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China betting on overland energy-supply lines

by Michael Richardson

China’s strategy to diversify supply routes for its rapidly rising energy imports has just taken a major step forward.

On July 15, natural gas from Myanmar (aka Burma) started to flow along a recently completed pipeline that stretches for 1,100 kilometers from the sea coast, through jungle and mountains, to Kunming in southwest China.

There it will feed into other gas lines supplying homes, industries and power plants generating electricity in the world’s biggest energy user.

The gas from Myanmar, pumped from offshore fields in the Bay of Bengal, is not expected to reach China via the new pipeline until next month or September. But at full capacity, it will deliver 12 billion cubic meters each year of additional supply to China. This is nearly 30 percent of current annual imports and one-twelfth of the country’s 2012 gas consumption.

A parallel oil pipeline, due to open by the end of the year, will be able to carry 22 million tons of crude oil from the Middle East and Africa. This amounts to about one-twelfth of China’s oil use last year.

The official Xinhua news agency has described the pipelines as “China’s new strategic energy channels” because they offer an alternative supply route for vital oil and gas imports in case the congested and relatively narrow Strait of Malacca and Singapore are blocked by piracy, terrorism, a shipping accident or conflict.

Since 2010, over 80 percent of China’s growing crude oil imports have come in tankers through the straits — the shortest sea route between the Middle East/Africa and China’s east coast ports.

China’s ruling Communist Party and the armed forces fear that this energy artery, which includes increasing quantities of gas from the Persian Gulf, could be cut in several crisis contingencies.

These scenarios include a confrontation between the United States and China over Taiwan; an escalating clash with U.S. mutual defense treaty ally Japan over the disputed Senkaku Islands in the East China Sea; and a similar flare-up with U.S. ally the Philippines over the conflicting territorial claims Manila has with Beijing in the South China Sea.

Beijing fears its maritime oil and gas imports could be targeted in a selective blockade of the straits led by the U.S. Chinese leaders call this potential vulnerability their “Malacca Dilemma.”

In recent years, Beijing has negotiated a series of alternative energy supply sources and routes. First, China built an oil pipeline from Kazakhstan in Central Asia, which has the world’s 12th-largest oil reserves. The 2,800-km line to China opened in 2006 and its capacity is to double by 2015.

In 2011, Russia started exporting oil to China by pipeline. Last month, Russia, one of the world’s biggest energy producers, announced that it would double its annual supply of pipeline oil to China to 30 million tons a year by 2018, and later lift it further to just over 46 million tons.

Russian officials said that the deal was worth $270 billion and would run for at least 25 years.

China has so far failed to clinch a major pipeline gas supply deal with Russia. Despite years of negotiations, the two sides have not agreed on the price.

However, talks are continuing with Moscow for two pipelines that could provide China with nearly 70 billion cubic meters (bcm) of gas a year. Meanwhile, a 1,830-km pipeline, designed to deliver up to 40 bcm of gas yearly from Turkmenistan to China, started operation in 2009. The Central Asian state has the world’s fourth- biggest gas reserves after Russia, Iran and Saudi Arabia.

As a result of these agreed or completed projects, China can now count on getting 35 percent of its current gas needs, and 25 percent of its oil, by overland pipelines. This means it will be less reliant on sea shipments through Southeast Asia’s straits.

That is, of course, provided there are no shortfalls in contracted pipeline supplies. These could arise from production problems, contract disputes or serious damage to pipelines from accidents, attacks or natural disasters.

China needs fuels derived from oil to run its modern land, air and water transport system. It needs gas to replace polluting coal.

Indeed, China’s demand for oil and gas has been growing so fast in recent years that all these new pipelines will not be enough to ease its dependence on maritime supply, particularly through the Straits of Malacca and Singapore, for long.

That may be why China is interested in what could be the riskiest overland energy supply route of all. It would run from China’s restive western territory of Xinjiang, across some of the world’s highest and most landslide-prone mountains. It would also traverse rebellious areas of Pakistan to reach Gwadar, a deep-water port overlooking the Indian Ocean and Arabian Gulf.

China and Pakistan agreed on July 5 to develop a long-term plan for an “economic corridor” connecting Kashgar, in Xinjiang, and Gwadar, more than 2,000 km away.

At present, there is only a tenuous road connection. However hopes for upgraded and expanded road links, as well as a railway and pipelines, from Kashgar to the presently little-used port at Gwadar received a major boost in February. Control of Gwadar was transferred from Singapore’s PSA International to China’s state-owned port holding company.

Gwadar is not far from the entrance to the energy-rich Persian Gulf. If oil from there and Africa could be offloaded at the port and transferred cost-effectively to China, it would further diversify Beijing’s supply options.

However, it is questionable whether the benefits to China would outweigh the costs and risks involved in building — and securing — such a long corridor over such forbidding terrain.

Michael Richardson is a visiting senior research fellow at the Institute of South East Asian Studies in Singapore. E-mail: mriht43@gmail.com