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13

China To Emerge Energy Player

China emerges as a major energy player

China is emerging as a major energy consumer and producer of oil and gas. Following the United States, China has become the world's biggest oil importer and consumer. With 1.3 billion people and a rapidly growing economy, China is forging deals with the world's major energy players.

China has now overtaken Japan as the second largest oil consumer in the world and has been increasingly looking overseas for oil needed to maintain its booming economy. Its oil consumption was 252.3 million tons in 2003 and the figure is expected to reach 308 million tons this year, according to the U.S. International Energy Agency.

Imports to China are increasing rapidly. The country's crude oil import is expected to reach 110 million tons in 2004, up 21 percent year-on-year, according to China's Ministry of Commerce figures. In 2003, China crude imports stood at 91.12 million tons valued at $19.81 billion. Refined oil import is projected to increase approximately 40 percent to 40 million tons this year compared to 28.24 million tons valued at $5.86 billion in 2003. More than one third of China's oil supply now comes from imports.

China has massive oil and gas deals with Russia. Russia's trade envoy to Beijing Sergei Tsyplakov told Interfax in an interview on July 26, "At the end of six months, their value reached almost 30 percent of the whole of Russian exports (to China). In fact, an amount equal to all exports in 2003, 5.2 million tons has been exported in the first six months of 2004." Russia has become the fourth largest supplier of oil to China, after Iran, Saudi Arabia and Oman.

The two countries also intend to construct a new Sino-Russian oil pipeline from eastern Siberia to Nakhodka with a branch to Daging in China. Project negotiations are still in their preliminary phases, according to Russia's Economic Development Minister German Gref and Chinese Trade Minister Bo Xilai. Transneft Vice President Igor Solyarskiy told Itar-Tass on August 4, "In that case, 30 million tons of oil a year will go to Daqing, and another 50 million to the ocean harbor of Perevoznaya (Khasanskiy District in Maritime Territory)."

Moreover, China and South Korea may become among the largest purchasers of oil and gas discovered on Russia's Sakhalin shelf. China would purchase approximately 25 billion cubic yards of gas over the next two or three years and take part in constructing Sakhalin shelf infrastructure, according to Governor of the Sakhalin Region Ivan Malakhov. Sakhalin currently supplies China and South Korea with crude, produced both on sea shelf and on land deposits.

In the meantime, Yukos will continue to supply oil to China by rail in 2004 despite the company's troubles. Yukos is the major supplier of Russian oil to China and the government has taken steps to ensure oil supplies continue to China. Russian Railways intends to transport as much as eight million tons of oil to China in 2004.

Operating at full capacity, China's railways have a difficulty meeting demand. China's railways transported 480 million tons of coal in the first half of this year, up 12.2 percent over the same period last year; oil transport via railways grew 12.1 percent to 58.67 million tons. Operating railways in China account for six percent of the world's total, yet it takes on 25 percent of the world's freight volume.

China is also exploring Saudi Arabia's lucrative markets. Sinopec subsidiary Zhongyuan Petroleum Exploration Bureau announced that it has clinched the three-plus-one-year $25.42 million contract for oil well reparation in Saudi Arabia from Saudi Arabia's oil giant Saudi Aramco. Reparations began in mid-June. Sinopec also secured a joint venture with Saudi Aramco in March to conduct gas exploration in a 23,612 square mile block in the Rub Alkhali Basin in the southern part of Saudi Arabia. The oil fields produce 2,800 barrels per day from five wells. The production platform and sub sea pipeline will help China's offshore production and allow it to take advantage of the current oil prices.

Iran, another major energy player, saw opportunities in a deal with China. Iran is now a major and the largest supplier of crude oil to China with an annual export of 10-12 million tons. Export of liquefied natural gas to China in a period of 25 to 30 years will turn the country into one of the major importers of Iranian energy. China has started investing in drilling, seismological and exploration sectors of Iran's oil industry and is interested in being involved in offshore and onshore as well as the upstream and downstream development projects in Iran.

Chinese companies also signed agreements with emerging energy players. China and Kazakhstan signed a joint venture in late July to construct the Atasu (Kazakhstan)-Alashankou (western China) 621-mile long oil pipeline with an annual capacity of 10 million tons. The parties expect to complete the pipeline by 2005.

China also has a deal with Syria. The two countries signed their first joint oil venture on July 26 to develop an old oil field in the northeast of Syria. The Sino-Syrian Kawkab Oil Company and the China National Oil and Gas Exploration and Development Corporation won the rebuilding project of the Gbeibe oil field in 2001 after competitive bidding with companies from United States, Canada and Russia. The two companies hold a 50-50 percent share of the joint venture. Syria has an oil reserve and production capacity of 500,000 barrels per day.

Turkmenistan also has interests in China. Turkmengas and the China Petroleum Technology and Development Corporation have signed a $14.5 million contract to supply equipment for repairs of gas wells in Turkmenistan. Twelve of 20 Turkmen projects involving Chinese companies are being implemented in the oil and gas industry. Total cost exceeds $200 million. The company is also reconstructing oil wells on the Turkmen shelf.

China meanwhile has expressed an interest in Kyrgyzstan. According to the Kyrgyz Ambassador to China Erlan Abdyldayev, Sinopec subsidiary China's Shenli Oil Company will participate in developing Kyrgyzstan's oil fields. Shenli will reconstruct Kyrgyzstan's outdated, eroding oil wells. "These oil fields have a big potential despite their large depth, because local oil is of high quality," said Abdyldayev, adding, "Kyrgyzstan will create favorable conditions for oil cooperation with Chinese companies, as the sides have agreed on building a railroad line between Osh, Turugart and Kashgar. The project will cost $950 million to $1 billion in Kyrgyzstan alone."

Japan and China dispute gas-rich waters. Fearing China could steal its energy resources, Japan launched a controversial survey for natural gas near a group of disputed islands also claimed by China and Taiwan. The $27.5 million survey, which has come under fire from Beijing, will last until October. The Japanese exploration site is near the disputed islands, called Senkaku in Japan and Diaoyu in China, which lie between Taiwan and Japan.

The Chinese government also has massive domestic projects under way to produce oil and gas. On August 4, China announced the completion of the 2,486-mile long pipeline project to pump natural gas from western to the eastern province of Gansu. The pipeline is expected to supply 15.7 billion cubic yards annually. A China National Petroleum Corporation spokesperson told Xinhua on August 4, "The project aims to turn the energy resources of China's vast western regions to economic advantages and to supply gas for the economic developed eastern region, which is in dire need of it."

China's Sinopec signed a partnership in early June with Brazil's Petrobus for oil exploration in China. This is the onset of new commercial and political relations between the two countries. Sinopec became the first Asian company to sign a deal with Petrobus. Brazil's Planning Minister Guido Mantega said Chinese companies would also invest $5 billion in Brazil's energy sector, its infrastructure and logistics.

China's oil consumption had entered a fast growing period with a widening supply shortage as a major barrier to the country's economic growth. Officials are worried as the country projects a 250 million ton annual crude oil shortage by 2020.