Chapter 19
The Red Dragon’s Thirst for Oil
China’s thirst for oil is unprecedented. In 2009, China consumed 8.6 million barrels of oil per day and that number will probably be much higher by the end of 2010. In fact the International Energy Agency (IEA) says that Chinese demand for oil jumped an astonishing 28 percent in January 2010, compared to January 2009.1
China ranks second only to the United States in demand for oil. In the United States, Americans consume about 10 times as much oil as their Chinese counterparts. But the Chinese are catching up. Most experts predict that China’s oil imports will grow substantially over the next few years, and at some point, could outpace the United States. Some experts suggest that between 2010 and 2020, Chinese oil consumption could increase 150 percent.2
The U.S. Department of Energy now predicts that China will overtake the United States as the world’s leading oil importer around 2030.3 Figure 19.1 compares China’s need for oil to that of the United States.
There’s no doubt China needs oil. And they’re doing whatever it takes to make sure those needs are met. For example, just recently China signed a $23 billion dollar oil deal with the government of Nigeria. The deal makes it possible for China to build three oil refineries and a petrochemical plant. The three refineries will be built in Lagos, the commercial capital of the country, and the refineries will have a combined capacity of 900,000 barrels of oil per day.4
But there are more deals on the table. In 2009, Yar’Adua, then-president of Nigeria, received a letter from the China National Offshore Oil Corporation (CNOOC) that expressed the company’s desire to buy up as much as six billion barrels of Nigerian reserves. The CNOOC is considered one of the world’s largest independent oil exploration companies. In addition to expressing an interest in Nigeria’s reserves, the company also showed an interest in 23 percent of the country’s prime offshore fields. Yar’Adua was forced to reject the offer when the letters were leaked to the press. However, negotiations continued. The price tag on the deal is estimated between $30 and $50 billion.
Initially China opened the door to oil deals in Nigeria when it bought the country’s state-owned telecom company. China has used this tactic of first acquiring infrastructure and then oil to set up deals in other oil rich countries including Angola and Sudan.
China also has deals in South America for oil fields in Argentina, Bolivia, and Chile. In early 2010, CNOOC paid $3.1 billion in cash for a stake in one of Argentina’s largest oil explorers, Bridas Energy. Bridas has proven reserves of 636 million barrels of oil, and puts out about 92,000 barrels a day.5
China is also planning deals with Brazil’s leading energy company, Petrobras. Petrobras is the fourth biggest energy company in the world. It produces about 1,978,000 barrels of oil a day with proven reserves of 11.19 billion barrels.6 Petrobras signed an oil export contract with Unipec Asia Ltd, a subsidiary of CNOOC to export about 100,000 barrels of oil a day. The deal is estimated to be worth $10 billion.7
China even has a deal worth $7 billion with Spain’s Repsol YPF, the country’s largest oil company. It operates five refineries in Spain and one in Peru. Repsol controls Argentina’s number-one oil company but also has operations in 30 other countries including in the Middle East and North Africa. China was attracted to Repsol because it has proven oil reserves of 2.2 billion barrels.
China has been consistently buying oil assets for the past 10 years and has landed deals in Africa, Asia and the Middle East.
China isn’t just making deals for oil in foreign countries either. The CNOOC is investing in U.S. energy reserves stockpiled in Texas. In October 2010, the country’s state owned oil-company announced a 33 percent interest in Chesapeake Energy Corporation’s oil leasehold acres. The deal is worth $2.16 billion.
Chesapeake Energy Corporation already has 10 rigs operating in the leasehold area and anticipates, with the infusion of capital from CNOOC, increasing that number to 40 rigs by the end of 2012.8 If the deal is approved it would mark a major milestone for China. For years the country has tried to establish ties with American-based oil and gas companies.
Five years ago, China tried to buy American-owned oil company Unocal. It successfully outbid other companies with $18.5 billion and was in top position. But the deal came under intense pressure and scrutiny from Congress and lobbyists, and CNOOC backed away. The issue was whether a strategic American asset should be sold to a foreign country, especially China, which was rapidly outpacing U.S. oil consumption needs.
The U.S. government has always placed restrictions on the extent of foreign ownership in a variety of industries, including airlines, media, and military contractors. The government approves these types of deals through its Foreign Investment Committee, which determines whether these types of deals pose a national threat to our security. Some previous deals have been approved such as the $1.75 billion sale of IBM’s personal computer business to Lenovo, a Chinese company. But the Unocal deal was considered more risky to the United States, considering it is the largest consumer of oil in the world.
China used to be a net exporter of oil, meaning it was able to keep up with internal consumption. But as the nation’s economic growth took off, so did its thirst for energy, particularly oil. The Chinese government has taken a proactive role in encouraging its national companies to look for ways to satisfy its oil needs, and it has the cash to make as many deals as possible. It has about $2.2 billion dollars stashed away. Jiang Jemin, chairman of Petrochina, a subsidiary of CNOOC says, “Low share prices of some global resource companies provide us with fresh opportunities.”9
In fact China is so dedicated to buying foreign oil reserves and companies that it created the China National Energy Administration. The new institution consists of nine departments, with 112 personnel. The China National Energy Administration’s main responsibilities include drafting energy development strategies, proposing reform advice, implementing management of energy sectors, and creating policies related to exploring new energy sources. The Administration even established a special fund for China’s three state-owned energy companies, including Petrochina, Sinopec, and CNOOC to buy oil and gas firms from around the world. So far, the three companies have put together deals in 30 countries.
That may not be enough. Robin Geffen, chief executive of Neptune Investment Management, which runs a Chinese investment fund, suggests that China would need to buy two companies the size of BP each year for the next 12 years to meet its growing domestic energy demands.10 Their need for energy could be seen as a direct threat to the U.S. As supplies of cheap oil are being quickly used up or depleted, China is creating competition with the U.S. for oil sources.
Right now 60 percent of China’s oil comes from the Middle East. Experts say that is expected to increase to 500 percent by 2030.
One of the main problems with China getting oil from the Middle East is the country’s relationship with Iran. Iran has a huge supply of oil. In fact, oil exports provide half of the Iranian government’s revenue. The U.S. Energy Information Administration reports that as of January 2010, Iran has proven oil reserves of 137.6 billion a day. That’s approximately 10 percent of the world’s total reserves. Iran is OPEC’s second largest producer, behind Saudi Arabia.11
China imports about 430 million barrels of oil a day from Iran and that number is growing. In March 2010, China increased its Iranian oil import by 14.8 percent,12 and Iran is the third largest supplier of oil to China. Experts say that this dependence on Iranian oil is making the Chinese government reluctant to implement sanctions against Iran.
That doesn’t make the United States happy as it pushes the Chinese government to provide sanctions against Iran. Currently the United States, Japan, South Korea, Australia, Canada, and the European Union have passed laws that restrict investing in Iran’s energy sector. China is not on that list. Although the country has signed on to United Nations Security Council resolution that punishes Iran for its nuclear weapons program, China isn’t using sanctions against the country.
China doesn’t believe its current deals violate the resolution and has often voiced opposition against Iranian sanctions. He Junke, Deputy Head of China’s Youth Federation, commented, “China is always opposed to sanctions against Iran. The sanctions method does not help settle the problems as China developed its defense industry in time of sanctions.”13 Jiang Jiemin, president of state-owned China National Petroleum says, “We will implement our projects in Iran as usual.”14
In fact after most U.S. companies withdrew from the area, CNOOC did indeed strengthen its position in Iran. For example, China’s state owned Sinopec (also a subsidiary of CNOOC) has a $70 billion deal with Iran. The deal allows Sinpoec to buy 250 million tons of liquefied natural gas for 30 years from Iran along with development rights in Iran’s Yadavaran field.
CNOOC is also in various phases of developing three other fields in Iran, including work on one of the world’s biggest natural-gas fields, and on enhancing recovery from a small, older oil field. CNOOC expects production from the older field to hit around 20,000 barrels a day later in 2010.
In addition, Iran is committed to providing China with 150,000 barrels of oil a day for the next 25 years. Iran oil Minister Bijan Zanganeh has publicly stated that Iran is China’s biggest oil supplier and wants to be its long-term business partner.
The U.S. is also accusing the Chinese of violating sanctions against Iran. According to an article in the Washington Post, the Obama administration has concluded that Chinese companies are helping Iran improve its missile and nuclear weapon technology.15 In 1997 China expressed its commitment to end involvement in supplying Iran’s nuclear program in an official policy declaration. However, the U.S. believes China isn’t aggressively following through on their commitment. In 2007, the Defense Intelligence Agency (DIA) director stated that China appears to be adhering to its commitment to limit nuclear-related cooperation, but that, “Chinese entities continue to supply key technologies to countries with WMD and missile programs.”16
Additionally the U.S. director of central intelligence says that assistance from Chinese entities has in part helped Iran move toward self-sufficiency in the production of ballistic missiles.17 And we’re not alone in this thinking. Israel believes there is a link to China and Iran missile technology. The International Assessment and Strategy Center released a report a few years ago that showed Hezbollah munitions were mainly rockets and missiles that could be traced back to China.18 Most notable are the C-802/Noor anti-ship missiles which were sold by China to Iran in the mid-1990s.
But the list of Chinese-related weapons runs deep. They now include the Shahab series of medium range ballistic missiles, solid-fueled missiles, long-range land-attack cruise missiles, short-range anti-ship and man-launched anti-aircraft missiles, optically guided missiles, deadly fast-rising naval mines, and very fast missile-armed attack ships.19
China’s involvement in Iran’s nuclear program goes back to the mid-1980’s when the two countries cooperated on missile technology. Then later on in the 1990s, China served as a source of raw supplies, providing Iran with nearly two tons of natural uranium.
The United States has tried to put a halt to China’s involvement in Iran’s nuclear programs. Between 2001 and 2007, the United States imposed sanctions in fifty-two instances against Chinese parties under the Iran Nonproliferation Act (INA) and the Iran and Syria Nonproliferation Act (ISNA).20
It’s not just China’s aid to Iran that worries the United States, it’s also the country’s ties to Sudan. Sudan supplies China with 7 percent of its oil. Sudan is an oil-rich country with an estimated 5 billion barrel reserve. That’s a lot of oil for energy-desperate China, and therefore the Chinese have invested billions of dollars in joint exploration contracts in Sudan, including the building of a 900-mile pipeline.
In return for oil, China sells small arms to Sudan; assault rifles are the most common weapon. In September 2004, the UN Security Council passed resolution 1564, threatening Sudan with oil sanctions unless it curbed its support for militia groups in Darfur.21 However, to protect its oil interests in Sudan, the Chinese government said it would veto any bid to impose such sanctions.
According to Human Rights First, because of the increase in arms, violence in Darfur has escalated. Khartoum is the capital of Sudan, and the Human Rights First says China has topped the list as biggest supplier of arms to Khartoum, at 90 percent. China denies such charges and says it is one of seven countries supplying weapons to Sudan. Betsy Apple of Human Rights First says,
So long as it continues to sell massive quantities of small arms to Khartoum, the government of China has created a virtual supply line from the small arms factories in China to the Sudanese government-sponsored militias killing civilians in Darfur.22
It’s highly unlikely China will stop selling arms to Sudan, not as long as the country has oil. As China’s oil consumption grows, China will use every avenue to fulfill that need, regardless of the number of lives lost.
Like Charlemagne, classified as the clandestine barbarian in Barbarians of Wealth, so too could China be considered a clandestine barbarian, except its oil-for-infrastructure, oil-for-arms are fairly transparent.
Although China just replaced Japan as the world’s second-largest economy, we can’t forget about India. From FY 1980 to FY 1989, the economy grew at an annual rate of 5.5 percent. By the early 1990s, economic changes led to a dramatic growth in the number of Indians with significant economic resources. More recently, India’s growth rate hit the 8.8 percent mark. India is now the second-fastest-growing economy in the world.
About 10 million Indians are considered upper class, and roughly 300 million are part of the rapidly increasing middle class. In 1984 and 1985, India’s middle class constituted less than 10 percent of the population, and since then, it has more than tripled. Experts predict that half of India will turn middle class between 2020 and 2040. McKinsey Global Institute (MGI) suggests that if India continues its recent growth, average household incomes will triple over the next two decades, and it will become the world’s fifth-largest consumer economy by 2025.23
India’s middle class likes to shop. They buy the same things that we do, including mobile phones, televisions, and cars. In fact the automobile industry in India is the ninth largest in the world.24 On top of all this unprecedented growth in India’s economy and its middle class, is the population itself. India holds 15 percent of the world’s population. This means the country’s energy needs are massive. India is currently the world’s fifth largest energy consumer and is expected to take third place by 2030, behind the United States and China. In 2009, India consumed nearly 3 million barrels per day of oil.
Despite the global economic recession, India’s need for oil has continued to rise, but it can’t domestically fulfill its energy needs. According to the Energy Information Administration, India has approximately 5.6 billion barrels of proven oil reserves, the second-largest amount in the Asia-Pacific region after China.25 To keep pace with demand, India will need to import oil from other countries. Now oil accounts for nearly 24 percent of total energy consumption. Nearly 70 percent of India’s crude oil imports come from the Middle East, primarily from Saudi Arabia.
India is in the same situation as China and seems to be following the same path of actively pursuing oil deals in other countries. Recently India’s Oil and Natural Gas Corporation (ONGC) acquired a 40 percent stake in a $19 billion project to develop crude oil in Venezuela. An official said the group would pay $1.05 billion to Venezuela as the signing amount and then invest another $9 billion in developing the field, which is expected to produce 400,000 barrels of oil per day.26
Another India-based oil company, Videocon, has a 10 percent stake in an offshore oil block in Mozambique, and the deal is worth $75 million.
Reliance Petroleum, another India company, is scouting for deals in Latin America and Africa. Indian Oil Corporation (IOC) is in talks to acquire Gulfsand Petroleum, a U.K. company active in Syria. In 2009, the ONGC bought another U.K. company, Imperial Energy, for $2.1 billion so it could gain access to West Siberia oil fields.
India is also considering Central Asia as a source to fulfill its energy needs. The Central Asia region, which consists of the republics of Turkmenistan, Kazakhstan, Uzbekistan, Kyrgyzstan, and Tajikistan, is emerging as a viable energy source. CK Santhanam, President of India-Central Asia Foundation, an organization formed to promote initiatives in Central Asia, says, “Central Asia could be a key region for fulfilling our rapidly expanding energy requirements.”27
India doesn’t have the cash reserves that China has, so its deals are smaller in size and scope. But that doesn’t mean the country is following in step with China. In fact, India, like China, also has ties with Iran. The United States says India’s two leading energy companies ONGC and Indian Oil Corporation (IOC) along with three others have oil-related ties to Iran. These ties, however, violate the UN agreed-upon sanctions against Iran. Those who violate the sanctions run the risk of sanctions themselves. This means the United States could impose sanctions against India. However, the reality is that since 1998 the United States has not imposed sanctions against any country violating the Iran Sanctions Act.
India doesn’t see its ties with Iran as a violation. A senior Indian official says that the oil companies are not in violation, stating, “Whatever we are doing is fully compliant with the Government of India policy. We have not violated any rule by investing in Iran.”28
As much as the United States would like countries like China and India to stay out of Iran, it’s not going to happen. These countries are on a hunt for oil. Just as a junkie needs to supply his or her daily heroin addiction, China and India will get their oil fix anywhere they can, even if that means supplying weapons to Iran.