The Asian giants compete for energy

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.

All countries have basic energy needs, but China's unrelenting, rapacious appetite for energy will only continue to increase and put further strain on the international system. Anyone who naively thinks that China's energy needs will peak out or decline are deluded. (Quote from the article: "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."

Their national self-interest in the energy arena implies a concomitant military self-interest. It is extremely unlikely that China's energy requirements will stabilize or even decline. This will put them at odds with their neighbors for dead certain.

It would be wise to keep a close eye on the modernization of Chinese military generally, with an emphasis on their Naval assets as this time bomb keeps ticking.

BTW, I hope the EU sinks if they sell advanced gear to the ChiComs.

Talk about securing sea lanes, China is building a Naval base in Pakistan (Gwadar) and India has a Naval base in Vietnam and a military base in Uzbekistan. Some intellegence reports even suggested India had a miliary base in Iran (Zahidan or Busher).

Make careful note of these things. Yes, they are making moves in just about every region, including the "Stans" and just about every where else.

Everyone one FREEP who has suggested that China is somehow a quaint, benign capitalist mercantile state not requiring expanded energy sources throughout the globe (yes, including massive increases in oil consumption) are 100% dead wrong in their analysis. Of course, they ignore the facts. Secondly, as part of the rapacious drive to lock up key venues for all types of energy, they will continue to quietly push their expansionist aims.

Sooner or later this will explode into direct outright military conflict with a variety of countries, potentially including the US. Other items could also open up military conflict (disputed territories, fishing rights, basic military forays (Hainan, Guam, Japan sub and other incidents etc.).

They are playing a smart game for a very long time and few in the West have been watching them. If they play their cards right, and if the liberals and money-blinded business types continue to aid and abet the Chinese, they could very well end up being the sole Superpower [unfortunately], a role which we are qualified to fulfill. With their abysmal human rights record, watch out if they become top dog instead of us!

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