Why Does China Buy Oil from Rogue Nations?
By: James Finch | Posted: 21st August 2006
Pragmatic China Resorts to Trading with
Rogue Nations for Energy Security
At the mercy of a ruthless global energy market, pragmatic China has turned to nations which are shunned by U.S. interests. One productive Silk Road leading to China begins in Iran. More specifically, it starts in the Yadavaran oil fields where the Chinese oil company Sinopec plans to import about 150,000 barrels of crude per day, after it has developed these oil fields. Initially, the October 2004 deal was reportedly valued at $70 billion. However, additional developments and China's substantial purchase of Iran's vast natural gas reserves may increase the value of this multi-decade energy deal to more than $200 billion. What could go wrong? Look at the daily headlines: Iran wants to enrich its own uranium. Unless this situation is resolved, escalated political tensions could impair China's ability to import oil and gas. Obviously, China would take great pains to avoid an Iraqi rerun in Iran.
Out-maneuvered by western oil companies in obtaining many of the world's proven oil reserves, China has cultivated the Sudan as its largest oil provider. Sudan depends upon the pragmatic Chinese for its economic and military strength. China is also the principal source of hard currency for Africa's largest country. Rejected by the world's community for the genocide it is committing in West Darfur, Sudan exports its oil to China for Chinese weaponry. China finds little competition for Sudanese oil. The Chinese are the largest single shareholders dominating Sudan's oil company consortium. It is the largest investor in a 1,500-kilometer pipeline delivering Sudanese oil to the Red Sea, which is then shipped by tankers to China.
China has not limited its African oil purchases to one country. Another blighted nation, Angola believes it could soon surpass Nigeria as Africa's largest oil supplier. According to the World Bank, China may have recently offered Angola about $9 billion in credits and loans. Two years ago, it was reported that China extended a $2-billion loan to Angola for 10,000 barrels of crude oil per day. Now, it appears China is eager to help Angola build sufficient infrastructure in that country to develop another strong energy source.
Hoping to create a Silk Road across the Pacific from South America, China has continued its hunt for energy security by developing ties with Venezuela's Hugo Chavez. This may come to naught. Venezuela's highly sulfurous crude would first have to be refined in the United States. China lacks the refineries for handling the heavy crude oil. Over the past year, China's oil imports from Venezuela amounted to orimulsion from the Orinoco Tarbelt, mostly used for asphalt.
New refineries, however, can be built to remedy the heavy oil Venezuela might provide. According to a recent special edition of the McKinsey Quarterly, China will be forced to heavily invest in refineries for all the crude oil it has committed for, "To keep up with surging demand, the country needs to build a large, technologically world-class refinery every year for the next 15 years, at a cost of $2 billion apiece." China lacks the refining capacity to meet its current needs. In the first half of 2006, China's imports of refined petroleum products jumped by nearly 50 percent, compared to the same six-month period in the previous year.
Although Venezuela hopes to become one of China's top three oil suppliers, it is likely more hyperbole than a realistic possibility before 2010. As China's proven oil reserves continue to deplete, it may very well have to turn to Venezuela at some point for this country's vast oil reserves. Outside of the Middle East, Venezuela may have one of the last great oil resource – reportedly at greater than 80 billion barrels of crude. The question is not if, but how fast can,Venezuela accommodate China's ravenous appetite for its country's oil?
Venezuela also has the largest natural gas fields in all of South America. Earlier this year, Brazil and Argentina (two of China's favorite Latin American trade partners) discussed with Venezuela the possibility of building a gas pipeline across the Amazon. A 5000-mile gas pipeline would need a port destination for LNG tankers to supply China. Instead, talk of an oil pipeline through Colombia could be replaced by a gas pipeline.
China's approach, in dealing with what the Anglo-American alliance call "rogue nations," reflects one of reported non-interference in a country's political affairs. It is a Chinese pragmatism, which many find amoral. By contrast, in what way is America judged around the world by its military invasion of Iraq? When U.S. President Bush recently criticized Vladimir Putin about democracy in his country, the Russian President pointed out that Russia's democracy was quite different from the one the U.S. had created in Iraq for the Iraqis. One has to wonder how long China's laissez faire doctrine will last. And whether China can continue developing new energy silk roads at the rate its GDP growth commands.
Some believe China doesn't need so much oil right now. In the first half of 2006, according to Xinhua news, China's refinery output was seven percent less than the country's domestic crude-oil production. Despite producing 85 million tons of crude oil, China still imported 70 million tons of oil (on top of 12 million tons of refined oil). Is China hoarding to avert a future political crisis, or does it expect its energy 'silk roads' to soon close or become blockaded?
The McKinsey Quarterly researchers also reported if China continues at its current pace, it would need to buy up about three percent of the world's proven petroleum reserves. That's more than all of the reserves held by Chevron, ExxonMobil, BP, Shell and others. As we have been reminded by energy analysts, getting oil out of the ground costs more, the quality of oil is falling and more water is found in the oil. All of this has registered on not only on the radar screens of Chinese energy advisors and politicians, but also at the gasoline pumps where filling up a tank should continue to increase every year. As Deng advised about getting rich, it can be glorious but the furious process of getting there has not only been taxing for China, but also for the rest of the world.
James Finch contributes to StockInterview.com and other publications. You can read all of his articles at http://www.stockinterview.com
About the Author
Occupation: Writer
James Finch is a contributing editor for StockInterview.com and other publications. http://www.stockinterview.com
This article is free for republishing
Printed From: http://www.articlealley.com/article_83590_19.html
Back to the original article
Tags: china china, silk road