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Outside View: China's energy diplomacy

China's building of the Gwadar port in Pakistan at the mouth of the Straits of Hormuz was more to protect its oil supplies coming from the Persian Gulf than to help Pakistan. It is a strategic location where China can police its own as well as Western supplies. At the moment Chinese interests are taking a back seat in the Middle East, but the Chinese are determined to alter this equation, especially if their supply line is threatened.
by Hari Sud
Toronto, Canada (UPI) Mar 04, 2008
China's building of a port in Pakistan, its extra-polite friendship with the rulers of Myanmar and now its offer to Iran to pick up gas from Pakistan if India shows no interest in doing so is all part of the country's quest for energy to feed its export economy.

The West has very cleverly shifted its smokestack manufacturing industry to China. There, a mix of its own but rapidly depleting oil, low-grade coal and imported oil and gas are keeping the wheels of the export industry churning. In the last five years it has cornered almost all of Myanmar's gas, struck a deal with a Canadian company to buy out its oil interests in Kazakhstan and negotiated with Russia, Indonesia, Nigeria and Angola to buy oil and gas assets even at a premium cost.

China's recent offers to Iran and Pakistan to buy their gas have caught analysts off guard. The official Indian reaction was muted and clever. They argued that taking gas over the Himalayas to China's industrial heartland on the eastern seaboard is difficult. But, with friendly Pakistan and a pipeline routed along the Korakaram Highway, it is possible to join the proposed central Asian pipeline, which China will build.

There is one catch -- by the time the gas reaches the Chinese users the cost of transporting it will have tripled the end-user price. Also, inhospitable conditions will add higher pipeline maintenance and operation costs.

Then why are Chinese policymakers moving in the wrong direction and making their nation vulnerable to all kinds of strategic pressures? Once China becomes dependent on suppliers and the route the supplies will take, it becomes dependent upon them. This situation defies description.

China's building of the Gwadar port in Pakistan at the mouth of the Straits of Hormuz was more to protect its oil supplies coming from the Persian Gulf than to help Pakistan. It is a strategic location where China can police its own as well as Western supplies. At the moment Chinese interests are taking a back seat in the Middle East, but the Chinese are determined to alter this equation, especially if their supply line is threatened.

Myanmar is being cultivated as an exclusive oil and gas supplier to China. The extraordinary friendship the Chinese have struck up with the Myanmar rulers is not so puzzling once you understand that oil and gas are China's main interest there. To this affect all loans advanced and all military hardware being sold have only one purpose -- to allow them to grab as much oil and gas as they can.

Unfortunately this is not as easy as it looks for the Chinese. Here they are in competition with India. India also needs oil and gas supplies and will do anything to get them. To India, Myanmar's supplies are closer than Iran's, so India would prefer that a significant portion of these supplies come to India. Hence India has altered its policies and befriended the Myanmar rulers. Myanmar is of course fully aware of the situation and will play India and China one against the other.

Iranian supplies are much better and more reliable if the Chinese are prepared to pay the elevated prices and arrange for transportation. A 56-inch pipeline from southern Pakistan to Kazakhstan, a distance of 1,800 miles, will cost upward of $25 billion. Add to this possible terrorist strikes in Baluchistan and Pashtun areas of Pakistan, and the pipeline may immediately become uneconomical.

Then why are the Chinese interested in Iranian gas?

In fact, it was not the Chinese who initiated this particular proposal, but the Pakistanis who persuaded China to show interest in it to pressure India. If India takes the bait, the Pakistanis have scored a major diplomatic and commercial coup. But India has shown no interest in China's pursuit of Iranian gas via Pakistan. It is a smart move on India's part. This may persuade Pakistan to be a bit more reasonable on transit fees and international assurances of uninterrupted supplies.

India certainly has to think twice before it hands over the keys to its vital supplies to Pakistan.

While trying to procure future energy supplies, China is also straightening up its commercial relationship with Russia. During President Vladimir Putin's visit to China in 2006, multiple agreements on energy supply cooperation were signed. These included the supply of 40 billion to 60 billion cubic meters of gas to China via two pipelines. The first one, if completed in 2010, will supply Siberian gas to China's northwest Xinjiang area. The second pipeline will end in the northeast province of Heilongjiang and is expected to be operational in 2015.

In far away West Africa, China has acquired large Nigerian offshore oil and gas fields. China's investment in this 2006 deal was $2.3 billion -- the country's largest overseas investment in a civil war-torn country. If the Chinese are successful in extracting oil there, its transport via the Cape of Good Hope in South Africa will be easy. But extracting oil and gas in Nigeria is not a cakewalk.

Other far away places like Angola, Venezuela, Ecuador and Peru are being tapped to supply China's energy needs. As a matter of fact, in 2006-07 Angola was the country's largest source of oil, supplying as much as 750 million barrels a day to China.

How much oil and gas does China need?

China ran a deficit of 4 million barrels a day last year. This deficit is expected to double by 2015. Importing this much oil requires safeguarding the supply line. Shipping routes via sea have to be strategically guarded, and pipelines carrying oil and gas have to be reliably routed. To this effect China's large-scale development of blue water naval capability makes sense.

In the last three years it has become apparent that China is switching to gas as its choicest source of energy. At the moment gas accounts for only 3 percent of the country's total energy needs, but in coming years its usage is going to increase. With its 80 trillion cubic feet of gas reserves, China has been able to pretty much balance its supply and demand. But with increased usage, increased supplies are being sought.

As explained above, gas pipelines will connect China with Central Asia, Myanmar and Russia. China still aims to supplement these supplies with liquefied natural gas, which can be procured in the Middle East or elsewhere. A fleet of 30 LNG tankers has been planned to shuttle between China and its supply sources. A dozen or so LNG terminals to unload the gas are planned. The first one became operational in 2006.

Eighty percent of China-bound oil and liquid natural gas passes through the Indian Ocean. Therefore China is attaching special importance to building strategic naval assets in the Indian Ocean. The building of the Gwadar port in Pakistan was part of this plan. Its naval listening facility in Myanmar is also augmenting China's blue water capabilities.

Standing in the way of Chinese mastery of Indian Ocean shipping lanes is the Indian naval facility in the Andaman and Nicobar Islands in the Bay of Bengal, opposite the Malacca Straits. In addition, India's modernization of its navy and its proposed acquisition of nuclear submarines and aircraft carriers are not sitting well with the Chinese.

From these small islands, India can interdict most of China's energy imports. Conversely, China could stage a Pearl Harbor-style attack on these islands and start a war. This explains why China is maintaining an uncompromising posture in its claim over areas of Arunachal Pradesh in northeast India.

In summary, China's oil and gas import needs are immense. The bulk of these supplies must pass through the Indian Ocean. In the last five years, China has been building up its naval fleet to safeguard its supply route. It is also building strategic alliances with Indian Ocean littoral states.

India remains a thorn in China's side. First, India is growing as rapidly as China is and needs imported energy from the same sources. Second, it is unpleasant for India to find China's military presence in its back yard -- in Pakistan and Myanmar. This may one day lead to a conflict unless China decides on a less aggressive policy and eventually strikes a deal with India.

(Hari Sud is a retired vice president of C-I-L Inc., a former investment strategies analyst and international relations manager. A graduate of Punjab University and the University of Missouri, he has lived in Canada for the past 34 years. Copyright Hari Sud.)

(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)

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