Chinas Problem: Putins Desire for Superpower Status

With Putins star rising, Russia has aspired to block Chinas energy ambitions in Central Asia. When China embarked on a Sino-Kazak strategy, Boris Yeltsin was still president. Since then, Putin and his inner circle of Chekists (named after the Soviet Unions first secret police squads) have begun tightening the noose around the ex-Soviet states. The mandate driving Putins fellow ex-KGB insiders is Russias return to superpower status.

This became evident on October 26th 2005, when SCOs top officials met in Moscow for their annual conference. Because Indias Foreign Minister and Pakistans Prime Minister attended as SCO-invited observers, Putin boasted the populations represented by SCO member states and observer countries exceeded three billion people. He bragged he had gathered half the planet at the Kremlin. At the top of the SCO agenda were energy issues, such as expanding the oil and gas sector and exploration of new hydrocarbon reserves. Of course, these are the issues which are clearly foremost on the mind of the Chinese.

But has Putins mood swung further toward impudence? When Chinese Prime Minister Wen Jiabao announced the Sino-Russian bilateral trade turnover might surpass $28 billion, Putin challenged, I hope this happens. While even Russias media suspected Putin used the SCO conference as his egocentric publicity showcase, Russia depends upon Chinas economic prowess to uplift its own economy. Will there come a time when Russia is less fearful of Chinas economic might? This might be well into the future. Russias economy continues to require an ally in China. Politically, Russia depends upon China politically as a buffer from the U.S. The September EU-China Summit to be held in Helsinki should offer clues about the tentative Sino-Russo alliance. Chinese Premier Wen Jiabao will give the keynote address, and possibly helping to forge closer alliances with Russias neighboring Finland. After all, Nokia is based in Finland, and China is the worlds largest consumer of mobile phones and services.

One has to wonder if Russia has been slowly closing Chinas door to Central Asia over the past few years. Gazproms press secretary, quoted in a 2004 interview in Vedomosti, announced, sharing mineral resources with foreign countries is against our policy In fact, sharing oil with the Chinese would be even more inappropriate. Gazprom, for example, is now developing Uzbekistans gas fields for export to the West, and not to China. (See part two of this series.)

The delicate equilibrium between Russia and China one where both countries hope to maneuver against further U.S. meddling (or as cynics call it, imperialism) in the Middle East requires yielding as few concessions to the other as need be conceded. When China moves too boldly, Russia plays upon its alliance with Japan to keep China in check. Both use their U.N. Security Council vetoes as negotiation tools in carving out petroleum, and other commodity interests, to preserve their energy security issues.

China serves Russias political aspirations in quelling U.S. expansion into the Middle East. Having decades-long ties with Iran and other Muslim states, Russia has a convenient ally in China, when using Iran as a thorn in Washingtons backside. And China still remembers the oil concessions it lost in Iraq, after the U.S. invasion of that country. China likely frets about the unending squabble over Irans uranium enrichment aspirations in light of having lost those Iraqi oil concessions.

Pragmatic China Resorts to Trading with

Rogue Nations for Energy Security

At the mercy of a ruthless global energy market, pragmatic China has turned to nations which are shunned by U.S. interests. One productive Silk Road leading to China begins in Iran. More specifically, it starts in the Yadavaran oil fields where the Chinese oil company Sinopec plans to import about 150,000 barrels of crude per day, after it has developed these oil fields. Initially, the October 2004 deal was reportedly valued at $70 billion. However, additional developments and Chinas substantial purchase of Irans vast natural gas reserves may increase the value of this multi-decade energy deal to more than $200 billion. What could go wrong? Look at the daily headlines: Iran wants to enrich its own uranium. Unless this situation is resolved, escalated political tensions could impair Chinas ability to import oil and gas. Obviously, China would take great pains to avoid an Iraqi rerun in Iran.

Out-maneuvered by western oil companies in obtaining many of the worlds proven oil reserves, China has cultivated the Sudan as its largest oil provider. Sudan depends upon the pragmatic Chinese for its economic and military strength. China is also the principal source of hard currency for Africas largest country. Rejected by the worlds community for the genocide it is committing in West Darfur, Sudan exports its oil to China for Chinese weaponry. China finds little competition for Sudanese oil. The Chinese are the largest single shareholders dominating Sudans oil company consortium. It is the largest investor in a 1,500-kilometer pipeline delivering Sudanese oil to the Red Sea, which is then shipped by tankers to China.

China has not limited its African oil purchases to one country. Another blighted nation, Angola believes it could soon surpass Nigeria as Africas largest oil supplier. According to the World Bank, China may have recently offered Angola about $9 billion in credits and loans. Two years ago, it was reported that China extended a $2-billion loan to Angola for 10,000 barrels of crude oil per day. Now, it appears China is eager to help Angola build sufficient infrastructure in that country to develop another strong energy source.

Hoping to create a Silk Road across the Pacific from South America, China has continued its hunt for energy security by developing ties with Venezuelas Hugo Chavez. This may come to naught. Venezuelas highly sulfurous crude would first have to be refined in the United States. China lacks the refineries for handling the heavy crude oil. Over the past year, Chinas oil imports from Venezuela amounted to orimulsion from the Orinoco Tarbelt, mostly used for asphalt.

New refineries, however, can be built to remedy the heavy oil Venezuela might provide. According to a recent special edition of the McKinsey Quarterly, China will be forced to heavily invest in refineries for all the crude oil it has committed for, To keep up with surging demand, the country needs to build a large, technologically world-class refinery every year for the next 15 years, at a cost of $2 billion apiece. China lacks the refining capacity to meet its current needs. In the first half of 2006, Chinas imports of refined petroleum products jumped by nearly 50 percent, compared to the same six-month period in the previous year.

Although Venezuela hopes to become one of Chinas top three oil suppliers, it is likely more hyperbole than a realistic possibility before 2010. As Chinas proven oil reserves continue to deplete, it may very well have to turn to Venezuela at some point for this countrys vast oil reserves. Outside of the Middle East, Venezuela may have one of the last great oil resource reportedly at greater than 80 billion barrels of crude. The question is not if, but how fast can,Venezuela accommodate Chinas ravenous appetite for its countrys oil?

Venezuela also has the largest natural gas fields in all of South America. Earlier this year, Brazil and Argentina (two of Chinas favorite Latin American trade partners) discussed with Venezuela the possibility of building a gas pipeline across the Amazon. A 5000-mile gas pipeline would need a port destination for LNG tankers to supply China. Instead, talk of an oil pipeline through Colombia could be replaced by a gas pipeline.

Chinas approach, in dealing with what the Anglo-American alliance call rogue nations, reflects one of reported non-interference in a countrys political affairs. It is a Chinese pragmatism, which many find amoral. By contrast, in what way is America judged around the world by its military invasion of Iraq? When U.S. President Bush recently criticized Vladimir Putin about democracy in his country, the Russian President pointed out that Russias democracy was quite different from the one the U.S. had created in Iraq for the Iraqis. One has to wonder how long Chinas laissez faire doctrine will last. And whether China can continue developing new energy silk roads at the rate its GDP growth commands.

Some believe China doesnt need so much oil right now. In the first half of 2006, according to Xinhua news, Chinas refinery output was seven percent less than the countrys domestic crude-oil production. Despite producing 85 million tons of crude oil, China still imported 70 million tons of oil (on top of 12 million tons of refined oil). Is China hoarding to avert a future political crisis, or does it expect its energy silk roads to soon close or become blockaded?

The McKinsey Quarterly researchers also reported if China continues at its current pace, it would need to buy up about three percent of the worlds proven petroleum reserves. Thats more than all of the reserves held by Chevron, ExxonMobil, BP, Shell and others. As we have been reminded by energy analysts, getting oil out of the ground costs more, the quality of oil is falling and more water is found in the oil. All of this has registered on not only on the radar screens of Chinese energy advisors and politicians, but also at the gasoline pumps where filling up a tank should continue to increase every year. As Deng advised about getting rich, it can be glorious but the furious process of getting there has not only been taxing for China, but also for the rest of the world.