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Taking charge of China’s future

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Oilfield Technology,

Thomas Sheltra takes a look at China’s attempts to ensure energy security through the development of transnational oil and gas pipelines.

In 1992 China became a net importer of oil. In the last 20 years a ‘going out’ energy strategy has been implemented, through which China has invested in oilfields and has built or has made deals to build transnational oil and gas pipelines to improve its energy security. China is currently suffering in all three phases of the upstream, midstream and downstream sectors of the oil industry. As the country tries to find a balance for its energy needs, which it sees as having reliable sources of oil for its economic growth, and as politicians tie economic growth to their positions of power, oil will be a key resource for decades to come. With that, China is also trying to balance economic growth with the impact that this growth has had in terms of increased environmental degradation.

As China’s domestic upstream exploration and production decreases, reliance on imports via tanker and pipelines will become more important as consumption increases. The IEA projects that by 2030, China could be importing as much as 12 million bpd. As China’s oil dependency increases, and as China looks for more oil that bypasses the Strait of Malacca, China seems willing to pay (or even over pay) for investments in upstream purchases of oil fields, and midstream investments in multi-billion oil pipelines. Two examples, the oil pipelines in Kazakhstan and Myanmar, show the types of oil dependence challenges that China will face in the coming decades.

The Kazakhstan-China oil pipeline is a three phase oil pipeline that ships oil from the Caspian Sea to Xinjiang province in northwest China. The pipeline has its pros and cons: For the strategic purpose of becoming less reliant on the Strait of Malacca and Kazakhstan’s geographical location, a transnational pipeline over the thirty year deal is much cheaper and faster way to supply 400 000 bpd of oil to China than by rail as it had been done in the past. 

However, China’s US$ 4.18 billion purchase of PetroKazakhstan from its Canadian owners, CNPC paying US$ 3 billion for the pipeline and the construction, and Kazakhstan using legal and political tactics to take a 50% ownership stake of the deal shed light on the poor investments China is making in its long term oil purchases. Some have suggested that the investment in Kazakhstan is China coming late to the Caspian region and only securing oil that is of lower quality. However, it provides much needed oil for this region in the far northwest of China, with updated refineries, will provide excess energy through China’s domestic west-east pipeline. The Kazakhstan pipeline, while marginal in China’s overall oil needs, has been less contentious than the Myanmar-China oil pipeline.

China recently completed construction of a transnational oil pipeline in Myanmar, which connects with the Yunnan province in southwestern China. This pipeline is strategic for several reasons:

  • First, it diverts 440 000 bpd of Middle Eastern and African oil from the Strait of Malacca.
  • Second, it helps bring energy to the Yunnan province, which ranks 30th out of China’s 31 provinces in terms of GDP. This added energy infrastructure, along with new refineries in Kunming and Chongqing city will help boost an underdeveloped province.
  • Third, it will open up a new corridor for China in the southwestern region, and co-operation with Myanmar.

However, the pipeline fails on several levels:

  • Firstly, the Myanmar pipeline supplies oil from the Middle East and Africa, and therefore fails to curb China’s dependence on these regions.
  • Secondly, the pipeline makes only a small dent in the total amount of oil that is shipped through the Strait of Malacca. As China’s oil imports continue to grow, the marginal percentage this pipeline provides will shrink significantly over the long term.
  • Thirdly, China has invested US$ 1.5 billion to build the pipeline, and will pay nearly US$ 15 million to Myanmar for transit fees for the oil. The small percentage of oil that bypasses the Strait of Malacca will cost more per barrel, than if it was shipped through the Strait, like the majority of China’s oil.
  • Lastly, the country has faced several PR nightmares resulting from the social and environmental impacts of the construction of the pipeline, which traverses mountains, through lush forests and farmland, and the lack of transparency over the refinery in Kunming.

Pipelines will be an integral part of China’s strategic plan both now and in the future as the country tries to find diverse sources of oil that reduces imports from volatile regions such as the Middle East and Africa. But as can be seen from the two examples of current existing pipelines, China is not enhancing its long term energy security as it over-invests in oilfields, builds pipelines through volatile countries and further binds itself to fossil fuels, which increase greenhouse gas emissions and environmental degradation. As China’s consumption of oil increases with no plans to stop, tankers are becoming a more viable option, as imports will likely come from sources that will inevitably pass through the Strait of Malacca. As China’s consumption gets closer to 12 million bpd, the impact these multi-billion dollar pipelines will have on China’s Middle East/Africa and Malacca problem will decrease.

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Adapted by David Bizley

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