China Moves to Secure Russian Oil Sources
Faced with rapidly growing demand for gas for automobiles,
the Chinese government is moving to secure oil exploration
and transportation agreements in Central Asia and Russia.
On May 28, OAO Yukos, Russia's largest oil producer signed
two agreements to supply China with $150 billion worth
of oil over a 25 year period. Beginning in 2005, Yukos
will be required to ship 20 million tons of oil a year,
or 400,000 barrels a day by pipeline to China. Volume
will jump to 600,000 barrels daily until 2030.
The 1,400 mile pipeline will lead from Angarsk in Siberia
to Daqing, China where it will be refined. Daqing is the
site of one of China's main oil fields, but currently
output from this field is declining. Construction of the
pipeline will begin in spring 2004, and it will be completed
in one year.
China pushed for an alliance with the Central Asia states
with Jiang Zemin's hosting of a summit of four Central
Asian countries and Russia in Shanghai in June 2001. The
political reason was to build friendly relations with
Central Asia, and serve as a counterweight against the
US's President Bush, who was (and is) seen as a unilateralist
in foreign policy. The business reason was to secure an
energy supply for China's growing consumer class. Since
the oil transportation and refining industry require huge
capital investments, government and industry interests
are often closely intertwined. This is especially the
case when there is huge consumer demand for oil products
when automobile sales take off, as is the case in today's
China.
China's original plans fell apart after the terrorist
attacks on New York in September 2001, and the group did
not meet again. Since then, US troops have moved to be
stationed in all of the Central Asian countries, except
Russia, as part of the war against terrorism.
Oil exploration, transportation, refining and distribution
are dominated by three Chinese state-owned enterprises,
CNPC (listed as PetroChina), Sinopec and CNOOC. Now, there
are exploration agreements in Indonesia, Russia, Venezuela,
Peru, Canada, Thailand, Myanmar, Kazakhstan, Uzbekistan,
Turkmenistan, Azerbaijan and Omar. So great is China's
demand for oil that it has even signed an agreement with
Taiwan's confusingly named state-owned China Petroleum
Corporation for joint exploration of oil in the Taiwan
Straits. Taiwan and China generally refuse to form joint
ventures (JVs) with each other because of the profound
political differences on both sides. Taiwan's China Petroleum
Corporation is also a state-owned enterprise.
Foreign companies, such as Shell and BP, participate
in construction of large infrastructure projects in which
China does not have sufficient technological expertise.
Chinese companies have always viewed owning tangible
assets as preferable to buying on spot markets, even though
this translates into much higher up-front oil exploration
costs, since they consider markets to be too volatile
and unreliable. A good deal of this experience goes back
to the Second World War, when Japan was cut off from US,
its main oil supplier before the outbreak of WWII. As
a result, the Japanese attacked Pearl Harbor, and invaded
Indonesia, then the Dutch East Indies, to acquire its
own independent oil supply. China's goal is to diversify
its sources of oil so that it cannot be seriously affected
by disruptions from any single source.
The Chinese government, faced with a growing consumer
class which wants to own private automobiles, a commitment
to 7% growth, and a need to create 15 million more jobs
every year, has counted on demand for private cars as
an important engine of economic growth. Ironically, the
SARS crisis has stimulated demand for private cars as
Chinese seek to avoid public transportation such as buses.
Year over year growth for cars was 83% in 2002.
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