China’s Energy Options Narrow As Mideast Risks Rise – Analysis
By Michael Lelyveld
The threat of conflict between the United States and Iran will pressure China to deal with its rising reliance on foreign oil and gas after years of unchecked growth, analysts say.
China’s petroleum demand has been racing ahead of domestic production for over a decade, leaving it vulnerable to price spikes and disruptions in the Middle East.
China’s dependence on foreign oil is particularly dire, rising to over 70 percent of consumption last year since topping 50 percent for the first time in 2008.
While China has sought to diversify its sources, the world’s largest crude buyer still relied on OPEC suppliers for 54 percent of its imports in 2018, Enerdata’s Global Energy Research said.
Despite several flare-ups of U.S.-Iran tensions in the past year, China’s dependence has deepened with record oil imports averaging 11.13 million barrels per day (bpd) in November as refiners rushed to use up annual import quotas, according to Reuters.
Imports from Iran through November fell 47 percent from a year earlier to about 315,000 bpd, the online news publication International Business Times reported.
The steep drop followed U.S. sanctions on Iran and Chinese shipping, offset by increases primarily from Russia and Saudi Arabia.
While China’s economic growth slowed, oil imports climbed 10.5 percent from the year-earlier period, exceeding the 10.1-percent increase in 2018.
Aside from China’s diplomatic efforts and calls for calm following the deadly U.S. attack on Iranian General Qassem Soleimani, there seemed to be no strategy for dealing with the country’s increased energy security risk.
“The case of oil is acute, and they have few short-term options,” said Mikkal Herberg, energy security research director for the Seattle-based National Bureau of Asian Research.
Running at full capacity
China’s options are likely to narrow over time, since the country has already pursued available alternatives during the attacks on tankers and Saudi oil facilities last year.
Further increases in imports from Saudi Arabia, which have already reached 1.6 million bpd, are unlikely to be a solution for China, if further conflict affects all tanker traffic from the Persian Gulf.
More secure supplies overland from Russia are possible, but these have already been increased on available routes.
“They are taking about as much of Russian supplies as they possibly can via the Eastern Siberia-Pacific Ocean (ESPO) pipeline, the Kazakhstan pipeline, rail supplies, and buying some seaborne supplies from Kozmino,” said Herberg, referring to Russia’s Pacific Ocean port for the ESPO route.
“Not much infrastructure is likely to be developed to change that very much in the near future,” he said.
Last month, Russian pipeline monopoly Transneft announced plans to boost oil transport on ESPO by 6.6 percent this year to 1.52 million bpd, approaching the route’s rated capacity of 1.6 million bpd, Interfax said.
Philip Andrews-Speed, senior principal fellow at the University of Singapore’s Energy Studies Institute, said that ensuring that all oil and gas pipelines from Central Asia and Russia are running at full capacity is one possible response to the Middle East risk.
The option could include accelerating the capacity build-up of Russia’s new Power of Siberia gas pipeline, Andrews-Speed said.
The 3,000-kilometer (1,864-mile) line, which opened in December, is expected to supply China with only five billion cubic meters (176.5 billion cubic feet) of gas this year, reaching full capacity of 38 billion cubic meters (bcm) in 2024, according to the official Xinhua news agency.
If China does turn to Russia in an energy security crisis, it could strengthen Moscow’s negotiating position in a relationship where Beijing has been seen as having the upper hand.
China’s alternative network of Central Asian gas pipelines from Turkmenistan, Uzbekistan and Kazakhstan carried 47.9 bcm to China last year with capacity of 60 bcm, Xinhua reported.
The pipeline connections are likely to rise in importance if transport risks spread to the passage of tankers for liquefied natural gas (LNG).
Dependency on foreign gas
China’s dependence on foreign gas has followed the same trajectory as oil with rising reliance reaching 44.5 percent of consumption in 2018.
The country has invested heavily in 22 import terminals for LNG to reduce pollution from coal, but the entire fuel-switching policy could be at risk if ocean-borne transport is disrupted.
The growth of gas consumption has already slowed last year from double-digit rates in 2017 and 2018 as the government eased the pace of conversions from coal under economic pressure.
Despite the environmental consequences, China preserves the option of burning more domestic coal.
Last month, The Wall Street Journal reported that “Beijing has taken a softer stance on coal use after (the) missile attack in September on Saudi Arabia.”
Consumption figures for 2019 are likely to show an increase in coal use for the third year in a row. Last February, the China National Coal Association (CNCA) predicted a rise in consumption to 3.89 billion metric tons.
Even without major transit problems, rising risk may drive higher import prices for both oil and gas over a period of months, posing a greater threat to China’s economic growth.
In that case, increased coal use could gain favor as both a haven from higher costs of imported petroleum and a form of economic stimulus for domestic industry.
Andrews-Speed said that other possible options for China may include pressing the national oil companies (NOCs) to increase their investments in domestic oil and gas production, both conventional and unconventional, even at a high cost.
Responses could also include increased support for coal-to-liquids production projects, accelerating the electrification of transport and continuing to expand oil and gas storage facilities, Andrews-Speed said.
Strategic petroleum reserve
The U.S.-Iran crisis may only accentuate some Chinese responses that have already been underway.
“Beijing was already shifting attention toward greater supply security for all energy imports (oil, gas, and coal) in the wake of trade conflicts with the United States and growing concerns that the U.S. might actually threaten seaborne supplies if the broader strategic competition worsened,” Herberg said.
“So, they are pushing their companies to raise domestic production despite high costs and market distortions,” he said.
“In the case of oil, that’s not going to make much of a difference. They have better prospects to raise domestic gas production via shale and higher-cost conventional gas projects,” he said.
China also has some protection from its largely secretive strategic petroleum reserve, which Herberg estimates is likely to contain over 300 million barrels of oil.
In the case of a serious disruption of oil supplies and a spike in world prices, China could get a “free ride” from coordinated releases of strategic stockpiles held by member countries of the Paris-based International Energy Agency (IEA).
“But otherwise, in my view, Beijing will remain deeply exposed to potential oil supply disruptions, price spikes and resulting economic damage,” Herberg said.