Global Cachet

As the United States and Europe dwell on the future of BP, possible new requirements for accident contingency funds, restrictions on deep-water drilling, and increased industry fees and regulations; China’s influence on world energy markets and the geopolitics of energy security continues to expand. On July 20th, the International Energy Agency announced that in 2009, China passed the United States to become the world’s largest energy user. In addition, in 2009, for the first time in China’s history, more than half (51.8%), of China’s oil needs came from foreign sources.

Passing the 50% threshold has re-invigorated the energy security debate both within China and among other major global energy market players. The lengths China is willing to go to ensure its energy security is a large part of the debate . Take Saudi Arabia, Angola, Iran, and Sudan; for the U.S. and Europe, these countries represent complicated foreign and military policy debates. For China, these countries represent its top oil suppliers.

Moreover, with their substantial government financial resources, China’s national oil companies (NOCs) have been aggressive in entering foreign markets. In particular, Chinese NOCs are willing to go into places that the international oil companies have avoided for political reasons or where they were not willing to pay excessive amounts for exploitation rights. This is particularly true in Iran, Sudan, Myanmar (Burma) and Venezuela. From the point of view of many of these countries, Chinese investment offers an additional advantage– it comes with no annoying “Western” political conditions.

Likewise, with the global economic crisis leaving Europe and the U.S. financially struggling, China has found itself with increased opportunities to expand, particularly into Central Asia, where it has been able to replace Western capital. For example, in November 2009, China’s largest oil and gas provider, jointly with Kazakhstan’s oil and gas firm, bought MangistauMunaiGas, a big oil producer in Kazakhstan. In exchange, China loaned the country US$10 billion.

It comes as no surprise that China is playing a more influential and assertive role in Kazakhstan. Development of its major oil fields could make Kazakhstan the world’s 5th largest oil producer within the next decade. Kazakhstan also stands to benefit: Kazakhstan’s expansion of export routes to China is helping reduce its dependency on Russia and should enable the country to increase its leverage in price negotiations. Increasing leverage on Russia is not necessarily a bad thing for Europe which, generally speaking, views its energy security as a need to decrease reliance on oil and gas, diversify supply routes (particularly vis-a-vis Russia), and expand the use of renewable energy sources. However, Europe’s plans to diversify supply routes do not include building pipelines from Kazakhstan eastward.

China’s anti-crisis policies (while focused mostly on supporting domestic demand), had positive effects on Kazakhstan’s economic recovery. In late 2008, Kazakhstan’s foreign direct investment tap began flowing again with about 31% of total funds pouring into the extraction sector and almost all was Chinese in origin. By the end of 2008, 60% of the total crude oil output was controlled by companies with a strong Chinese presence.

China’s attention to large potential energy suppliers such as Kazakhstan and even negligible energy suppliers such as Myanmar is also due to Chinese policy makers unease with relying so heavily on vulnerable Persian Gulf energy sources. For the Chinese, Gulf oil shipments use sea lanes susceptible to interception as well as terrorism, military conflicts, and other sources of instability in the Middle East that could abruptly disrupt Gulf energy exports.

Transatlantic energy companies are still the major players in both the upstream and downstream sectors. However, with rising costs, declining old resources in the North Sea, and new deepwater developments, their global competitiveness could well be compromised in an environment where the downside of trying new technologies, exploring in deep waters, and taking risks outweighs the potential benefits.

The allegations that BP lobbied the Scottish and UK governments to release the Lockerbie terrorist in exchange for deep drilling rights off the coast of Libya certainly does not bode well for an industry trying to dig itself out of a major PR hole. (Libya has the largest oil reserves in Africa and currently sends most of it to Italy, Germany and France.) But it’s important to consider this: the question is not whether there would be deep water exploration off the coast of Libya, but who is going to do it. Would the Chinese oil companies have the same reservations? There is no such thing as a level playing field in the energy game.

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