What is Beijing willing to do to secure oil and gas supplies?

by Michael Richardson

SINGAPORE — China’s dependence on increasing amounts of oil imported from potentially unstable areas of the Middle East and Africa through vulnerable shipping channels has become an uncomfortable fact of life for the government in Beijing.

Chinese policymakers have called it their “Malacca dilemma,” a reference to fears that the Straits of Malacca and Singapore in Southeast Asia, the channel used by most ships steaming between East Asia and the Middle East-Africa region, could be disrupted or even closed in a crisis.

Countries flanking the straits, chiefly Indonesia, Malaysia and Singapore, have sought to reassure China that this key artery for international shipping is secure.

Indeed, the bigger risk to oil supplies today is the possibility that a confrontation between the West and Iran could threaten the flow of oil from the Persian Gulf through the narrow Hormuz Strait, the only way into and out of the gulf by sea. China gets about half its imported oil from this energy-rich but volatile zone.

From being a net oil exporter in the early 1990s, China now imports just over half the oil it uses. Last year, it surpassed Japan to become the world’s second-largest oil importer after the United States. The U.S. Defense Department reckons that China will import almost two-thirds of its oil by 2015 and four-fifths by 2030.

As if that was not set to create a perfect storm of energy supply worries, China in 2007 became a net importer of natural gas as well, after almost two decades of self-sufficiency.

While oil meets nearly 20 percent of China’s total energy consumption, gas accounts for just 3 percent. But this is rapidly changing, as the government tries to move electricity generators, heavy industry, and home-heating and cooking away from polluting coal to gas, the cleanest of the fossil fuels.

China’s gas consumption has tripled in the past decade and is expected to make a similar leap over the next 10 years, driven by growing industrial production and expanding urbanization in the world’s second-biggest economy. By 2020, gas is projected to have a 10 percent share of energy use.

Where will all this extra oil and gas come from and how will China seek to secure its foreign energy sources and supply lines?

Will it do so cooperatively with other interested countries, or by an assertive policy backed by the threat of force as the Chinese military becomes stronger?

China’s handling of offshore territorial disputes this year with Southeast Asian countries in the South China Sea and with Japan in the East China Sea shows that Beijing may opt for strong-arm tactics.

But as the costs of this approach become apparent, as key neighbors and foreign states like the U.S. with interests in stability and freedom of navigation in the region align to deter China, Beijing may moderate or even reconsider its push to create a greatly enlarged maritime security and resources zone.

The benefits of cooperation and sharing of disputed resources clearly outweigh the costs of conflict. Consider gas in the South China Sea.

On Dec. 15, the state-owned China National Offshore Oil Corp. (CNOOC) and its foreign partner, BG Group PLC, formerly British Gas, announced they had found gas-bearing sands while drilling for the first time in the deep-water Qiongdongnan Basin, about 130 km south of Hainan Island in a water depth of almost 1,400 meters. CNOOC’s Executive Vice President Zhu Weilin said the firm was “excited about the well results. It has further strengthened our confidence in deep-water exploration in this area.”

To the northeast, CNOOC and Canada’s Husky Energy Inc, controlled by Hong Kong tycoon Li Ka-Shing, are preparing to start commercial production in 2013 from China’s biggest offshore gas find so far. Gas there is up to 3,000 meters below sea level.

Beijing’s largest South China Sea gas field in operation is a primary source of energy for Hong Kong’s power stations and produces about 124 billion cubic feet of gas per year. It is a joint venture between BP, CNOOC and Kuwait Foreign Petroleum Exploration Co.

Significant amounts of oil are also being pumped ashore in China from finds in the South China Sea. CNOOC thinks the area is a promising hot spot, estimating that it holds the energy equivalent of 22 billion barrels of oil.

Overall gas reserves in China’s offshore continental shelf are estimated at 10.6 trillion cubic feet, nearly one-eighth of the country’s total proven reserves. This gas is beneath the seabed in an area disputed only by Taiwan.

China’s first deep-water drilling platform is nearing completion in a Shanghai construction yard. As it builds more of these rigs and gains experience in ocean drilling, will it be tempted to push its search for oil and gas southward ever deeper into the South China Sea where Vietnam, the Philippines, Malaysia and Brunei have rival claims to sovereignty and control over oil and gas reserves, some of which are already being exploited?

Deep-water exploration and production is expensive and will only be undertaken by big foreign energy firms if security is assured. The giant rigs needed to withstand South China Sea typhoons and drill thousands of meters beneath the sea surface can cost more than $1 million a day to operate.

China claims some form of control over as much as 80 percent of the South China Sea, stretching deep into the maritime heart of Southeast Asia. However, it would be difficult, if not impossible, for Beijing to continue the climate of business certainty for productive joint ventures with foreign energy firms in this contested zone in the teeth of opposition from Southeast Asian claimants.

Michael Richardson is a visiting senior research fellow at the Institute of South East Asian Studies in Singapore.