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Commentary (March 22, 2006)

Where Energy and Politics Collide - China

Michael Richardson (Visiting Senior Research Fellow at the Institute of Southeast Asian Studies in Singapore)

China pursued its energy security interests on two main fronts this week. One was in talks with visiting Russian President Vladimir Putin. The other was in the United Nations Security Council, as leading powers tried to reconcile differences over how to handle Iran's suspected programme to make nuclear weapons.

Both fronts are interrelated. If Russia (the world's largest natural gas producer and No2 in oil) exported more energy to China (the world's second-biggest oil consumer and importer after the US), it could make Beijing less reluctant to see the security council take tough action to prevent Iran from developing nuclear arms. Russia and China have been holding out against moves by other security council members that could lead to sanctions being imposed on Iran - where Moscow and Beijing have substantial commercial interests.

Just last month, the Chinese financial media and Iranian officials reported that Beijing was rushing to complete a deal worth as much as US$100 billion that would allow the state-owned energy firm Sinopec to take a majority stake in developing the Yadavaran oilfield in Iran. US reports said the development underlined Iran's increasing importance to China as an oil and gas supplier, and could hobble US and European initiatives in the UN to halt Iranian nuclear plans.

If it materialises, the China-Iran deal could yield as much as 300,000 barrels of new oil per day for China. It would cement a memorandum of understanding signed by China and Iran in October 2004.

China imports about 40 per cent of the oil it consumes, and as much as 80 per cent of these imports come in tankers from the Middle East and Africa. They travel through straits in Southeast Asia that Chinese military planners worry could be blocked in a conflict over Taiwan, or in another crisis with the US. That potential vulnerability strengthens the strategic appeal of overland energy supplies from China's northern neighbour, Russia.

Before Mr Putin's visit this week, Chinese officials had expressed dissatisfaction that previous promises from Moscow to increase sales of oil to China - and tie it into an export pipeline network - had failed to come to anything.

At present, Russia sends no gas to China. It supplies barely 5 per cent of China's oil imports, via an unreliable rail system.

If the outline agreements reached during Mr Putin's visit result in practical deals, this situation will change radically - at least in gas supplies. Russia plans to build two pipelines to carry 60 to 80 billion cubic metres of gas a year from Siberia to China, with initial shipments starting in 2011. This would enable Moscow to play Europe off against Beijing in gas pricing and sales.

Moscow has also agreed in principle to allow China's biggest oil company, China National Petroleum Corp, to jointly develop some of Russia's extensive oil and gas reserves with Russian state firms.

But China's hope of gaining a decisive advantage over rival Japan in their long battle to secure the route of an oil pipeline from Siberia appears to have been frustrated again this week. Russian officials said that more time was needed to complete a feasibility study to determine whether the pipeline would go to China or to a Russian Pacific port for export to Japan and other Asian buyers.

(Originally appeared in the March 24, 2006 issue of South China Morning Post in Hong Kong, reproduced here with permission.)

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