Big Shift in China's Oil Policy
With Iraq Deal Dissolved by War, Beijing Looks Elsewhere

By Peter S. Goodman
Washington Post Foreign Service
Wednesday, July 13, 2005

SHANGHAI -- Until recently, China's view of the global energy map focused narrowly on the Middle East, which holds roughly two-thirds of the world's oil. Special attention was directed toward one well-supplied country: Iraq.

Through cultivation of Saddam Hussein's government, China sought to develop some of Iraq's more promising reserves. Beijing advocated lifting the United Nations sanctions that prevented investment in Iraq's oil patch and limited sales of its production.

Then the United States went to war in Iraq in 2003, wiping out China's stakes. The war and its aftermath have reshaped China's basic conception of the geopolitics of oil and added urgency to its mission to lessen dependence on Middle East supplies. It has reinforced China's fears that it is locked in a zero-sum contest for energy with the world's lone superpower, prompting Beijing to intensify its search for new sources, international relations and energy experts say.

As a vocal camp in Congress recoils at the prospect of a Chinese state-owned company, Cnooc Ltd., taking control of the California-based Unocal Corp., the Bush administration's decision to wage the war in Iraq stands out as a crucial factor in explaining how China came to scour the earth for energy and why the effort is likely to remain central to U.S.-Chinese relations for some time, those analysts say.

"Iraq changed the government's thinking," said Pan Rui, an international relations expert at Fudan University in Shanghai. "The Middle East is China's largest source of oil. America is now pursuing a grand strategy, the pursuit of American hegemony in the Middle East. Saudi Arabia is the number one oil producer, and Iraq is number two [in terms of reserves]. Now, the United States has direct influence in both countries."

Many other factors help explain China's motives in dispatching its energy companies abroad for new stocks. Oil demand is exploding in China as people embrace automobiles and as factories, apartment towers and office buildings proliferate. For the third summer in a row, China is rationing energy, limiting production in industrial areas.

In little more than a decade, China has changed from a net exporter of oil into the world's second-largest importer, trailing only the United States.

Concern is mounting about future prospects for China's domestic oil production, which supplies about two-thirds of the country's crude oil needs. China's government estimates that it will need 600 million tons of crude oil a year by 2020, more than triple its expected output. Worldwide, the best oil fields are already claimed.

For the United States, Europe and Japan, the oil shocks of the 1970s supplied the lessons that have shaped their thinking about energy. China is a latecomer to the vagaries of the global energy business. It is grappling with how to manage dramatic growth and soaring demand for energy at the same time it confronts the implications of interventionist U.S. foreign policy.

"Many people argue that oil interests are the driving force behind the Iraq war," said Zhu Feng, a security expert at Beijing University. "For China, it has been a reminder and a warning about how geopolitical changes can affect its own energy interests. So China has decided to focus much more intently to address its security."

Throughout China's modern history, and particularly under Communist Party rule, the country's leaders have sought self-sufficiency -- a drive fueled by nationalist pride and the experience of colonialism, which fed notions that the outside world wants to prevent China's rise as a great power.

Under the rule of Mao Zedong, China -- under the banner of fending for itself -- focused on oil production in its northeast, near the city of Daqing. The government's current push to secure foreign oil fields is driven by worries that there may one day be too little oil to meet worldwide demand and that foreign powers -- in particular the United States -- will choke China.

"If the world oil stocks were exceeded by growth, who would provide energy to China?" said Shen Dingli, an international relations expert at Fudan University, who advises the government on security policy. "America would protect its own energy supply. The U.S. is China's major competitor."

Such fears involve Taiwan, the self-governing island claimed by China. The United States has pledged to help Taiwan should China attack. Officials in Beijing envision being cut off from energy supplies by the U.S. Navy in the event of war.

Many energy experts say owning oil fields provides no real energy security. It does not cushion against a rising cost of energy because no one country is large enough to determine the market price. Neither does it ensure access, because getting oil where it is needed depends largely upon shipping lanes policed by the U.S. Navy.

"There's an illusion that ownership ensures either volume or price," said William H. Overholt, director of the Rand Center for Asia-Pacific Policy in Santa Monica, Calif. "Oil is an internationally traded commodity. The key is having secure lines of supply from the Middle East."

Even the chairman of Cnooc asserted in an interview that buying foreign oil fields would give China additional security, dismissing the notion that anything other than commercial interest motivates his company's $18.5 billion bid for Unocal.

"In today's world, as long as you have money, you can buy oil from anywhere," Fu Chengyu said.

Fu maintained that Cnooc's interest in Unocal is purely commercial. The Chinese company is eager to have Unocal's substantial oil and gas reserves in Southeast Asia to help feed the liquid-natural-gas terminals it is developing in coastal China.

For China's leaders, however, buying foreign oil and gas fields in the name of energy security has become a central mission. Throughout the 1990s, China made deals to lock in long-term supplies and buy installations from Africa to Latin America. In 2002, Cnooc became the largest offshore oil producer in Indonesia when it bought a field from the Spanish firm Repsol YPF SA.

The Iraq war substantially intensified the foreign push. Most immediately, it destroyed China's hopes of developing large assets in Iraq. China had been waiting for the end of sanctions to begin work on the Al-Ahdab field in central Iraq, under a $1.3 billion contract signed in 1997 by its largest state-owned firm, China National Petroleum Corp. The field's production potential has been estimated at 90,000 barrels a day. China was also pursuing rights to a far bigger prize -- the Halfayah field, which could produce 300,000 barrels a day. Together, those two fields might have delivered quantities equivalent to 13 percent of China's current domestic production.

But the larger impact of the war was on China's understanding of the rules of the global energy game.

"The turning point in China's energy strategy was the Iraq war," said Tong Lixia, an energy expert at the Chinese Academy of International Trade and Economic Cooperation, which is affiliated with China's Commerce Ministry. "After 2003, both the companies and the government realized China could not rely on one or two oil production areas. It's too risky."

This year, China began work on a strategic oil reserve in coastal Zhejiang province that would allow the country to operate without imports for as long as three months. But the biggest emphasis has been on securing new stocks abroad, particularly in neighboring countries such as Kazakhstan and Russia, to limit dependence on shipping lanes.

China National Petroleum Corp. led the way. Since 2003, the company has signed 20 contracts to explore or purchase production facilities in 12 countries, including Peru, Tunisia, Azerbaijan and Mauritania. In 2004, the company's production of natural gas at overseas facilities nearly doubled from the previous year. Its overseas oil production climbed by a fifth.

Late last year, President Hu Jintao said Chinese companies would invest $5 billion in oil projects in Argentina.

So far, however, China's foreign campaign has delivered more lessons in the difficulties of the energy business than energy itself. In June 2003, Beijing hailed a $150 billion agreement with Russia to tap fields in Siberia and send the oil through a new pipeline to China. The project was to supply as much as one-third of China's needed imports by 2030. But that deal appeared to disintegrate when the Russian signatory, Yukos Oil Co., fell into disarray last year after its chief founder was jailed on tax-evasion charges. Japan appears poised to capture the Siberian oil with a promise of at least $6 billion to develop the fields, though recent indications are that Beijing is putting together an even more generous package to bring the project back, according to an adviser to the government.

With so much competition for assets, China has pursued deals with international pariah states that are off-limits to Western oil companies because of sanctions, security concerns or the threat of bad publicity. China National Petroleum is the largest shareholder in a consortium running much of the oil patch in Sudan, a country accused by the United States of genocide in its western region of Darfur. Last year, China signed a $70 billion oil and gas purchase agreement with Iran, undercutting efforts by the United States and Europe to isolate Teheran and force it to give up plans for nuclear weapons. If Cnooc acquires Unocal, it would have gas fields and a pipeline in Burma, whose operation by the U.S. company has been criticized by human-rights groups.

"No matter if it's rogue's oil or a friend's oil, we don't care," said an energy adviser to the central government who spoke on the condition he not be identified, citing the threat of government disciplinary action. "Human rights? We don't care. We care about oil. Whether Iran would have nuclear weapons or not is not our business. America cares, but Iran is not our neighbor. Anyone who helps China with energy is a friend."

Special correspondents Eva Woo and Jason Cai contributed to this report.

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