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The Role of China’s National Oil Companies in Beijing’s Plan for Energy Security The Intersection of Energy Policy and Foreign Policy in Iran
Walt Laws-MacDonald
Spring 2014
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Abstract
China’s extraordinary economic growth has forced Beijing to drastically reevaluate its energy policy and strategy over the past two decades. Since becoming a net crude oil importer in 1993, China has pursued energy security through its national oil companies, which have invested in foreign oil projects to provide a stable supply of crude oil. However, scant information and rampant speculation have created an alternate discourse; this dialogue purports that China’s quest for regional and global hegemony has pushed Beijing’s energy policy towards protectionism, allowing – or even encouraging – its NOCs to hoard oil supplies, and work with rogue states to undermine the influence and stability of the United States and the West. Though ties between Beijing and China’s NOCs are indeed close, the policies and projects they have pursued have actually increased the total supply of oil available to the global market. In the case of Iran, Beijing has allowed China’s NOCs to pursue high-risk, high-reward projects with a fraction of the risk, and has successfully curtailed operations when facing significant pressure from the international community. This study shows that China’s NOCs do control the country’s energy policy, but Beijing remains firmly in control when foreign policy comes into play.
Table of Contents
Introduction 3 I. China’s Oil Situation 7 1. Demand 7 2. Supply 12 3. Imports 14 4. Structure 16 5. Domestic Security 21 II. China’s Response 23 1. Strategy and Implementation 23 2. China’s NOCs 26 3. NOC Expansion and Equity Oil 28 4. Is China Secure? 31 III. China, Iran, and Oil 34 1. Energy Partnership 34 2. The Modern China-Iran Relationship 37 3. The Role of the United States 39 Conclusion 43
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Introduction
In their 2006 article “The New Axis of Oil,” Flynt Leverett and Pierre Noël boldly state
that, “the political consequences of recent structural shifts in global energy markets are posing
the most profound challenge to American hegemony since the end of the Cold War.” According
to Leverett and Noël, the “axis of oil” comprises of Russia and China, the rising powers in oil
production and consumption, respectively, with Iran playing the role of diplomatic and economic
pawn. The authors claim that Beijing and the Kremlin have used the Iranian nuclear issue to
intentionally frustrate Washington, and to challenge the power of the United States on the global
stage (Leverett and Noël 2006).
It makes for a nice storyline, and the “axis of oil” carries sinister undertones that echo
both the World War II-era Axis powers and George W. Bush’s terrorist “axis of evil.” Some of
Leverett and Noël’s points certainly ring true; energy interests certainly influenced Russia’s
actions in Ukraine and Crimea in 2014, and Putin has clearly made a push to reestablish Russia
as a global, if not regional, hegemon. China has played a substantial role in the development of
Iran’s nuclear program, and its energy and trade policies in the region have created strong
economic ties with the Islamic Republic.
Alas, the axis of oil, at least in the dramatic sense that Leverett and Noël discuss it, does
not exist. China and Russia indeed hope to become hegemonic powers in Asia and the world, and
Iran conveniently provides an arena for both powers to assert themselves on the global stage.
Though Russia remains somewhat of a wildcard in many respects, China does not use its energy
relationship with Iran to intentionally aggravate or antagonize the United States. Above all else,
energy security – not domestic policy interests – lies at the heart of China’s relationship with
Iran. China has certainly bent certain United Nations sanctions against Iran in order to further its
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own energy policy, but when the international community – and almost always, the United States
– applies pressure, China relents.
However, oil has played an integral role in foreign policy since the inception of the
petroleum economy in the late 1800s. As Daniel Yergin writes, “at the end of the twentieth
century, oil was still central to security, prosperity, and the very nature of civilization. […] Oil as
a commodity [remains] intimately intertwined with national strategies and global politics and
power.” (Yergin 2008, 13) Though oil accounts for more than 40 percent of global energy
consumption, just ten countries produce more than 60 percent of the world’s crude oil (“Key
World Energy Statistics,” 11). This oil market has a plethora of buyers, and very few producers,
resulting in the complicated arena of so-called “petropolitics.”
Though global demand has never exceeded supply to the point of an absolute shutdown,
energy security is a top priority for nearly every government in the world. Different regimes
define energy security in different ways, and use different tools to carryout their energy
strategies. For some states, one governing body or ministry controls every aspect of energy
strategy, from goals and polices at the macro level, to exploration and extraction, down to the
prices consumers pay at the pump. Others have a much more broadly defined energy strategy,
with policy coming down from multiple agencies to independent companies. For some states,
true energy security means complete self-sufficiency, with absolutely no need for imports. For
others, energy security means acquiring a stable supply of energy, from both domestic and
foreign sources.
Until 1993, energy security meant the former for China. In the past two decades, China
has taken on a new role in the global oil market, with imports now accounting for more than half
of its total oil consumption. Like most oil importing countries, China relies on the Middle East
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for the majority of its oil supply. But China’s demand for oil has grown exponentially in the past
decade, vaulting it into a new position in petropolitics. While the United States has had its hand
in Middle Eastern politics for the better part of the past century, increasing domestic oil and gas
production and reductions in both consumption and imports have greatly reduced its reliance on
the region for energy security. Though stability in the Middle East will remain an important
focus for Washington, this shift away from petropolitics has opened up the “oil well of the
world” to more regional and international players than ever before.
As China has slowly moved into this role, a dialogue similar to the one alleged by the
“axis of oil” narrative has emerged. It claims that China’s energy strategy continues to seek self-
sufficiency, and that China’s policies will greatly reduce the amount of oil available on the
global market and double oil prices within 20 years (Salameh 2013). Some see this gradual
“hoarding” of oil as a preventative measure against a possible military conflict with the United
States or a smaller regional player, “developing a solid relationship with a supplier unlikely to be
intimidated” by the international community (Harold and Nader 2012, 18). Beneath the macro
level policy of this debate lie China’s national oil companies (NOCs), huge state-invested
operations that actually carry out the policy laid out by Beijing.
Though ties between Beijing and China’s NOCs are indeed close, the policies and
projects they have pursued have actually increased the total supply of oil available to the global
market. In the case of Iran, Beijing has allowed China’s NOCs to pursue high-risk, high-reward
projects with a fraction of the risk, and has successfully curtailed operations when facing
significant pressure from the international community. This study shows that China's NOCs do
control the country’s energy policy, but Beijing remains firmly in control when foreign policy
comes into play.
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As this research shows, China’s definition of energy security is incompatible with the
interconnected nature of the global oil market and economy. Though Beijing’s energy strategy
have driven much of the speculation behind this alternate dialogue, the policies and projects
pursued by China’s NOCs have taken a more progressive approach. Their definition of energy
security builds upon the same concept of establishing a stable stream of supply, but differs
widely on the question of what to do with that supply. China’s NOCs have embraced the global
oil market. Though their own economic interests have largely driven this shift, it has resulted in a
more secure and more efficient energy market for both China and the world.
Though this strategy goes against the strict definition of energy security laid out by
Beijing, the Chinese government has supported its NOCs through multiple channels, providing
cheap sources of financing, access to domestic markets, and increased trade relationships when
necessary. When Beijing’s foreign policy and energy policy overlap, however, it has shown itself
willing and able to pull back its NOCs. As China continues its quest for regional and global
hegemony, it remains aware that its own foreign policy interests must be pursued without
encroaching on existing diplomatic and economic relationships. Despite the temptation of cheap
oil and significant investment returns, Beijing continues to be a smart and deft player in the
international community.
Chapter I of this study will deal with the China’s domestic energy situation, and trends
among supply, demand, imports, and growth. Chapter II will focus on China’s response to its
growing reliance on imports, and the role of its NOCs in pursuing its oil strategy. The third and
final chapter will study the case of Iran, and the relationship between Tehran, Washington,
Beijing, and China’s NOCs.
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Chapter I
China’s Energy Situation
Introduction
This chapter will explain China’s current energy situation, focusing on China’s rapid
surge in crude oil demand and general trends in production, imports, and economic growth.
China became a net importer of crude oil in 1993, creating an energy policy issue that Beijing
had never dealt with before. It will also explain the structure of the governmental agencies
responsible for China’s energy policy and strategy.
1. Demand
China’s Growing Thirst for Oil
The energy needs of China have grown substantially in the past three decades, from just
420 million tons of oil equivalent (toe) in 1980, to over 2,150 million toe in 2009 (“Oil & Gas
Security: Emergency Response of IEA Countries - People’s Republic of China” 2012). China,
like all developing countries, has required more oil to fuel its economy as it shifts away from its
traditional agricultural-based system towards modern industry and manufacturing. This trend
alone does not make the Chinese energy situation unique. Nearly every country in the world
consumes more oil today than it did in 1980. China, however, has upped its consumption to such
an extent that trend line truly shows an exponential rate of change. For comparison, the United
States increased its oil consumption by 8.4 percent from 1980 to 2012, from 17.1 million barrels
per day to 18.5 million barrels per day (bbl/d). Japan actually decreased oil consumption in the
same period by 4.7 percent, dropping from 5 million to 4.7 million bbl/d.
In 1980, China consumed just 1.8 million bbl/d. In 2012, China consumed more than 10.3
million barrels of oil every day. China consumes 572 percent more oil today than it did just over
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three decades ago, and the most recent data available indicates that this rapid rise will only
continue. China’s oil consumption has grown in leaps and bounds in the past decade, jumping
more than 84 percent from 2003 to 2012. In 2009 alone, oil consumption grew more than 14
percent, with another 9 percent increase the following year. Though rising fuel prices and the
global recession temporarily slowed these trends in 2007-2008, China’s own economic engine
has continued to drive China’s oil consumption.
Oil Consumption since 1980 for China, India, Japan, and the United States
(“International Energy Statistics” 2014)
During this same period, China’s economy has grown more than any other country in the
world, averaging an increase in gross domestic product of over ten percent every year. In
nominal terms, China’s GDP has overtaken those of regional players Russia and Japan, and all of
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Europe. Though the Chinese economy still stands only half as large as that of the United States,
its growth and size have easily outpaced the rest of the world, and it now measures nearly twice
as large as that of second-place Japan. This move towards rapid liberalization and growth began
in 1978 with the economic reforms of Communist Party leader Deng Xiaoping. For most of its
history, China had used its massive population to its advantage, bypassing limited capital inputs
with sheer manpower.
GDP Growth since 1980 for China, India, Japan, and the United States
(“World Development Indicators” 2014)
After Mao Zedong’s death in 1976, the Chinese government gradually dismantled the
agricultural commune system, privatizing small businesses and returning most of the country’s
land to individual citizens. Deng Xiaoping’s economic reforms denationalized huge swaths of
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the Chinese economy and took the first steps towards liberalizing trade, but traces of China’s
history as a self-sufficient communist republic can still be seen today. The largest industries
remain state-owned, or state-operated, and fears over the security of importing goods persisted
for decades. Indeed, China boasts an energy self-sufficiency rate of over 90 percent, even with its
growing appetite for foreign oil (“China’s Energy Conditions and Policies” 2007, 20).
China’s rapid economic growth drives its need for oil more than any other factor.
However, China’s economic growth rate actually outpaces its oil demand growth rate. While the
Chinese economy has grown at an annualized rate of 10.7 percent since 1980, China’s oil
consumption has grown at a rate of just 5.6 percent a year (“China - EIA Full Report” 2014).
Both China’s economy and its oil consumption have grown significantly faster than the global
average, but the spread between the two rates points to a system that has become less dependent
on oil as a source of growth as it industrializes. The two growth rates remain closely tied, but the
slower increase in oil consumption shows that China has developed into a more efficient
economy since it began reforms (Wang 2008, 3).
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Annual GDP and Oil Consumption Growth for China from 1980 to 2012
(“World Development Indicators” 2014; “International Energy Statistics” 2014)
Industry and transportation account for the vast majority of China’s oil consumption,
making up roughly three quarters of China’s total oil demand. Industry accounted for more than
70 percent of oil demand in 1980, but the nominal level has only slightly increased. As more
Chinese citizens have purchased cars, transportation has risen to a much higher level since 1980.
Civil vehicles skyrocketed from under 2 million in 1980, to nearly 50 million in 2008, raising
transportation’s share of oil consumption from 10 percent to 40 percent over the same period.
Industry and transportation now account for roughly 40 percent of oil consumption each, with
agriculture, commerce, and construction rounding out the remaining demand for oil (Wang 2008,
4). This shift stems from more efficient technologies, as well as China’s rapid move towards
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urbanization. In 1980, less than 20 percent of the population lived in urban areas; by 2010 that
proportion had jumped to over 50 percent (Wang 2008, 5; “World Development Indicators”
2014). Still, China’s per-capita energy consumption level is less than 25 percent of the global
average, making it incredibly efficient for its size (“China’s Energy Conditions and Policies”
2007, 40).
2. Supply
Slowing Production Growth
Until 1993, China produced more oil than it consumed. While China’s energy needs have
grown exponentially, its own energy supply has increased in a much more linear fashion. Though
consumption has increased more than fivefold, domestic oil production has just barely doubled,
from 2.1 million bbl/d in 1980 to 4.4 million bbl/d in 2012. These two trends inevitably crossed
paths in 1993, and since then the gap has only widened. China must now import 5.9 million
barrels of oil per day, more than half of its total consumption. Analysts expect the current trends
in both oil production and consumption to continue in similar fashions, with growth at an
average annualized rate of 2.2 percent and 5.6 percent, respectively. The United States Energy
Information Administration predicts oil production will reach 4.6 million bbl/d in 2020 and 5.6
million bbl/d in 2040.
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Total Oil Supply and Demand for China since 1980
(“International Energy Statistics” 2014)
Though China’s oil production will continue to grow, any additional output will likely
come from new drilling technologies or offshore oil fields. China will probably not discover new
onshore oil deposits, and its existing oil fields have already reached peak production levels.
Production in eastern China, which accounts for the vast majority of domestic supply, actually
started to decline over a decade ago (E. Downs 2000, 1). Northeast China’s Daqing field, the
largest source of production in China, has matured, and a high extraction rate for most of China’s
oil fields has driven oil and gas companies to look outside of China for new reserves (Xu 2007,
3).
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Despite the EIA’s predictions of increasing oil production, it notes that most of this
growth will come from new extraction technologies operating on existing sites, with “crude oil
production remaining relatively flat.” (“China - EIA Full Report” 2014, 6) Offshore projects in
the seas of China’s coast have met considerable diplomatic resistance, as many of the major oil
fields in the region fall within disputed waters. Though offshore production in the East and South
China Seas will provide a boon for oil supply in the region, challenges to China’s claims have
prevented any projects from coming online before the respective governments resolve the
territorial issue (Chatterjee 2014).
3. Imports
The “Going Out” Strategy Applied to Energy Security
The acceleration of economic growth has propelled China’s import needs onto a new
level entirely. In fact, China officially surpassed the United States as the world’s largest importer
of oil in September 2013, importing more than 6.5 million bbl/d (RT 2014). Just like China’s
domestic consumption and production trends, oil imports in China have steadily risen, while U.S.
oil imports have fallen over the past five years. While China’s oil consumption continues to
grow, global demand for oil has actually fallen in recent years, as a combination of high prices
and new technologies have made alternative fuels more attractive (“China - EIA Full Report”
2014, 2).
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Oil Imports since 1980 for China and the United States
(“International Energy Statistics” 2014)
Given the limited growth potential for domestic crude oil production, China has turned to
foreign oil to meet the widening consumption gap. Though official statistics lag a few years
behind current trends, China imported 4.7 million bbl/d in 2010, and an estimated 5 million bbl/d
in 2011. Of those 5 million barrels per day, more than half came from the Middle East, with
Africa and Eurasia making up the remaining imports. According to these figures, China relies on
foreign oil for more than half of its domestic consumption. This means that China depends on the
Middle East to fuel more than a quarter of its economy. While the Chinese government
announced that imports will account for no more than 61 percent of its oil consumption by 2015,
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EIA expects imports to account for 66 percent of consumption by 2020, and 72 percent by 2040
(KPMG 2011).
Saudi Arabia accounts for the largest portion of China’s oil imports, making up 20
percent of total imports with over 1 million bbl/d. As the largest oil exporter and holder of
reserves in the world, Saudi Arabia represents the most secure source of imports for China. Saudi
Arabia’s combination of production capacity and good standing among the global community
makes it both politically and economically reliable. After Saudi Arabia, however, come more
instable import partners, with Iran, Iraq, and Sudan representing the third, sixth, and seventh
largest importers in 2011, respectively. In 2012, China reduced imports from Iran by 20 percent,
and cut off imports from Sudan entirely. These resulted in a net reduction of 376,000 bbl/d.
4. Structure
Administrative Holdovers from a Planned Economy
Though oil accounts for less than 20 percent of China’s total energy consumption, it
represents the most important piece of China’s energy strategy. Coal accounts for roughly 70
percent of China’s energy consumption, with natural gas, renewable, and alternative fuel sources
making up the remaining portion. Some argue that China’s reliance on coal – the dirtiest burning
fuel in the world – and its carbon emissions should stand at the forefront of China’s energy
policy, but coal remains a nonissue for two reasons. First, China accounts for more than half of
both global supply and global demand for coal, making it a reliable and largely secure source of
energy. Chinese coal production and consumption have moved in lockstep for the past decade,
and coal imports remain negligible. Second, China has placed carbon emission initiatives the
back burner with regard to energy strategy, instead hoping to address the issue at other levels of
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the economy. For now, China has prioritized growth over pollution reduction, though the
emissions issue is not limited to coal alone.
Thus, China’s energy strategy focuses on the production and consumption of oil. China
has announced that coal use will fall below 65 percent of total energy consumption by 2017, and
non-fossil fuels will make up 15 percent of consumption. This means that oil will continue to
account for roughly 20 percent of China’s energy needs for the foreseeable future. The current
(12th) Five-Year Plan, created by the Central Planning Committee of the Communist Party of
China and approved by the National People’s Congress, outlines China’s economic goals from
2011 to 2015. Though these bodies to not explicitly deal with China’s energy policy, they
provide a general starting point for trends in Chinese policy as a whole.
The National Development and Reform Commission (NDRC) has administered China’s
energy strategy since 1952, when its predecessor, the State Planning Committee (SPC), took
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control of the centrally planned economy. The SPC merged with several other economic
commissions within the Chinese government, and eventually became the NDRC in 2003. As
economic reforms and price liberalizations moved through the economy, control of the energy
industry had grown largely decentralized, with independent companies controlling most of the
market by 2002 (Rosen and Houser 2007, 18). China lacked a true energy ministry for more than
25 years, with power and authority spread out over several agencies. In 2007, Rosen wrote, “the
energy policymaking apparatus has too few people at the national level and the wrong set of
tools to deal with the energy challenges of a large, diverse economy.”
Though the NDRC oversees everything from macroeconomic predictions to major
construction projects, it created the National Energy Administration (NEA) in 2008 to deal more
specifically with energy policy. This too lacked any real power, and proved insufficient and
convoluted in its attempt to direct China’s national energy strategy. In 2010, the NDRC created
the National Energy Commission (NEC) as a centralized energy policymaker. The NEA still
plays an active role in administering China’s energy policy, with “undertaking the daily work of
the National Energy Commission” listed as one of its primary functions. This constant
administrative turnover and confusing regulatory structure has created difficulties for both
domestic companies and foreign investors hoping to enter China’s domestic energy market
(Daojiong 2006, 186).
While the NDRC sets the overall price level for the Chinese economy, the NEA sets the
price levels for different sources of energy, calling it “the core of the market mechanism.”
(“China’s Energy Conditions and Policies” 2007, 37) This tool is both deceptively simple and
extraordinarily complex: the NEA sets a simple price, but an incredible amount of research goes
into the setting of the price, and the price itself has countless repercussions for both consumers
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and suppliers. In the same ten-year period that saw China’s oil imports increase 84 percent, crude
oil prices tripled, from roughly $40 a barrel in 2003 to well over $100 a barrel in 2012. China,
however, could not simply pass these higher prices onto its consumers. Rising fuel prices can
easily lead to unrest among China’s lower and middle classes, who rely on subsidized fuel prices
for farming and commuting.
While the price of crude oil doubled between 2004 and 2006, China’s inability to change
the price level for consumers resulted in a $5 billion loss for the refining industry, as Chinese oil
companies actually lost money on all oil refined in China. These losses eventually resulted in
China’s two largest state-owned oil companies shutting down refineries for part of 2006, which
in turn created fuel shortages and higher prices for consumers. Though the NDRC eventually
raised fuel prices, the spread between global oil prices and the prices paid by Chinese consumers
remains an ongoing issue. Despite the price controls in place, the commodities price boom has
also had a negative impact on the consumers themselves, as prices at the pump have more than
doubled since 2004.
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Pump Prices for Gasoline since 1995 for China and the United States
(“World Development Indicators” 2014)
The NDRC has instituted multiple rounds of pricing reforms to attempt to narrow these
pricing discrepancies, which have resulted in significant imbalances in the Chinese oil market.
With domestic prices well below international levels, companies extracting oil from China can
sell their product at a much better price outside of China, while companies that refine oil in
China incur significant losses from this same difference. A 2009 reform gave the NDRC the
power to adjust consumer prices when crude oil prices fluctuated by more than 4 percentage
points outside a 22-day moving average. This did little to stop the flow of refinery fuel exports,
and in March 2013 the NDRC reduced the moving average to ten days, and allowed prices to
automatically adjust to price fluctuations greater than $1 per barrel.
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Though these reforms have made volatile price swings in the oil market much easier to
swallow, foreign oil companies still look at the price spread as a major deterrent to operating in
the region. When fuel shortages occur, China’s state-owned oil companies sometimes divert
resources towards residential consumers, and away from rival companies. “The foreign
companies have been forced to lobby provincial and national officials to keep the gas turned on.”
5. Domestic Security
Added Refining Capabilities and the Strategic Petroleum Reserve
Until fairly recently, China’s refining capabilities had lagged far behind its competitors,
which severely limited the grades – and thus the locations – of crude oil it could process
domestically. Despite the financial cost to refiners operating in China, Beijing sees refining as a
source of growth within the oil market, and plans on increasing its refining capacity from 13
million bbl/d to 17 million bb/d by 2020. Chinese refineries currently operate at only 75 percent
of their total capacity, but these new projects will process a wider range of oil grades, allowing
China to further diversify its imports in both location and type.
These added refining capabilities will also allow China to build up its strategic petroleum
reserve (SPR) without relying on foreign sources. SPRs represent oil security in the most
fundamental form; in the event of a sudden supply shock (or even absolute cutoff), SPRs allow
countries to continue to operate until normal oil flows return. China’s 10th Five-Year Plan (2000-
2005) outlined an SPR that could hold 500 million barrels of oil by 2020, with a goal of roughly
700 million barrels – the equivalent of 90 days of consumption. China also has 250-400 million
in NOC-owned commercial storage. Holding a sizable SPR will also allow China to protect itself
against sudden supply shocks and volatile price swings in the global oil market, as it can use
crude oil reserves to stabilize fuel prices in its domestic market.
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Conclusion
China’s demand for oil has grown exponentially over the past three decades, well
outpacing global oil demand and increasing its oil consumption by 572 percent from 1980 to
2012. Though China’s domestic production has grown over this period, it has not been able to
keep pace, resulting in a surge in imports starting in 1993. China relies on imports for half of its
domestic consumption needs, with about half of those imports coming from the Middle East.
Though NDRC creates China’s energy policy, multiple rounds of reorganization have left the
administrative structure complex and difficult to maneuver, resulting in significant lag times
between policy and enactment.
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Chapter 2
China’s Response
Introduction
This section will focus on China’s response to its growing oil import gap, and the tools
that it will use to enact its energy policy. The NDRC’s energy policy outlines energy security, in
the form of a stable stream of crude oil inflows, as the most crucial piece of China’s energy
strategy. However, Beijing’s reliance on China’s NOCs to actually enact its policy has created a
disconnect between the priorities of the NDRC and those of China’s NOCs. The chapter will
close with a discussion of China’s equity oil strategy and whether or not China is secure.
1. Strategy and Implementation
Top-down Energy Policy in a Bottom-up Market
Though Beijing had known China’s trends in oil consumption and demand would lead to
a growing need for oil imports, “the concept of energy as a national security issue did not really
emerge until the turn of the century.” (Daojiong 2006, 3) China has implemented its energy
strategy under a strict definition of energy security that involves locking in supply through trade
contracts and agreements. Though China has not faced the threat of an embargo since it began
importing oil, it fears the global oil market. China’s energy strategy has focused on establishing a
secure flow of supply, rather than developing the global market (Giljum 2009, 15). China has
successfully diversified its oil supply at both the global and regional levels, importing oil from
multiple regions and multiple states within those regions.
This wide range of sources, along with the global economy’s growing reliance on trade
with China, means that the chances of a politically motivated oil cutoff are lower than ever
before (Daojiong 2006, 181). Rather than use this this interconnectedness to promote its energy
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strategy, Beijing’s distrust of the global market has fueled speculation that China’s energy
security will come at the cost of supply instability for the rest of the world (Giljum 2009, 17).
Though countries do not necessarily make their energy strategy public information, the
infrequency with which China releases any sort of official policy guidelines or official statistics
has only furthered this sentiment among the international community.
In a 2007 policy report – the most recent of its kind available – dealing with China’s
energy policy, the NDRC highlights six key points for China’s energy strategy: “Giving priority
to thrift [low prices], Relying on domestic resources, Encouraging diverse patterns of
development, Relying on science and technology, Protecting the environment, and Cooperation
for mutual benefit.” Essentially, China hopes to keep fuel prices low through investing in
existing production and working with international organizations to build stronger trade ties.
China must “protect the legitimate rights and interests” of foreign businesses operating in
Chinese oil ventures, improve the environment for and scope of foreign investment, and “ensure
stable and sustainable energy supply internationally.” (“China’s Energy Conditions and Policies”
2007)
This report, which is nearly seven years old and less than fifty pages in length, is the
closest thing available to China’s official energy policy. Furthermore, China offers energy
policies from just two sources – the NDRC and the Five-Year Plans. The United States releases
energy strategies from multiple sources in both the legislative and executive branches, and
continually updates them as economic and geopolitical shifts occur. Perhaps even more unusual
is the vagueness with which China discusses its energy plans and projects. The NDRC’s report
does not reference one specific production project, current or planned. Though the report makes
the direction and strategy of China’s energy policy clear, it provides shockingly few concrete
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examples of what China has actually done or will do moving forward. It resolves the questions of
“when,” “why,” and even “what” easily; the “where,” “how,” and maybe most importantly,
“who,” remain unanswered.
Despite the power that the NDRC wields and the numerous attempts to restructure the
energy that created the NEA and NEC, China has lacked a way to unilaterally enact energy
policy since it disbanded the Energy Ministry in 2003. Though the NDRC and Five-Year Plans
offer a snapshot of China’s overarching energy strategy, neither the NDRC nor the NEA have
significant communication with energy organizations domestically or internationally, resulting in
a vague description of China’s role in its own energy strategy. While the NDRC’s report on
“China’s Energy Conditions and Policies” lays out clear objectives of China’s energy policy,
most of the language focuses on “the international community.” The report rarely mentions
China acting alone, instead using phrases like “China, together with all other countries…” or
“China is an active participant in international energy cooperation.” (“China’s Energy Conditions
and Policies” 2007)
While the NDRC and Five-Year Plans outline the plans and policies that China wants to
pursue with regard to energy, these strategies are actually carried out by China’s national oil
companies (NOCs). Many countries, including all of the OPEC members, use NOCs to control
the import and export of petroleum products, with different industries and sectors of the
petroleum business belonging to different NOCs. However, China lacks any sort of overarching
body to administer its NOCs and coordinate their policies. This disconnect has created a
significant lag – and in some cases split – between the NDRC’s official policy and the actions of
China’s NOCs. In discussing China’s NOCs, the IEA makes the important distinction between
26
“state-invested” and “state-run” – China’s NOCs fall firmly into the former category (Jiang and
Sinton 2011).
2. China’s NOCs
Enacting China’s Energy Policy As They See Fit
China’s has dozens of national oil companies, but the three largest NOCs account for 90
percent of oil production and control most of the domestic energy market (Lewis 2007, 9;
“International Energy Statistics” 2014): China National Petroleum Corporation (CNPC), which
focuses on the “upstream” – exploration and extraction – oil market; China Petroleum and
Chemical Corporation (Sinopec), which focuses on the “downstream” – refining and
transportation – oil market; and China National Offshore Oil Corporation (CNOOC), which
focuses on offshore upstream activities.
While CNPC, Sinopec, and CNOOC had played major roles in the Chinese energy
market for decades, a period of rapid expansion and restructuring from 1994 to 1998 turned them
into superpowers, as the NDRC combined many smaller state-owned oil companies into these
three national oil companies. The NDRC also made CNPC and Sinopec vertically integrated,
allowing them to control the supply of oil from upstream operations all the way down to
downstream activities (“China’s Energy Conditions and Policies” 2007, 34).
27
Connections between China’s NOCs and the Government
(Jiang and Sinton 2011)
CNPC, Sinopec, and CNOOC account for the vast majority of oil and gas operations
within China (Lewis 2007, 6). The three NOCs dominate different regions of China based on
which oil and gas assets the NDRC assigned to them in the 1990s; CNPC operates in the north
and west, Sinopec covers the south, and CNOOC controls most offshore activities (Lewis 2007,
11). While CNOOC focuses on the exploration and extraction of oil and gas, CNPC and Sinopec
operate in a much more self-contained structure, controlling the extraction, transportation,
refining, and sale of oil and gas to Chinese consumers. Though the media spotlight has shown
brightest on their international activities, China’s NOCs have very actively sought domestic
projects as well. CNOOC invested $15 billion to develop some of the disputed territories in the
East China Sea in 2013, while Sinopec plans to invest more than $4 billion in pipeline and
service station projects in 2014 (Aizhu 2013; Ma 2014).
28
Though China’s NOCs do not take orders from the NDRC or the state more generally,
they do serve as the primary means through which China’s energy policy actually goes into
action. China’s 1999 “Going Out,” which aimed to increase foreign investment into China and
outward investment into foreign markets, has manifested itself in China’s energy strategy
primarily through the actions of its NOCs. China’s NOCs have invested in foreign oil projects
since 1993, when Sinopec purchased territories in Thailand, Canada, and Peru, and CNOOC
purchased offshore assets in Indonesia. Today, the government strongly believes that “the state
must use policy tools to secure ownership of foreign upstream production assets” by its NOCs
(“China’s Overseas Investments in Oil and Gas Production” 2006). China’s foreign oil strategy,
as prescribed by the NDRC, is more pessimistic than optimistic. Fear and distrust of the global
oil market has driven investments in overseas projects, rather than the potential for profit and
increased production (Giljum 2009, 15).
3. NOC Expansion and Equity Oil
Investing in the Global Oil Market
China’s three major NOCs have responded to this policy by growing their international
assets significantly in the past decade. Chinese NOCs spent $18.2 billion on ten mergers and
acquisitions in 2009, accounting for 13 percent of global oil and gas M&A activity, and 61
percent of global NOC M&A activity (Jiang and Sinton 2011, 10). From January 2009 to
December 2010, Chinese NOCs spent $47.6 billion on oil and gas assets around the world, while
CNPC and Sinopec alone lent an estimated $77 billion to nine countries in twelve loan-for oil
agreements. Chinese NOCs have also committed an additional $18 billion to researching
exploration and extraction in the Middle East.
29
These purchases have focused on investing in “equity oil” – projects where the Chinese
company has an actual stake in ownership and production, allowing them to sell any oil they
receive at global market prices (“China’s Overseas Investments in Oil and Gas Production”
2006, 3). Before this massive influx of money and support, less than 10 percent of China’s oil
imports came from equity oil projects in 2006, and two thirds of equity oil production came from
assets purchased in Kazakhstan and Sudan nearly a decade earlier. In fact, these purchases did
not receive support from the NDRC, which “did not envision overseas upstream investments as a
sound strategy to meet the growing Chinese demand.” (“Oil & Gas Security: Emergency
Response of IEA Countries - People’s Republic of China” 2012) As illustrated by more current
goals and initiatives, the NDRC has completely reversed its position on investing in foreign oil,
and now views it as a crucial piece of its energy security.
Though China’s NOC’s enact the most substantial and visible pieces of China’s energy
strategy, they remain largely disconnected from the Chinese government. While the NDRC and
China’s NOCs have both pursued equity oil projects, their motives have diverged significantly.
Some have argued that this schism has resulted in a disjointed energy strategy and weak policy,
but the independence that China’s NOCs enjoy puts them at a huge advantage from both
economic and political perspectives. In reality, CNPC, Sinopec, and CNOOC fall somewhere
between international oil companies (IOCs), like Exxon-Mobil or BP, and true NOCs, like
Petroecuador or Saudi Arabia’s Aramco.
China’s NOCs essentially have free reign to pursue projects as they see fit, giving them a
noticeable influence over energy policy and allowing them to challenge the NDRC’s guidelines
when necessary (“China’s Overseas Investments in Oil and Gas Production” 2006, 6). A similar
link exists between top-level executives at China’s NOCs and bureaucrats within the NDRC.
30
After a former CNOOC CEO was appointed governor of Hainan in 2003, CNOOC announced a
$1 billion investment in petrochemical projects in Hainan. Beijing has also appointed former
CNPC and Sinopec executives to government positions, further strengthening the ties between
China’s NOCs and the government (“China’s Overseas Investments in Oil and Gas Production”
2006, 7).
In some cases, China’s NOCs benefit from government backing, as the state can offer
incredibly cheap credit, increased trade, and in some cases, even sell discounted arms and
defense systems to countries (“China’s Thirst For Oil” 2008). These economic tools allow
China’s NOCs to invest with far less risk than other NOCs and IOCs competing for the same
deals, and produce a much more attractive offer: “It is nearly impossible for any international oil
company to structure a deal that involves infrastructure projects with costs as lose as those China
can put on the table.” (Wing-Chu 2007, 10) China’s robust economy has also become a major
selling point for China’s NOCs, as IOCs and other NOCs look to gain access to China’s massive
domestic oil market. By establishing domestic ties with NOCs in this manner, China’s NOCs can
build on these relationships and increase investment in other countries (Jiang and Sinton 2011,
16).
In other scenarios, China’s NOCs can put distance between themselves and the state.
China’s NOCs continued to carry out oil extraction in Sudan for far longer than other NOCs and
IOCs operating within the country. Though China eventually cut trade ties with Sudan in 2012,
the state’s refusal to associate – or even involve – itself with the Sudanese government and its
human rights violations allowed China’s NOCs to operate outside of what more traditional
economic and foreign policy would have allowed. Most NOCs must operate with economic and
31
political motives moving hand-in-hand. The unique setup of China’s NOCs breaks down these
ties when it needs to, and plays them up when it does not.
Though the NDRC designed its equity oil strategy to establish a stable supply of oil
flowing into China, this has not necessarily been the case. Though many of these equity oil
projects have successfully established production, the oil rarely – if ever – makes its way to the
Chinese oil market. Instead, China’s NOCs sell the vast majority of their equity oil on the
international market, where they can find a much higher price than the ones instituted by the
NDRC (Jiang and Sinton 2011, 17). In 2006, CNPC produced 220,000 bbl/d in Kazakhstan,
while the pipeline form Kazakhstan to China brought in just 50,000 bbl/d (Giljum 2009, 17).
Though equity oil projects indeed produce roughly 50% of China’s import needs, the majority of
this production does not actually offset the imports.
4. Is China Secure?
Political Security or Energy Security
All energy policies must face the question, “Are we secure?” In China’s case, the
response varies depending on whom you ask. Due to the strict definition of energy security
outlined by the NDRC, Beijing’s response would likely be a firm no. Despite the growth of
China’s equity oil projects in the last decade, equity oil accounts for at most half of China’s oil
imports (“China’s Overseas Investments in Oil and Gas Production” 2006, 17). Domestic
production will continue to grow into 2040, but this too will fall far short of China’s
consumption needs.
The implementation of the equity oil strategy has also created discord over the issue.
While the NDRC’s energy strategy seeks to use equity oil to acquire a stable stream of foreign
oil, China’s NOCs have pursued the policy with a much more profit-driven approach. Since a
32
fraction (if any) of the oil obtained from the equity oil projects actually makes its way back to
China, the strategy cannot truly contribute to energy “security” in Beijing’s view. China’s has
not secured a large enough supply of oil to meet its growing needs, and all trends indicate that
this deficit will only increase in the future.
Pose this question to the international community, however, and you will receive a very
different answer. The equity oil strategy, though flawed in its purpose, has served China’s energy
security – and its NOCs – extremely well. Having established equity oil projects in more than 20
countries, China’s NOCs have successfully diversified its sources of oil to that point that any
regional-level conflict would have a negligible impact on its inflows (Zhang 2012). As China’s
role as a hegemon grows, the chances of a regional conflict also greatly diminish, in turn creating
a circular cycle of influence and stability. With equity oil operations in Kazakhstan, and
numerous pipeline and well projects in the figurative pipeline in Mongolia, Russia, and Japan,
China’s neighbors rely on Beijing more than ever for their own energy security.
Beijing’s apparent refusal to accept this interconnectedness has only fueled speculation
regarding the intent of China’s energy strategy. The NDRC’s energy policy clearly promotes the
concept of China as a member of the international community, and highlights its role in
cooperating with other regional players to make the oil market more secure for all players. Yet
China’s insistence on pursuing energy security as defined by the NDRC has increased fears that
Beijing hopes to lock up a sizable portion of the global oil market (“China’s Thirst For Oil”
2008, 11). The extent of China’s consumption gap soundly disproves this theory. Much to the
chagrin of both Beijing and its skeptics, China and its NOCs simply cannot secure a large
enough supply of oil to meet its demand needs without relying on imports.
33
Conclusion
China’s equity oil strategy has created a significant split between the NDRC and China’s
NOCs. While the NDRC hopes to secure a stable stream of supply for its domestic market,
China’s NOCs have taken advantage of the equity oil strategy by lowering their risk and increase
their profits. Given China’s massive economic standing and growing role as a regional hegemon,
the equity oil strategy has allowed China to diversify its sources of oil imports and build upon
existing economic and diplomatic relationships. Though China’s NOCs prioritize these economic
ties, they have actually had a positive impact on China’s energy security.
34
Chapter 3
China’s NOCs and Iran
Introduction
This chapter will focus on China’s energy relationship with Iran, and the foreign policy
implications of doing business with a “rogue” state. Though China no longer relies on Iran as
heavily as it once did for oil imports, its NOCs have established significant (in both scale and
consequence) equity oil projects in the Islamic Republic, provoking a response from the
international community and the United States. The relationship between Beijing and China’s
NOCs is more complex than the media and other outside observers perceive it to be.
1. Energy Partnership
The Basis for a Multifaceted Relationship
While trade between China and Iran involves a wide range of products at multiple price
points, oil lies at the core of the relationship, accounting for 80 percent of Chinese imports from
Iran in 2008 (Dorraj and Currier 2008). China currently imports more than half of its crude oil
from the Middle East, with Iran making up around 8 percent of China’s total crude oil imports.
China plays a much more significant role in Iran’s oil exports, and became the largest buyer for
Iranian oil in 2012 (Sedghi 2014). Oil import trends actually show China diversifying away from
Iran, with Iran making up more than 10 percent of China’s total crude oil imports as recently as
2011 (Davis et al. 2013, 19). Iran, however has grown more reliant on China as a buyer, with
exports to China growing from 5% in 2000 to more than 25% in 2012 (“China - EIA Full
Report” 2014).
Though China has imported oil from Iran for the entirety of their modern relationship, it
took on a much more active role in the 1990s, after the Iran-Iraq war and its resulting sanctions
35
left Iran’s oil infrastructure crumbling. With 132.5 million barrels of oil, Iran holds 11 percent of
the world’s total oil reserves (Liu and Wu 2010, 44). As the third largest holder of proven
reserves, Iran’s future would appear bright to most; however, its lack of technology and
financing has held production far below its potential. Despite its massive oil reserves, Iran
accounts for just 5 percent of total oil production, pointing to a much lower extraction rate than
its OPEC neighbors (Dorraj and Currier 2008).
Iran represents a high-risk, high-reward investment for China; if China’s NOCs and other
non-energy Chinese companies can effectively establish operations in Iran, they stand to make a
great deal of money. Due to wide-ranging economic sanctions and an over-reliance on high oil
and gas prices, Iran’s economy lags far behind its potential. Over three decades of double-digit
inflation, high unemployment, and crumbling infrastructure have left the Iranian economy
unstable and contracting. Though sanctions lie at the root of Iran’s economic issues, they have
also cleared the path for China to step-in, with virtually no other major powers willing to take up
the Iranian cause.
China occupies a unique position in this sense; few countries have the sheer amount of
capital required to jumpstart Iran’s oil infrastructure, which requires an estimated $35 billion per
year in upstream investment (“Iran - EIA Full Report” 2014). Though China has mainly invested
in much safer assets (like U.S. Treasury bonds), it has the money to foot at least some of these
costs. But lack of capital has not kept foreign companies from entering the Iranian oil market.
The primary impediment to investing in Iran has been, and will continue to be, economic
sanctions imposed by the United States and the United Nations. Here, too, China occupies a
unique position: the unorthodox structure and implementation of its energy strategy has allowed
its NOCs to operate in a gray-area between sanctions and outright investment.
36
Beijing and Tehran have long worked together to promote economic ties between the two
countries. The unique structure of China’s NOCs benefits themselves and China as a whole in
this case too; while Beijing makes the broad, non-binding and somewhat vague diplomatic
agreements, China’s NOCs can enter the Iranian market in a much more thorough manner. China
supplied Iran with extraction and refining technology and equipment as early as 1988, and in
1997 the two sides officially agreed to cooperate on oil and gas exploration and extraction in Iran
(Zahirinejad and Ghoble 2010; Davis et al. 2013, 16).
In 1999, Iran found new reserves in the Azadegan oil field that brought its total value to
more than $2.6 trillion. With more than 30 billion barrels of oil, the Azadegan field represented
one of the largest undeveloped oil fields in the world, and Iran quickly opened up exploration
and extraction rights to international bidders. Though development rights initially went to a
Japanese IOC, pressure from both the United States and the UN forced Japan to pull its initial $3
billion investment in the field in 2003, and later reduce the IOC’s stake to just 10 percent (Dorraj
and Currier 2008). Realizing the huge potential of the field, China’s NOCs quickly stepped in.
Iran awarded drilling rights in Southern Iran to CNPC in 2000, in a contract worth $85 million
(Zahirinejad and Ghoble 2010).
Sinopec agreed to import 150,000 barrels per day over 25 years in a 2004 deal focusing
on the Yadaravan oil field, and agreed to a second, $2 billion contract in 2007 (Kurtenbach
2007). Though Sinopec and CNPC remain the major Chinese players operating in Iran, some
smaller Chinese NOCs (including CNOOC) have also entered into contracts with Iran, and the
China-Iran oil connection continues to strengthen both internationally and domestically. China
has built oil and gas hubs near its major coastal cities to help receive and refine Iranian imports,
37
and Iran has given China special status to operate in the upstream sector (Zahirinejad and Ghoble
2010).
2. The Modern China-Iran Relationship
More Than Just Energy
Though China’s relationship with Iran began millennia ago, Beijing and Tehran have
shared many experiences in the past seventy years; both China and Iran underwent massive
regime changes and policy shifts in the 20th century, pushing the two closer than ever before.
Both countries once served as strategic launching pads for the Soviet presence in Asia, only to
break ties curtly and crisply. Both countries have historically opposed Western power, and in fact
both current regimes seized power from Western-backed regimes (Harold and Nader 2012, 3).
The China-Iran relationship seen today commenced with the Iranian Revolution and the
establishment of the Islamic Republic in 1979, just two years after Deng Xiaoping instituted the
first of China’s economic reforms. The similarities grew even stronger in 1989, after China
struck down the pro-democratic Tiananmen Square protests and Ayatollah Khomeini died,
resulting in a period of rebuilding for both regimes (Davis et al. 2013, 8; Harold and Nader 2012,
4). Somewhat coincidentally, commercial ties intensified during this same period, as China’s
economy began to experience rapid growth.
Trade initially revolved around arms sales, as economic liberalization in China allowed
the People’s Liberation Army to sell its output to international buyers, including an Iran that
hungered for cheap weapons (Davis et al. 2013, 8). During the Iran-Iraq War (1980-1988), China
became Iran’s largest arms supplier. Ironically, China chaired the United Nations Security
Council meeting that ended the war with a cease-fire resolution (Fite 2012, 8). As the Chinese
economy developed into more modern industries, arms sales fell drastically, accounting for less
38
than 1 percent of Chinese exports by 1996 (Davis et al. 2013, 8). Since then, China has greatly
expanded trade with Iran and the Middle East as a whole, growing Middle East trade from $7.4
billion in 1998 to nearly $94 billion in 2007 (Fite 2012, 8).
Energy clearly binds China and Iran in a way that no other economic or diplomatic
interest could, but the oil does not constitute the relationship in its entirety. As Downs and
Maloney write, “Oil may grease the wheels, but the Chinese-Iranian relationship transcends
energy.” (E. S. Downs and Maloney 2011) Though China’s trade relationship with Iran has been
based in arms and oil for most of the past thirty years, trade between the two nations has
diversified and increased substantially in recent years.
China now invests in a plethora of infrastructure projects in Iran, with more than 100
state-owned companies currently working in Iran in both energy and non-energy fields (Liu and
Wu 2010, 43–44). Today, China and Iran have extensive economic ties; non-oil trade with China
accounts for 24 percent ($7.43 billion) of Iranian exports and 19 percent ($9.66 billion) of
Iranian imports, making China the largest destination for and the second largest source for
Iranian trade (“Foreign Trade Statistics of Iran during the Past Year” 2014).
Iran, however, plays a far smaller role in the Chinese economy, with Iranian imports and
exports accounting for a negligible fraction of China’s total global trade. This imbalance has
created some tension between Iranian consumers and Chinese exporters, as cheap Chinese
products have flooded the Iranian market (Fite 2012, 12). The Iranian government, clearly aware
of the trade imbalance, has gone so far as to ban 170 “low quality” – primarily Chinese –
“products … beneath the dignity of the Iranian consumer.” (E. S. Downs and Maloney 2011)
Consumers at ground-level share similar sentiments; an Iranian chemical importer claims that he
39
must pay for quality control tests for Chinese imports, saying “They only care about themselves.
The Mongols are invading again.” (The Economist 2012)
Despite this lopsided trade relationship, China has a vested interest in developing the
Iranian economy, and views its unique position as a chance to prove itself on the global stage
(Cristiani 2014). Furthermore, the Persian Gulf’s supply of oil and demand for cheap technology
and consumer goods has created a beneficial relationship for both sides (Ziegler 2006, 9). As
Iran’s primary trade partner, China also stands to benefit from a stronger Iranian economy. China
has invested $1 billion in Tehran’s infrastructure, including over $300 million on a the city’s
subway system (The Economist 2012). These non-energy projects have created employment
opportunities for thousands of Chinese workers and state-owned enterprises (Harold and Nader
2012, 18).
These projects show that Iran means more to China than just another source of oil
imports. While Iran needs China more than China needs Iran, both Beijing and Tehran have
shown a willingness to work with each other even when international sentiment have blown
against the two powers. China has complementary relationships with many Gulf state economies,
but only in Iran does it have the unique opportunity to provide developmental assistance and
pave the way towards economic growth (Ziegler 2006). If China can turn Iran into an economic
success story, it will benefit from both the added value in trade ties and the diplomatic standing it
would receive from controlling a pariah state.
3. The Role of the United States
An Uncomfortable Trilateral Relationship
Both China and Iran oppose Western interference in foreign policy, and have looked to
each other for support and solidarity in the past. As Harold and Nader write, “Opposition to
40
American ‘hegemony’ is an ideological pillar of the Islamic Republic.” (Harold and Nader 2012,
5) China has also historically opposed Western hegemony and sided with Iran on the issue
(Davis et al. 2013, 25). As recently as 2009, Chinese rhetoric has followed this line of
opposition, with President Hu Jintao stating that “Tehran and Beijing should help each other to
manage global developments in favor of their nations otherwise the same people who are the
factors of current international problems will again rule the world.” (Fite 2012, 9)
Though the United States played a very significant role in the domestic politics of Iran
for decades, its current relationship (or lack thereof) revolves around Iran’s nuclear program and
resulting economic sanctions. The United States first instituted economic sanctions against Iran
in 1979, freezing $12 billion in assets in response to the embassy hostage crisis. The United
States escalated these sanctions during the Iran-Iraq war, first cutting off arms sales and
assistance, and later introducing an outright embargo against trade with Iran. More recently, the
United Nations has erected similar barriers around the Iranian economy to prevent its nuclear
program from developing any further. China actually supports nuclear nonproliferation,
believing that an additional nuclear power would create instability in the region and have a
detrimental effect on China’s quest for energy security (Shen 2006, 60).
In this way, China faces a decision between continuing to work with Iran and the
appeasing the United States. China cannot invest in Iran in the same consequence free manner as
its NOCs, as mounting pressure from both the United States and the United Nations ensures that
every diplomatic move is closely tracked. Despite claims that China uses Iran to antagonize
Washington, Beijing is keenly aware of the threat that a truly rogue Iran poses to its own security
and diplomatic standing: “An unnecessarily belligerent Iran threatens China’s credibility, but if
41
China can show itself to be a force of moderation it can justify its continued relationship with
Iran.” (Fite 2012, 10)
China hopes to maintain economic relations with Iran, both to promote growth, and to
further establish its role as a global hegemon (Liu and Wu 2010, 46). Despite the massive dollar
amounts of China’s equity oil projects, China’s NOCs have invested in Iran carefully, and have
made efforts to appease Washington (Fite 2012, 11). Many of the multi-billion dollar deals are
non-binding agreements, which allow China’s NOCs to back out with minimal losses in the
event of a diplomatic and economic Western crackdown (E. S. Downs and Maloney 2011).
China does not appear willing to jeopardize its relationship with the United States – its largest
trade partner – to increase ties to Iran. Despite what most would consider “skirting” the embargo,
China has historically followed the international community when it comes to serious human
rights or security threats.
In some cases, though, China’s NOCs have ignored the heeding of the United States
while doing business in Iran. Just as Japan faced pressure from the United States in 2003,
Sinopec saw diplomatic resistance over its bid for development rights on the Azadegan field in
2004. “According to Sinopec officials, the U.S. Embassy in Beijing requested that Sinopec
withdraw its bid, but Sinopec refused.” (Dorraj and Currier 2008). In a more recent case, the
United States Treasury sanctioned a subsidiary bank of CNPC for dealing with blacklisted
Iranian banks in 2012. A spokesmen reiterated China’s commitment to nuclear sanctions and
denounced the penalty as “erroneous and “unprovoked.” (Zhou 2012) Chinese officials regularly
oppose sanctions against Iran, and have pushed for a diplomatic resolution to the nuclear
situation (Al Jazeera 2014).
42
If the United States hopes to change China’s policies in Iran, it must do so in ways that
do not jeopardize Chinese energy security (Fite 2012, 13). Though China would certainly like to
see Iran develop into a stronger and more open economy, its own energy security remains the
basis for the relationship. As Fite writes,
“While the leaders in Washington and Tehran attempt to elicit China‘s cooperation on the basis of commitment to the global status quo or a new world order, Beijing‘s leaders appear far more concerned with the security and prosperity of China, and they will pursue international relationships from that standpoint.” (Fite 2012, 21)
China has used its diplomatic standing to protect its NOCs from international pressures where
possible, but Beijing has shown an understanding for the global status quo. Though Beijing seeks
regional and global hegemony on other levels, it does not appear willing to provoke the United
States on the case of Iran. It will continue to push and skirt sanctions where possible, but only for
its own benefit. As Calabrese wrote more than a decade ago, “China’s relationship with Iran is
conditioned, but not determined by the ‘US factor.’”
Conclusion
China’s relationship with Iran has consistently put it on the global stage, for better or for
worse. Though certain lines of dialogue have suggested a more sinister goal for Beijing’s
involvement in the region, China’s ties to Iran remain firmly based in energy security. China’s
NOCs have defied Washington’s wishes on occasion, but they have also made concrete efforts to
appease the United States when doing business in Iran. If China wants to continue, or further, its
relationship with Iran, it must do so in a way that promotes stability for itself, Iran, and the
United States.
43
Conclusion
China’s national oil companies have forced Beijing to use more progressive policies to
ensure the nations energy security. While the NDRC’s equity oil strategy provided a solid
stepping-stone for China’s NOCs to build from, the implementation prescribed by the NDRC has
proved shortsighted and inadequate. China’s greatest success in the past fifty years has been its
ability to open its own markets to foreign investors, and to go out into the world and invest
elsewhere. For Beijing to truly promote energy security, it must apply these same principles to its
energy strategy, and accept the benefits and risks of the global oil market. Once this shift occurs,
perhaps the global economy will realize that the risky equity oil projects pursued by China’s
NOCs have actually increased – not decreased – the total supply of oil available to the world
(“China’s Thirst For Oil” 2008, 12).
China’s integral role in the global economy promotes its energy security. As the largest
trading partner in the world, China also has significant economic relations with nearly every
country it imports oil from (BBC 2014). Though Beijing fears that a politically motivated
embargo could suddenly cutoff China’s access to certain oil markets, the threat of any country
(or even any group of countries) taking such a strong economic action against China is
infinitesimally small. As Daojiong notes, the value of trade between the United States and China
makes the chances of a U.S.-backed response to a Chinese offensive in Taiwan or the South
China Sea increasingly slim (Daojiong 2006, 181). Though China will remain under the scrutiny
of the media and the international community, its current standing in the world will ensure its
energy security more than equity oil ever will.
Since China began to rely on imported oil in 1993, it has benefitted from the relationships
and stability fostered by the United States and its seemingly omnipresent authority in the Middle
44
East. As the United States grows increasingly energy independent, it will play a slightly but
noticeably smaller role in the Middle East (Daojiong 2006, 11). Here, too, is an opportunity for
both China’s NOCs and Beijing’s quest for global hegemony. Though China lacks the military
and historical presence, its tremendous economic strength and growing diplomatic influence will
allow it to slowly step into the role of the United States as the region’s primary oil importer.
China’s consumption gap is too high to focus on domestic energy security; instead,
Beijing must shift towards global energy security (Giljum 2009, 19). China’s NOCs have already
shown tremendous prowess in taking on new market and developing successful business
relationships where diplomatic ties had not previously existed. If Beijing can accept the
interconnectedness of the global oil market and the economic and diplomatic benefits it will
receive from promoting global security, China’s NOCs will play an integral role in developing
the oil market in the 21st century.
45
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