coal for the production of electricity and imported oil for transportation. For reasons of supply security and environmental security, both options are seen as risky and unsustainable by the Chinese government”.14

The IEA hinted at the future of China’s environmentalism in their report titled China’s Worldwide Quest for Energy Security: “Yet national standards and a fair amount of environmental legislation do exist, and the government is well aware that pollution levels in Chinese cities approach crisis proportions”.15 It hinted at the fact that the authorities in Beijing realized that change needed to start with 13

Constantin, C. (2005). p. 18. Constantin, C. (2005). p. 39. 15 International Energy Agency (2000). p. 27. 14

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moving the bureaucracy away from past practices: “The main problem is changing, throughout the population and within the bureaucracy, the ingrained environmentally unsound habits of the former command economy”.16 Scientific management which had hitherto been output-oriented started to take on additional dimensions of environmentalism in a process which eventually gained top political attention in the early 21st century. In fact, this concerted push for energy environmentalism came fairly recently in 2003. Chinese academicians intimate with the Chinese oil industry like Mao Yushi started writing about energy efficiency in UN-affiliated publications in 1990. Thus, both modernist and post-industrial concerns may eventually converge in the Chinese oil industry, especially after China’s economic reforms began to mature. There are also signs that China is making headway in the environmental realm, starting with tighter emission standards by 2005 and, by 2008, putting in place emission standards that are tougher than the US.17 By the end of the 21st century, China seems to be leading the way in the fight against environmental destruction. China is quietly emerging as a global force in renewable-energy technologies. China which currently gets 8 percent of its energy from renewable sources has an official target to increase that to around 15 percent by 2020.18 There are many examples of Chinese implementation of environmentalism. Solar water heaters can be seen on the roofs of remote village homes and endless lines of new urban apartments. The Chinese private sector is also getting into the act of going green. Former US vice-president Al Gore recently presented Chinese firm Daxu, the makers of a coal-burning stove, with an Ashden Award

16

International Energy Agency (2000). p. 27. Wonacott, P., Whalen, J. and Bahree, B. (2003). Balance of Power China’s Growing Thirst for Oil Remakes the Global Market, The Wall Street Journal, Wednesday, 3 December 2003, Vol. CCXLII, No. 109, p. A6. 18 Seapsnet (2007). Going Green-Energy Security and Climate Change, dated 16 October 2007, Singapore Institute of International Affairs (SIIA) website [downloaded on 1 November 2007], available at http://www.siiaonline.org/ news_highlights?wid=171&func=viewSubmission&sid=1419. 17

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which promotes world-leading sustainable technologies.19 Other Chinese firms are also beginning to dominate the market for other environmentally friendly technologies like solar. Jiangsu-based Suntech Power is one of the world’s leading makers of equipment that turns sunlight into electricity. Other than alternative energy sources and energy conservation, China is also exploring the option of reinvigorating old energy resources in China. One of these facilities is the Japanese Occupationera Fushun oil shale. Oil shale is defined as a “fine-grained sedimentary rock containing organic matter that will yield substantial amounts of oil and combustible gas upon destructive distillation”.20 Because the Fushun oil shale is delineated by a flat coal bed, it was highly extractable with 5–6 percent recoverable oil at low costs.21 Contemporary estimations of the Fushun oil shale place it at 48–190 m in thickness.22 These measurements differ from different sections of the oil shale. For example, the average thickness of the Jijuntun Formation at Fushun is estimated to be 115 m (within a range of 48–190 m).23 In Chinese terminology, the oil shale layer is known as “brown combustible shale”.24 The shale formation can be divided into two sections of varying content: the lower 15 m of light-brown oil shale is lower-quality and the upper 100 m layer of brown to dark-brown consists of finely laminated oil shale.25 The oil percentage of the lightbrown shale is lower than 4.7 percent by weight while the brown to

19

Seapsnet (2007). Dyni, J. R. (2003). Geology and Resources of Some World Oil-Shale Deposits, Oil Shale, Vol. 20, No. 3 (Estonia: Estonian Academy Publishers), p. 193. 21 Wang, K. P. (1977). Mineral Resources and Basic Industries in the People’s Republic of China (Colorado: Westview Press), p. 113. 22 Dyni, J. R. (2003). p. 214. 23 World Energy Council (2004). Survey of Energy Resources, World Energy Council website [downloaded on 30 March 2004], available at www.worldenergy.org/ wec-geis/publications/reports/ser/shale/shale.asp. 24 World Energy Council (2004). 25 World Energy Council (2004). 20

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dark-brown layer grade is higher than 4.7 percent in oil content.26 This content percentages again vary; depending on the exact location of the deposit, the maximum oil content can be as high as 16 percent.27 It has been reported that the average oil content is 7–8 percent which would produce approximately 78–89 liters of oil per ton of shale oil (at 0.9 specific gravity conditions).28 Historically, extraction was first started by the Japanese. Between 1948 and 1952, the PRC quickly rebuilt production facilities in Fushun29 and quickly expanded the national number of oil personnel and equipment from 18 geologists with eight drilling machines to 6000 geologists with a few hundred drilling machines in 1955.30 The PRC government also developed more advanced methods of oil shale extraction with technology imported from the former Soviet Republic of Estonia (which then possessed some of the world’s most advanced oil shale extraction technologies due to the presence of a large extractable oil shale there).31 In the immediate postwar years, Fushun refinery No. 1 had 200 retorts equipping with a daily output of 100–200 tons of oil shale per day. This was augmented by Fushun refinery No. 2 in 1954.32 Then, in Fushun refinery No. 3, shale oil became hydrotreatable for producing light liquid fuels.33 High production was reached in China between 1958 and 1960 when as much as 24 million metric tons of oil shale per year were mined at Fushun.34 Table 8.1 shows the overall rapid development of shale oil in China under the PRC government and how it remains as the second 26

World Energy Council (2004). World Energy Council (2004). 28 World Energy Council (2004). 29 Cheng, C. Y. (1976). China’s Petroleum Industry (New York: Praeger), p. 2. 30 Cheng, C. Y. (1976). p. 3–4. 31 Wang, K. P. (1977). p. 113. 32 World Energy Council (2004). 33 World Energy Council (2004). 34 Dyni, J. R. (2004). Oil Shale, Energy Minerals Division (American Association of Petroleum Specialists) [downloaded on 30 March 2004], available at http:// emd.aapg.org/technical_areas/oil_shale.cfm. 27

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most important class of oil products emanating from post-1949 China. It also shows how shale oil production in China increased nine times by end 1950s under the PRC government compared to the figure for the 1935 extraction and, similarly, 27 times by end 1960s and 47 times by the mid-1970s (see Table 8.1). At the beginning of the 1960s, 266 retorts were operating in Fushun refineries Nos. 1 and 2.35 Despite the revival of the oil shale industry in the early postwar period, the fate of the Fushun oil shale ebbed when once again cheaper oil became available on the Chinese market. The availability of cheaper oil can be traced to Chinese development of the Daqing oilfield. With the importation of Japanese equipment, the presence of a Japanese oil export market and Chinese indigenous experience at oil development accumulated in Daqing, affordable crude oil became available in China, downplaying the importance of shale oil. Moreover, as China reintegrated into the world community and trading system and normalized relations with the world catalyzed by Table 8.1. Historical development of oil reserve estimates in China, 1935–1942 (million tons).

Year

Crude oil

Shale oil

Total liquid reserves

Percentage of shale oil of total

1935 1937 1942 1951 1953 1959 1966 1968 1971 1973 1975

197 182 206 210 1700 2000 6000 6986 10 000 1500 3420

423 — 521 — 1050 3900 — 11 780 20 000 20 000 —

629 — 727 — 2750 5900 — 18 766 30 000 21 500 —

34 — 36 — 19 — — 31 33 47 —

Source: Cheng, C. Y. (1976). China’s Petroleum Industry (New York: Praeger), p. 27. 35

World Energy Council (2004).

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the Nixon rapprochement, crude oil imports also became available. By the early 1990s, the availability of much cheaper crude oil had led to the Maoming operation and Fushun refineries Nos. 1 and 2 being shut down.36 However, even with the discovery of Daqing, China still has far more shale oil than liquid oil.37 In the 1970s, on the eve of the Nixon rapprochement with China, the PRC government labeled the vast deposits of Fushun oil shale as a natural oil reserve supplementary to the natural crude produced in Daqing, China’s largest oilfield at that time.38 The oil content of China’s four major shale-bearing regions is known to be from 4 to 27 percent with the average of 6 percent. 6 percent oil content of a total deposit of shale found up to the 1970s amounted to about 360 billion tons would yield as much as 20 billion tons of oil.39 Shale oil continued to be produced at small refineries located in the northeast provinces to avoid whittling down Chinese oil reserves in the 1970s.40 However, as the Chinese economy opened up to the world, there is once again shortage in Chinese oil supply and thus all energy resources are revisited to cater to China’s economic growth. According to the latest 2003 numbers provided by Dyni from the US Geological Survey, Fushun has an estimated 260 million tons of oil shale resources of which 235 million tons (90 percent) are exploitable.41 If the portion of unexplored or unmineable (by today’s technology) oil shale is included, Fushun is estimated to contain

36

World Energy Council (2004). Dyni, J. R. (2003). p. 214. US Government Printing Office (1974). (printed for the use of the Committee on Foreign Affairs), Oil and Asian Rivals, Hearings Before the Submittee on Asian and Pacific Affairs of the Committee on Foreign Affairs House of Representatives 93rd Congress First and Second Sessions, 12 September 1973; 30 January, 6, 20 February, and 6 March 1974 (Washington: US Government Printing Office), p. 42. 38 US Government Printing Office (1974). p. 44. 39 US Government Printing Office (1974). p. 43. 40 US Government Printing Office (1974). p. 44. 41 Dyni, J. R. (2003). p. 214. 37

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3,600 million tons of oil shale resources in total.42 Perhaps, it is because of China’s oil-starved booming economy that substantive production in Fushun was revived in 1992 when a new plant was built with 60 100-ton capacity machinery that was able to churn out 60,000 tons of shale oil per year.43 If other liquid oil deals with foreign countries do not work out as expected, hope may still fall back on the Fushun oil shale amongst all other alternatives. The Liaoning Provincial Bureau of Foreign Trade and Economic Relations remains optimistic in the development of the oil shale within their provincial purview, especially since the new Chinese leadership is currently stressing on reviving the Northeast economy (“zhenxin dongbei”). Table 8.2 indicates the list of projects in which the Liaoning Provincial Bureau of Foreign Trade and Economic Relations is trying to seek foreign collaborators or partners for joint ventures in developing the Fushun oil shale. If all efforts to initiate production at the Fushun oil shale continue to remain cool, Fushun will still serve as an important natural oil reserve for the Chinese in the near future. According to the latest 2003 numbers provided by Dyni from the US Geological Survey, Fushun has an estimated 260 million tons of oil shale resources of which 235 million tons (90 percent) is exploitable.44 If the portion of unexplored or unmineable (by today’s technology) oil shale is included, Fushun is estimated to contain 3,600 million tons of oil shale resources in total.45 These statistics came from 1983 Chinese state pronouncements of its own reserves. This source may be tapped upon in times of urgent need or emergencies which may be civilian or military in nature. In the near future, we may see China taking a leadership role in global environmentalism. China argues, along with other members of the Group of 77, that industrialized economies gave rise to 70 percent 42

Dyni, J. R. (2003). p. 214. Dyni, J. R. (2003). p. 214. 44 World Energy Council (2004); Dyni, J. R. (2003). p. 214. 45 Dyni, J. R. (2003). p. 214. 43

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Table 8.2. Table of projects/joint ventures advertising for partners in development. Extending Engineering of Shale Oil Refinery City: Fushun Industry Sector: Pectrifaction No: 47 A. General Survey of the Cooperative Project: 1. Description of the project: In Oil Shale Refinery of Fushun Mining Group, three oil shale dry distillation devices have been installed with annual design capacity of 90,000 tons for shale oil; the actual output was 100,000 tons in 2002. The increased output can be 500,000 tons for shale oil after extended. The demand for the product could exceed supply both in Liaoning Province and other adjacent coastal provinces. The most important is that the product has no competitors for it is exclusive in China. Its national share is 100 percent 2. Form of Cooperation: Joint Venture 3. Estimated Total Investment: US$283.13 million Chinese Investment: US$212.37million Foreign Investment: US$70.76million 4. Main Products Output: Shale oil 90,000 tons yearly 5. Main Raw Materials and Resources: Oil shale comes from Fushun East Open Pit B. General Survey of the Enterprise: 1. Name of the Enterprise: Fushun Mining Group Co. Ltd 2. Address: No. 25, Zhongyang Street, Xinfu District, Fushun City, Liaoning Province 3. Ownership: State owned 4. Registered Capital: US$155.46 million 5. Scope of the Operation: Coal, shale oil, cement, coal seam gas, machine processing, etc. 6. Number of Employees: 37,000 employees 7. Main Products and Scale: Respectively annual output of coal 6 million tons, shale oil 100,000 tons, cement 100,000 tons, coal seam gas 200 million cubic meters 8. Main Equipment and Capacity: 9. Annual revenue: US$287 million Contact Unit: Liaoning Provincial Online Foreign Investment Info Center Contact Person: Julia , Yolanda Tel: 86-24-86892298-8188; 86-24-86895390 Fax: 86-24-86907762 E-mail: [email protected] Table derived from: Liaoning Provincial Bureau of Foreign Trade and Economic Relations, Extending Engineering of Shale Oil Refinery [downloaded on 30 March 2004], available at www.china-liaoning.org/lniipc/xin/2003/projects/047-en.doc.

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of the world’s carbon dioxide present in the atmosphere today and these industrialized nations should cut their own greenhouse emissions by 80 percent by 2020. China is firm on its own way for turning green and it is doing so at its own pace and time. In June 2007, China’s State Council ordered all government agencies, associations, companies, and private owners in public buildings had to set air-conditioning temperatures no lower than 26°C, or 79°F. Air-conditioning consumes one-third of the energy demand in summer. China is also being self-critical about it, accepting criticisms for areas lacking in environmental standards, such as conformity to power-saving rules that set air-conditioning at fixed temperatures. Beijing is also aware of its other limitations in implementation of environmental protection laws. Another example lies in the complexity of its vast size and the tendency for the periphery to disobey central directives. When Beijing announced a nationwide campaign to reduce energy consumption in 2005, officials in regional capitals like Qingtongxia engineered creative schemes to evade the requirements. Local officials arranged for their flagship companies like Qingtongxia Aluminum Group to be removed from the national electrical grid and supplied directly by the local company, exempting it from expensive fees and, as a result, Qingtongxia continued to get its power at the lowest price available. Such actions prompted leaders in Beijing to criticize the performance of some local leaders, and they have vowed to use more of their powers to bring wayward officials into line. Nevertheless, underlining the doctrine of doing the best in each individual capacity, the Chinese government stressed that the developing world would look at the Kyoto-negotiated principle of “common but differentiated responsibilities”, thus reiterating Chinese and developing positions that each nation had to sacrifice according to their priorities or needs. In the name of the principle of common but differentiated responsibilities, China lobbied for the World Bank to expand its energy assistance to sub-Sahara Africa and to explore new financing mechanisms to mobilize sufficient financial resources and compensate for the developing countries’

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incremental cost of emission reduction to utilize its comparative advantages and explore the possibility of creating an international technology cooperation fund to help improve the access of developing countries to affordable and advanced environment-friendly technologies. China is also increasingly taking part in international initiatives for environmental protection. The Asia Pacific Partnership on Clean Development and Climate was also established during the ASEAN Regional Forum on 28 July 2005, involving Australia, China, India, Japan, the Republic of Korea, and the United States. The new partnership aims to develop and transfer existing and emerging clean technologies with the United States providing US$52 million and Australia providing US$75 million in funding support. Britain’s Tony Blair is also pushing for the United States and rapidly growing economies such as China and India to sign up to a new global pact to curb greenhouse gas emissions. Such participation would ensure that China lives up to its stakeholder status in environmental protection. China and India are coming on board with emissions trading schemes and adopting cleaner technologies, but persistent concerns that emissions reduction will sap the strength of fossil fuel-dependent developing economies remain, contributing to a lack of advancement in the post-2012 regime. While being exempt, India signed and ratified the Protocol in August 2002 (likewise for China in the same year), and stands to benefit in terms of transfer of technology and related foreign investments, especially under the Protocol’s Clean Development Mechanism (CDM) scheme. China, a big winner of CDM investment dollars, is currently pushing for a post-2012 Kyoto agreement. Asian countries currently account for 84 percent of the total volume in the CDM market, with China and India in the lead. Ultimately, China is only slowly and gradually beginning to react to post-industrial impulses, with the IEA indicating the nascent changes starting in 2000 with respect to renewable energy which until then was “viewed as highly peripheral”46 by the Chinese government 46

International Energy Agency (2000). p. 73.

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and oil industry. China’s implementation of energy conservation, resource renewal, and alternative energy utilization remains a complicated negotiation between the impulses of modernization and the post-industrial awareness of developmental negativities, two increasingly interpenetrating concerns of developmentalism.

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2 Bibliography AFP (2008). Russia, China Sign Landmark Oil Pipeline Deal, dated 28 October 2008, China Digital Times [downloaded on 16 December 2008], available at http://chinadigitaltimes.net/2008/10/russia-china-sign-landmark-oilpipeline-deal/. Albright, M., Pilot Remembers ‘The Hump’, The Amarillo Globe News website [downloaded on 18 November 2003], available at www.amarillonet.com/ stories/091703/new_pilotremembers.shtml. Appenzeller, T. (2004). The End of Cheap Oil, National Geographic June 2004, editor-in-chief William L. Allen (Washington: National Geographic Society). Ashcroft, J. (1997). Chinese Military Expansion and U.S. National Security, dated 9 July 1997, FAS, http://www.fas.org/ (accessed 1 December 2002). Asmarani, D. (2003). Chance to Reduce Reliance on the West, Straits Times Online, November 2003, available at straitstimes.asia1.com.sg. Aung, Z. (2008). Financing Small and Medium Enterprises in Myanmar, dated 30 December 2008, (entry) [downloaded on 1 January 2009], available at http://www.burmalibrary.org/new.php. Bajpaee, C. (2005). China Fuels Energy Cold War, dated 2 March 2005, Asia Times website [downloaded on 9 January 2009], available at http://www.atimes. com/atimes/China/GC02Ad07.html. Bajpaee, C. (2005). India, China Locked in Energy Game, dated 17 March 2005, Asia Times website [downloaded on 9 January 2009], available at http://www. atimes.com/atimes/Asian_Economy/GC17Dk01.html.

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Index Daqing, 2, 5, 9, 14, 17, 22–24, 28, 29, 32, 37, 81, 82, 92, 121, 130, 137, 138 Demand, 2, 6, 8, 9,11, 15, 17, 23, 44, 54, 92, 96, 103, 104, 106, 107, 113–116, 118, 125, 140, 141 Dependence, 1, 8, 10, 18, 21, 33, 45, 47, 82, 87, 90, 98 Deposits, 12, 46, 47, 63, 70, 85, 86, 87, 135, 138 Diaoyu, 12, 13, 58–62, 65, 66, 68, 70, 71, 72 Diesel, 6, 77, 104–106 Diplomatic, 11, 22, 25, 59, 100–102 Diversification, 14, 20, 24, 25, 33, 50, 55, 89, 132

Alternative energy, 11, 15, 21, 129, 135, 143 Beijing, 30–32, 46, 49, 52, 53, 59, 62, 63, 70, 74, 75, 85, 89, 92, 96, 102, 104–106, 110–112, 118, 123, 130, 133, 141 China, 1, 17, 39, 57, 81, 95, 118, 129 Competition, 10, 11, 12, 15, 27, 28, 31, 33, 44, 50, 55, 70, 81, 85, 87, 98, 119 Conservation, 15, 110, 117, 129, 131–133, 135, 143 Crisis, 15, 32, 44, 63, 95, 104, 105, 110, 111, 123, 130, 133 Crude, 2–9, 14, 17, 19, 22–24, 27, 28, 31, 34, 37, 38, 43, 47, 50, 51, 54, 81, 82, 87, 88, 91, 95, 97, 105–108, 110–112, 115, 116, 137, 138

East Asian, 1, 8, 10, 12, 21, 33, 40, 52, 57, 58, 68, 75, 78, 81, 91, 92, 101 Economic reforms, 1, 134

159

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Economic, 1, 5, 7, 11–13, 15, 17–26, 33, 39–41, 44, 52–54, 57, 65, 74–78, 84, 91, 95, 98, 99, 101–103, 111, 116, 118–120, 123–127, 131, 133, 134, 138–140 Energy consumption, 1, 7, 15, 103, 117, 118, 123, 125, 131, 141 Energy, 1, 19, 39, 57, 81, 95, 117, 129 Environment, 5, 70, 81, 89, 91, 102, 117–119, 122, 131, 142 Export, 8, 21, 24, 28, 30, 36, 37, 54, 55, 77, 105, 119, 137 Foreign Direct Investments, Foreign policy, 9, 18, 59 Gas, 4, 6, 9, 10, 12, 25, 26, 30, 31, 33, 43, 44, 46, 47, 50, 51, 53, 53, 62, 66, 69–72, 74, 76, 77, 83–88, 91, 92, 98, 102, 105, 116, 135, 140, 142 Gasoline, 8, 104 Geological, 9, 29, 138, 139 Geopolitical, 11, 14, 22, 24, 30, 46, 82–84, 86, 97, 98 Globalization, 13 Hydrocarbon, 5, 30 Import, 23, 33, 36, 77, 78, 96, 97, 103, 107–112 India, 15, 25, 30, 36, 46, 47, 68, 81–93, 98, 99, 103, 142 Industrialization, 11, 22, 28, 34, 117, 119, 121–123, 125, 127 Infrastructure, 8, 9, 20, 32, 43, 75, 82 International Energy Agency (IEA), 4, 5, 9, 50, 90, 96, 103, 112, 115, 116, 129, 130, 133, 134, 142 International relations, 81, 129

Investment, 2, 8, 9, 20, 26, 27, 32, 47, 50, 52, 76, 87, 88, 91, 99, 140, 142 Japan, 2, 17, 40, 57, 81, 95, 119, 142 Japanese, 11–13, 18–24, 29, 30, 33–37, 58–66, 68, 70, 71, 76, 78, 82, 87, 88, 93, 98, 100–103, 119, 135–137 Koizumi, 29 Liberal Democratic Party (LDP), 18, 21, 60, 61 Manufacturing, 20, 21, 42, 45, 51, 96, 123, 124 Maritime, 12, 14, 15, 49, 57–59, 63, 64, 67–70, 72–74 Nakasone, 37 Natural gas, 91, 12, 31, 43, 46, 47, 51, 62, 71, 73, 76, 83–88, 90, 98 Normalization, 18, 23, 36 Northeast Asia, 2, 4, 11, 14, 17, 33, 67, 92, 93 Nuclear, 20, 21, 64, 76, 100, 101, 114 Offshore, 9, 46, 47, 53, 58, 61, 72, 74, 75, 85–87, 88, 91 Oil, 1, 17, 39, 57, 81, 95, 117, 130 Oil shortages, 45, 106 Oilfield, 22, 23, 28, 91, 99, 137, 138 Okinawa, 58, 59 Petrochemical, 42, 54 Petroleum, 2, 6, 9, 10, 11, 19, 27, 31, 34–37, 40, 43, 44, 50, 51, 54, 62, 92, 95–99, 102, 109, 112, 114, 116, 126, 136, 137

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Index Pipelines, 11, 14, 29, 31, 40, 44, 45, 47, 48, 84, 85, 87 Piracy, 33, 49, 50, 76, 78, 79, 85 Production, 2–7, 9, 10, 20, 23, 31, 35, 45, 51, 77, 90, 96, 103, 121–124, 131–133, 136, 137, 139 Putin, 25, 30–32 Rationing, 45, 96, 105 Reserves, 5, 7, 9, 18, 25, 31, 43, 72, 90, 91, 93, 98, 101, 106, 137–139 Resources, 9, 12–15, 22, 33, 43, 50, 57, 58, 61, 70, 72, 73, 6, 85, 88, 97, 98, 104, 116, 117, 122, 124, 129, 131, 132, 135, 138–141 Russia, 4, 6, 11, 14, 17, 18, 22, 24–33, 70, 90, 95, 99, 100 Self-sufficiency, 5, 8, 131 Senkaku, 12, 13, 58, 59–62, 65, 70–72 Siberian, 11, 28, 30–32

161

Sino-Japanese, 11–13, 18, 20, 21, 28, 33, 35, 38, 59, 64, 65, 71, 84, 103 Southeast Asia, 14, 39, 41, 42, 46, 53, 66, 68, 79, 81, 99 Straits of Malacca, 14, 25, 33, 44, 46–48, 50, 78, 84, 85, 87 Strategic, 25, 33, 49, 50, 52, 53, 65, 66, 68, 83–85, 89, 93, 102, 103, 106, 111, 116, 132 Supply, 2, 10, 14, 17, 23–25, 32, 42, 44, 46, 48, 49, 51, 55, 76, 84–86, 88, 92, 95, 101, 106, 125, 126, 132, 133, 138, 140 survey, 5, 26, 27, 61, 74, 135, 138–140 Technology, 19, 67, 91, 136, 138, 142 Tokyo, 12, 24, 63, 71, 101 Transporting, 14, 47, 48 Xinjiang, 85