China’s Achilles’ heel: Growing foreign oil and gas dependency

China’s Achilles’ heel: Growing foreign oil and gas dependency

Tim Daiss

2013-12-21

Amid news of China’s GDP growth for the third quarter, still stellar at 7.8% compared to the rest of the world, its impressive US$3.66 trillion in foreign currency reserves — the largest in the world — and even its recent successful unmanned moon mission, China has an Achilles’ heel, a weakness that is mounting and posed to worsen in coming years: its dependency on foreign oil and natural gas.This dependency stems from two dynamics: First, China’s oilfields are maturing and can’t come close to meeting increased domestic demand. Second, around 70% of the country’s energy mix is still derived from coal. Of all the hydrocarbons, however, coal is the dirtiest. With mortality rates rising in numerous locations across the country due to air pollution from coal usage, Beijing has mandated that coal-fired power plants be replaced with cleaner natural gas plants starting in several cities, including Beijing, where pollution has reached record levels.

However, the problem is supply. Just as China’s oilfields can’t meet demand, the country’s natural gas supplies are just as insufficient and the country, in addition to piping in natural gas from several neighboring countries, is forced to import expensive liquefied natural gas (LNG), which is sold for Asian destinations at prices more than five times the price for which it sells in North America.

In 2010 China passed the US as the world’s largest energy consumer and earlier this year temporarily passed the US as the world’s largest net oil importer, a trend that is projected to continue. Zhang Guobao, former executive of China’s National Energy Administration, said in September that China’s import of crude oil this year is expected to hit 300 million tons, making the country 60% dependent on foreign imports. This growing foreign oil dependency is a development similar to that which made the US so reliant on imported crude for decades and embroiled it in two Middle Eastern wars amid an unprecedented transfer of wealth worth trillions of dollars for oil.

The US, due to its recent unconventional oil and shale gas boom, however, has turned the situation around and is projected to overtake Saudi Arabia by 2015 as the world’s largest oil producer, according to the Paris-based International Energy Agency’s annual World Energy Outlook released in November. US.oil production will increase to 11.6 million barrels per day by 2020, compared with 9.2 million in 2012, moving the US to near self-sufficiency in the next two decades. Meanwhile, the US has already passed Saudi Arabia as the world’s biggest fuel producer, which includes crude, refined petroleum products like gasoline and other liquids such as biofuels.

Both China’s growing energy dependency and the US oil and gas boom have profound geopolitical ramifications that will soon intersect. While the US is still mostly prohibited by law from exporting crude oil, that could change as increasing oil production creates a domestic glut. In addition, the US is already approving numerous projects to export LNG. Much of that supply is already under contract with gas dependent Asian countries, including Japan (the world’s largest LNG importer), India and South Korea. It is likely that Beijing will avoid US hydrocarbon imports for as long as possible but in time will have to secure those supplies to meet escalating demand. In doing so, the massive flow of payments to China, mostly for consumer goods, with corresponding trade imbalances, will then be greatly reversed.

China’s insatiable hydrocarbon thirst is also influencing its policy in the South and East China seas. While Beijing’s growing assertiveness in the region has smaller neighbors with overlapping claims, chiefly the Philippines and Vietnam, scrambling for answers, Beijing’s new air defense identification zone (ADIZ) in the East China Sea announced on Nov. 23, which covers the disputed islands known to Japan as the Senkaku, to China as the Diaoyu and to Taiwan as the Diaoyutai, is motivated by natural gas as much as any other motive — despite claims that it is purely nationalistic.

The US Energy Administration (EIA) estimates that the area holds 1 to 2 trillion cubic feet of natural gas reserves. Chinese claims dwarf those figures, however, with some estimates as high as 250 trillion cubic feet. In light of this, an argument can be made on China’s behalf; it simply has no choice but to secure hydrocarbons both abroad and closer to home, even while beefing up its periphery. Its economic survival depends on it.

On the other hand, for Japan, South Korea or Taiwan, whose claims overlap China’s new ADIZ, the Middle Kingdom appears to be the proverbial neighborhood bully that you don’t want to confront, but also can’t afford to run away from.