by Geoffrey York

29-11-04

At first glance, the events are unconnected. A possible Chinese takeover of a leading Canadian oil company. A secret submarine in Japanese waters. A border deal in Siberia. Trade pacts with obscure African nations. Diplomatic efforts to protect rogue states in the Middle East.
These seemingly random incidents around the world, however, are united by one crucial phenomenon: China's growing obsession with its energy security.

Fearful of its mounting vulnerability to any threat to its oil and gas imports, Beijing has become frantically active in its quest for new energy supplies. The latest example -- its effort to acquire Husky Energy of Calgary -- is just the most recent of a long series of initiatives to gain fresh energy sources for its booming economy.
China's oil imports leaped by 40 % in the first half of this year. It recently surpassed Japan to become the world's second-biggest oil importer. Its own oil production, once large enough to supply its needs, has fallen into steady decline. By the year 2020, China expects to depend on imported oil for 60 % of its oil supply, up from 36 % today, leaving it increasingly vulnerable to an oil embargo or an unexpected cut-off of supply.

Beijing sees the risk of an energy shortage as one of the biggest potential threats to its national security and social stability. It has become fixated with the goal of diversifying its sources of oil, gas, electricity and coal. The Chinese government has reportedly drafted a plan to build a 90-day strategic reserve of crude oil -- much bigger than its previous plan for a 30-day stockpile. It is already building 52 massive tanks near the East China Sea, south of Shanghai, to stockpile a month's worth of oil. Each tank would hold more than 25 mm gallons.
But this might not be enough. China's economy -- with its emphasis on voracious energy-gobbling industries such as steel, cement, and manufacturing -- is increasingly dependent on heavy energy consumption.

For every dollar of GDP,it consumes three times as much energy as the global average, and almost five times as much as the US average. By 2020, China is projected to have 130 mm private cars -- five times as many as today -- and its cars are already consuming far more gasoline per car than the average car in the United States or Japan.
As a result, China is aggressively negotiating trade and investment deals with almost any country that boasts a supply of oil or natural gas, regardless of the cost. It is already co-operating with 27 countries on oil exploration.

In Africa alone, it has reached agreement to buy oil from Cameroon, Nigeria, Gabon and Angola. In Latin America, it has signed a trade deal with Brazil to finance a drilling and pipeline program that would provide oil and gas to China, even though the Brazilian deal is estimated to be three times more expensive than simply buying supplies on the open market.
To secure Russian oil, Beijing gave favourable terms to Moscow to settle a long-standing border dispute on a Siberian river. Russia reciprocated by promising to deliver as much as 420 mm barrels of oil by train to China annually by 2010, up from the present level of 140 mm barrels.

China and Japan have been jousting for the right to receive an oil pipeline from Russia, although the latest indications suggest that Japan might win the battle. China's obsession with energy security has put it on a collision course with the United States, which disapproves of Beijing's eagerness to cut deals with "pariah states" such as Iran and Sudan.
In October, China signed a $ 70 bn deal to help develop an Iranian oil field and purchase natural gas from Iran. Within a few days, Beijing signalled that it would oppose any effort to seek UN sanctions against Iran over its nuclear program.

In a similar move, China has supported Sudan against allegations of human rights abuses. China has invested hundreds of millions of dollars in developing oil fields and pipelines in Sudan, its biggest single African energy supplier.
And in another far-reaching consequence of China's energy appetite, China and Japan are jostling for control of the vast natural-gas deposits below the East China Sea. Both countries have laid claim to much of the sea, and China has begun the construction of drilling platforms to tap the gas deposits in disputed waters, provoking sharp protests from Tokyo. When a Chinese nuclear submarine was discovered in Japanese waters, a three-day chase by Japanese warships ensued. The incident was widely believed to be linked to China's challenge of the Japanese gas deposit claims.

In this global context, the possible takeover of Husky Energy fits neatly into Beijing's energy strategy.
China is interested in importing up to 1 mm bpd of oil from Alberta's oil sands projects, including those on the drawing board at Husky. Beijing is also seeking Husky's expertise in offshore oil drilling, primarily because of Chinese drilling plans in the East China Sea.

With a file from reporter Jacquie McNish in Toronto.

Source: The Globe and Mail