The Asian giants compete for energy
By Victor Mallet
Financial Times | March 3, 2005
http://news.ft.com/cms/s/36620a9c-8c04-11d9-a895-00000e2511c8.html
China National Offshore Oil Corporation is considering a nearly
$14bn (�7bn, �10.6bn) takeover of Unocal of the US. Sinopec, another
Chinese state-controlled oil group, has struck a $70bn deal to buy
Iranian crude oil and liquefied natural gas over three decades.
China has sent $6bn to Rosneft, the Russian company that bought the
main production unit of the embattled Yukos oil group, as advance
payment for oil supplies.
India has just reached a $40bn agreement to import LNG from Iran and
develop Iranian oilfields, and is promoting pipeline projects to
bring oil and gas across neighbouring countries to supply its energy-
hungry economy.
These deals are among the largest of their kind, but scarcely a week
goes by without Indian or Chinese companies announcing similar, if
smaller, energy transactions from Ecuador to Gabon. The race by the
two emerging economic giants of Asia to secure fuel has begun in
earnest.
With world energy supplies already tight, the question is not
whether the rising demand from India and China will bring them into
commercial competition with each other and with other big importers
such as the US and Japan: that is already happening. The question is
whether it will lead to diplomatic tension and ultimately increase
the risk of military conflict in the Asia-Pacific region.
For the moment, the competition for resources is fierce but not
hostile. The main evidence of concern is that Beijing, nervous about
the possible use of US and Indian naval power to control oil
supplies from the Middle East in the event of conflict, is rapidly
strengthening its own navy. "The Chinese are building up a
capability to defend those sea lanes," says Gary Samore, director of
studies at the London-based International Institute for Strategic
Studies. "There is a naval rivalry building up in south-east Asia
and the Indian Ocean."
There is no doubt that India and China, which together account for
more than a third of the world's population, must greatly increase
their imports of oil and gas if their economies are to continue
growing at annual rates of 6-10 per cent. China was once an oil
exporter but is now the world's biggest oil consumer after the US
and is increasingly dependent on imports: already, a third of its
oil is imported.
India, although its economy and its energy needs are smaller than
China's, is even more dependent on imports than its dynamic
neighbour. Mani Shankar Aiyar, petroleum minister, reckons India's
import dependency will increase from 70 per cent of consumption this
year to 85 per cent in 15 years.
In Mapping the Global Future, an assessment of the world's prospects
in 2020, the US government's National Intelligence Council says
China is expected to boost its energy consumption by 150 per cent
and India by nearly 100 per cent if they maintain steady
growth. "The single most important factor affecting the demand for
energy will be global economic growth, particularly that of China
and India," says the report, released in December. Both countries
lack domestic resources and need to ensure access to imports. "The
need for energy will be a major factor in shaping their foreign and
defence policies, including expanding naval power," says the
intelligence report, adding that this is likely to prompt China to
be more "activist" in the Middle East, Africa, Latin America and
Eurasia.
This, too, is already happening. In recent years, Beijing has
courted nations rich in natural resources. Trips by Hu Jintao, the
Chinese president, to countries such as Kazakhstan and Gabon are at
least partly inspired by China's thirst for energy.
Rivalry between China and India would be a concern even if it
occurred in a world where other demands for energy were unchanged.
But that is not the case. With oil and gas remaining the essential
fuels for industrial societies, the importance of Middle East
suppliers will increase as reserves elsewhere are depleted.
"Last year the UK for the first time became a net gas importer, as a
result of which there is a lot of interest in pipeline and LNG deals
in the UK and Europe," says Anna Howell, a Hong Kong-based
consultant for Herbert Smith, the international law firm. "That is
exactly what we're already seeing here in India and China."
Japan, the world's second largest economy, and South Korea, which
recently sealed an agreement to buy $20bn of LNG from the Russian
far east and Yemen, also remain highly dependent on energy imports.
The continuing confrontation between China and Japan over a gas
field in a disputed part of the East China sea and the fierce
diplomatic battle (apparently won by Japan) over the route of a
proposed Russian pipeline carrying Siberian oil show that the
dangers of energy competition are real.
Not everyone, however, is pessimistic. Claude Mandil, executive
director of the International Energy Agency, the club of
industrialised oil consumers, says the difficulty of meeting China's
and India's need for fuel imports can and should be eased by
international and regional co-operation.
India's Mr Aiyar takes the same view. He dismisses the idea that the
tussle may become a new version of the "Great Game" for influence
between rival 19th century imperial powers, saying he plans to visit
Beijing later this year for consultations. One of his aims is to
avoid damaging competition between Indian and Chinese oil companies
for the overseas energy assets coveted by both countries. "India and
China don't have to go through fratricide in order to arrive at the
conclusion that it is better to co-operate on energy security," he
says. "Of course there will be competition where the market
dictates."
The need to secure oil and gas supplies for the Indian economy may
also help improve relations with other neighbours including
Pakistan, its long-time enemy. Among the pipelines under
consideration are one bringing gas from Burma across Bangladesh, one
from Iran across Pakistan, one from Turkmenistan across Afghanistan
and Pakistan, and even one across India from Iran to China.
S. Chander, an energy and infrastructure expert at the Asian
Development Bank, notes that reaching access agreements with
neighbouring states is easier than before, at least
financially. "For these countries like China and India with booming
exports, to pay out a couple of hundred million dollars to Pakistan
or Bangladesh is not a big deal, as it might have been five or seven
years ago when foreign exchange was tight."
The need for governments to co-operate on long-term infrastructure
projects thus points at least to the possibility of improved
relations between previously hostile states. "People are getting
pragmatic," says one Asia-based strategist at a big international
oil company.
he energy squeeze is not so good for human rights or environmental
protection, in central Asia or countries such as Burma. Governments
in oil importing countries typically care more about energy security
than the politics of the exporter. Democratic India has forged close
relations with Burma's military junta and all but abandoned support
for the pro-democracy opposition led by Aung San Suu Kyi. Like
China, India is prepared to sacrifice other goals in the search for
energy security.
In this search, both countries are implementing an array of policies
designed to keep their power stations, factories and vehicle fleets
running in the years ahead. The first and most obvious step is to
boost domestic output of oil and gas, but the two governments accept
that domestic production, even if it can be increased, cannot be
enough to meet fast-growing demand.
The next step is to ensure good relations with suppliers, which is
why India hosted a meeting of Gulf oil exporters and big Asian oil
consumers (including China) last month. It also explains why India,
China and Japan are all prepared to risk the wrath of the US by
striking deals with Iran.
Another priority is to guard against disruptions to supply. Both
India and China have decided to create oil stockpiles for this
purpose and India has signed a memorandum of understanding with the
IEA on the co-ordinated release of stored oil. China is expected to
begin its stockpile this year.
The fourth strategy is to diversify sources of supply, both
geographically and in terms of fuel types. In short, no one wants to
depend on oil from the Gulf. China and India are enthusiastic new
customers for LNG from various sources, with India's first terminal
operating and several more being constructed and planned in each
country.
"The objective of LNG imports is to substitute for liquid petroleum
imports from the Middle East," says Mr Chander. "It will, if not
reduce the dependency, then at least hold it to a manageable level."
Both Beijing and New Delhi are also eager to exploit more nuclear
power. China wants to quadruple its output of nuclear-generated
electricity in the next decade.
A fifth policy, favoured by environmentalists and finance
ministries, is to allocate imported energy to the most suitable
users and increase the efficiency with which the energy is used.
Much fuel would be saved if India's cars and China's power stations
and factories were as efficient as vehicles and plants in Japan and
the west.
Yet analysts doubt that improved efficiency can make a noticeable
difference to energy consumption. Joe Zhang, head of China research
at UBS, argues that for the policy to work it must be universally
adopted, or else the few plants that do invest in better equipment
would simply be at a financial disadvantage. "If one factory does
it, it's no use," he says. "You need 200,000 other factories to do
the same."
Mr Zhang believes it is unfair to compare China's high energy use
per unit of gross domestic product with the lower figures recorded
in western countries because the whole point about China's economic
growth is that the nation has attracted heavy, high-energy
industries from richer countries. China, furthermore, is importing
particularly large amounts of energy at the moment because it is
building so much physical infrastructure roads, ports, buildings and
power stations.
The last and most controversial strategy, pioneered with spectacular
lack of success and large financial losses by Japan in the 1970s, is
to try to achieve energy security by purchasing overseas exploration
and production assets, or even whole oil companies. China has
pursued what it calls a "go out" strategy for a decade and its oil
companies have secured footholds in countries such as Venezuela and
Sudan. The mooted Unocal bid is another example.
It is an idea that attracts only scorn from financial
analysts. "It's actually a silly thing to do," says Mr
Zhang. "Whether the energy is produced by you yourself or by
somebody else in Canada or Australia, you still have to pay for it.
It makes sense to buy the reserve, the resource, only if you are a
better producer. It doesn't change your energy dependency at all."
David Hurd, energy analyst at Deutsche Bank, adds that it is odd for
CNOOC to think about buying Unocal, whose share price has recently
been valuing its reserves at about $8 per barrel of oil equivalent,
when it is buying gas assets in Australia for a quarter of the
cost. "The argument about oil security is in my opinion irrelevant
until you control the sea-lanes of the world," he says. Pipelines
are even more insecure, as shown by repeated sabotage of pipes in
Iraq and in the Pakistani province of Baluchistan.
Indian companies are starting to play the same game, and Indian and
Chinese groups are now partners in one project in Sudan. "We are a
late starter," says Ravi Mohan, chief executive of Crisil, the
Indian credit rating agency. "In the early round of this, I think
China is perhaps ahead of India, but India has woken up, so we can
expect to see more action on this front." Yet even the best of the
strategies India and China are adopting to improve their energy
security will make a difference only at the margins. The two
countries will inevitably compete to buy oil and gas, just as they
will compete with other energy importers in developed and developing
countries. The challenge is not to stop the competition but to keep
it amicable.
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