China’s Quiet Shopping Spree

US President George W. Bush’s visit to China provides a good opportunity for a closer look at the revolutionary steps the world’s most populous nation has taken to modernize an energy sector that fell victim to a half century of central planning and economic stagnation.

Energy was among the last economic sectors in China to undergo liberalization and reform. But the industrious Chinese, in the space of only about five years, have managed to turn their country into a main player in the global energy market.

DEBKA-Net-Weekly‘s oil sources report that partnerships with technology-rich multinational companies to develop domestic oil resources and the purchase of oil fields abroad have fueled China’s advances. At the same time, Beijing is making an effort to reduce its reliance on environmentally unfriendly coal, which provides 75 percent of the country’s primary energy compared with only 27 percent in the West.

Since the mid-1990s, China has published two five-year plans that charted investment in oil and gas resources overseas as part of a campaign to build strategic oil reserves.

China met its own energy needs until 1993, but it now must import about a third of its requirements due a sharp rise in demand sparked by rapid economic development.

Coal will continue to be king in China for years to come. It is one of the biggest producers and consumers of coal, and controls 60 percent of the international trade in the coal derivative, coke. China also is home to the largest known coal reserves in the world. But heavier utilization of oil and gas is at the top of China’s energy agenda.

To do so, it must fill a widening gap between domestic oil production and consumption.

In 2000, China produced about 165 million tons of oil, while it consumed 205 million tons. According to all forecasts, the gap could grow to 100 million tons in 2010.

But China has proven oil reserves of about 3.3 billion tons – exactly half of Russia’s – and estimated potential reserves of about 9.5 billion tons. Partnerships with foreign companies could help tap them.

The China National Offshore Oil Corporation (CNOOC), for example, signed a strategic partnership with Shell in November 2000 to develop the Bohai Bay field, 30 km (18 miles) northwest of Longkoun.

Royal Dutch Shell and Unocal are involved in explorations begun in Xinjang province, which borders on Afghanistan. Royal Dutch Shell, Exxon-Mobil and BP-PLC have invested $2.7 billion in stakes in pipeline and oilfield development projects with CNOOC and China’s two other big government-owned oil companies, China National Petroleum Corporation and China Petroleum & Chemical Corporation.

But the fluctuating world oil prices do not help. When oil prices drop below a certain level, developing domestic oil resources turns uneconomical and attracting international companies becomes more difficult.

So back in 1996, China began purchasing oil fields around the world and a year later started to receive its first shipments from them. It was a change of policy: instead of just buying oil, China was buying oil fields.

China has made oil field investments in Sudan, Azerbaijan, Venezuela, Indonesia and Iran. It purchased a 60 percent stake in two oilfields in Kazakhstan and has South China Sea fields that it cannot develop because of disputes over territorial water boundaries and underwater natural resources.

While diversifying its energy sources and seeking to reduce its dependence on Middle Eastern oil, China’s shopping spree has managed to boost its strategic oil reserves to more than 900 million tons.

With strategic reserves overseas that are expected to supply half of its energy needs in 2010, China is entering the big leagues. Along with OPEC and the multinationals, it could soon play an influential role in setting world oil prices and output.

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