The New Bigfoot in the Global Oil Market

On the eve of a new century, China is becoming a key strategic player in global oil economics through production-sharing agreements, already running into many billions of dollars, direct investments and commitments for the development of fields and pipeline construction. This year, China has signed contracts with Kazakhstan and Iraq. It is negotiating deals with Kuwait, Nigeria and Venezuela, among other producing countries. As a result, China has quietly moved ahead of the competition in the rush to tap the world’s remaining crude-oil and natural-gas reserves.

In June, the Chinese outbid U.S. oil companies, in a $4-billion deal, to become partners in one of the richest oil fields in Kazakhstan, which is at the center of the enormous Caspian Sea oil pool in the former Soviet Central Asia. In Kazakhstan, Beijing also committed itself to help build a 2,000-mile-long pipeline to the western province of Xinjiang, at an estimated cost of $3.5 billion.

China’s involvement in what is shaping up as the last great oil rush of the 20th century is part of an emerging geopolitical scenario that has considerable political-risk potential for the United States in its relations with its allies.

Last week’s bitter confrontation between the United States and France over a French consortium’s $2-billion contract with Iran to explore for natural gas is an example of what may lie ahead. Washington opposes the deal because it benefits a country that the United States suspects of supporting terrorism. Under a 1996 sanctions law, any company, U.S. or foreign, investing more than $40 million in either Iran or Libya is subject to sanctions by the United States.

Total Oil Group, the French consortium, is a partner in various Iranian enterprises with Gazprom, the giant Russian energy concern once headed by Russian Prime Minister Viktor S. Chernomyrdin, and with Petronas, the Malaysian energy company. Consequently, the United States could find itself embroiled in disputes with Moscow and Malaysia, too. Dozens of other foreign oil companies are currently negotiating with Iran.

The United States already has a stake in Central Asian oil, only second to its interests in the Middle East. Last August, four U.S. oil companies signed an agreement to invest $8 billion in Kazakhstan’s Tengiz oil field, one of the 10 richest in the world. The second-richest Kazakh field is Novy Uzen, on the east Caspian Sea, with an estimated 1.5 billion barrels in oil reserves. China has been granted exclusive development rights to the area. Along with India and Pakistan, it is also interested in immense natural-gas reserves in Turkmenistan.

With its economy quadrupling in size over the last 20 years and expected to grow indefinitely, China faces an urgent need for fuel to sustain its development. Beijing has committed more than $6 billion to underwrite production-sharing agreements abroad. It plans to spend $100 billion annually--with the aid of foreign capital--over the next 20 years to expand domestic production of oil. It is about to sign a $2-billion contract with Westinghouse to build nuclear power plants. More than $20 billion will be spent on the world’s largest hydropower dam--Three Gorges on the Yangtze. But what China needs most is a guaranteed supply of oil.

China is the world’s second-largest energy consumer, and the U.S. Department of Energy projects that Chinese consumption will rise from 3.3 million barrels a day in 1996 to 4.6 million in 2000; by 2105, the department estimates Chinese consumption at 10.5 million barrels daily. At a 5.7% average annual change--upward--between 1995 and 2015, China will have the highest consumption in the world.

China currently produces about 3.1 million barrels a day (on land and offshore), but it is consuming more than 3.5 million. As a result, China is experiencing a rapidly rising deficit. It had to import 160 million barrels of crude oil in 1996, a 37.5% increase over the previous year, and 1997 imports will balloon even more, according to Yan Wenfong, spokesman for the China National Petroleum Corp.

Beijing, to be sure, has the financial wherewithal to import foreign oil and expand its domestic production (it has $132 billion in foreign-currency reserves). But China needs to partner with great oil producers, and the judgment among experts is that its new policy will pay off. Thus far, 65 foreign companies have invested $5.2 billion to drill for oil in offshore Chinese waters.

China appears determined to manage its industrial and technological revolution by achieving maximum independence in acquiring oil and setting its price. For this reason, Beijing has embarked on new overseas ventures in which it will have a deciding voice. Almost simultaneously with its Kazakhstan deal, China signed two production-sharing contracts with Iraq to develop the al-Ahdab field in central Iraq, which could produce up to 90,000 barrels a day. Two Chinese oil corporations, working jointly, formed a company, al-Waha, to develop the field. Because Iraq remains under United Nations sanctions until all its lethal weaponry are destroyed, the Chinese contract provides for actual payment only after the sanctions are lifted. But the Iraqis have already begun work for China in Ahdab, happy to collect later.

The Chinese are also partners with Russian, British and French interests in developing Iraq’s Rafidain field, with a potential output of 75,000 barrels daily. And earlier this year, Chinese Premier Li Peng visited Nigeria to open negotiations with its military regime for an oil production-sharing agreement; Nigeria is one of the world’s leading oil producers.

Announcing the World Petroleum Congress, to be held in Beijing this month, the China National Petroleum Corp. summed up its objective: “China has huge resources, but lacks the ability to produce, refine, transport and market at a competitive level. The key to modernization and expansion of the oil and gas industry lies in the complete cooperation between China and foreign companies providing investment and expertise.”

This is the latest reality in China’s entry into the brave new world of globalization.