Canadian-Asian Affairs

The Chinese Situation:

Prior to the Deng Xiaoping era, modern China was largely energy self-sufficient. However China’s prolonged economic boom led to it becoming a net energy importer in 1993, rising to the world’s second largest consumer of oil in 2003, and third largest petroleum importer by 2005. Petroleum’s singular economic significance has resulted in China expending great diplomatic energy in securing improved access to worldwide oil reserves. Subsequently China is highly concerned about security and control over energy supply routes, specifically pipelines and seaways.

Presently China sources the majority of its foreign oil from the Middle East. This dependence on one, at times unstable, region gives the Chinese leadership reason to look elsewhere for oil. A diversification of supply regions increases stability. Dependence on Middle Eastern oil is also problematic for China because of American predominance in the region. Therefore China has increasingly been looking to Russia, Central Asia, Africa and the Americas as energy suppliers.

Securing transport of oil has featured large in China’s recent foreign policy. Eighty percent of Chinese oil imports travel through the straits of Malacca. This combined with the USA’s control of Indian Ocean sea lanes makes the Chinese somewhat concerned about the vulnerability of their oil imports and thus national security. For instance, it is not unimaginable that a conflict with Taiwan could result in a US enforced shipping embargo which could severely impact the Chinese ability to prosecute a successful campaign.

China’s lack of strategic oil reserves makes the possibility of impeded oil imports that much more worrisome. Neighbouring and competing countries such as Japan and South Korea share similar energy concerns with China. However these countries are not faced with a growing demand for energy as China is. Furthermore both South Korea and Japan have over 100 days of strategic oil reserves. This weakness has not been lost on the Chinese leadership. The construction of strategic oil reserves has started, and is scheduled to be completed by 2010. These reserves will help insulate China from rapid price shifts, while also providing some insurance against possible embargoes.

China’s energy concerns have influenced the creation of new international relationships and formal organizations. While the Shanghai Cooperation Organization (SCO) is the most prominent of these, new efforts to engage African and American countries have also resulted from China’s quest for improved energy security. Most recently the China-Africa Summit’s action plan clearly emphasized the importance of energy in bilateral relations between China and African countries. Relations with Russia and other Asian countries have also been influenced by China’s oil appetite. Russia and the other Central Asian members of the SCO have the distinct advantage of being able to transport oil to China via pipeline. This increases supply security by avoiding difficult to secure sea transportation. Recently China lobbied the Russian government to route the Russian Far East pipeline to a Chinese terminus. However following their initial agreement, the Russians decided to route the pipeline to Russian territory to enable marketing of the oil to both Japan and Korea. While China’s oil diplomacy has not been universally successful, we can observe that the atmosphere created by increasing energy demand has forced China to work with foreign entities. There are two possible outcomes from this situation. Either China can become more integrated in a globalized world system, or it may develop relations with a bloc of countries in opposition to Western hegemony.

While there is not a simplistic binary relationship between these two options it seems clear that presently China is leaning towards focusing on the fringes of the international energy market. Obviously this focus is not exclusive. Chinese petroleum companies are active in many markets. However for a number of reasons China finds itself dealing with states that have largely been rejected by Western actors. This is evidenced by China’s improving relations with countries like Iran, Syria, Venezuela and Sudan. The reasons for China’s focus on the fringe are numerous. One is that the strength of American influence on most oil producing nations causes China to feel forced to deal with these pariah states. Another is that when China attempts to legitimately expand into other markets it often faces opposition. The failed UNOCAL acquisition is an excellent example of why China may feel unwelcome dealing overtly in Western petroleum markets.

Fear of China’s rise should not influence the West to shut China out of international oil markets. Nor should the West give China reason to believe that its oil supplies are vulnerable as the target of a concerted effort to fence China in. These actions will only foster the development of a Chinese-led bloc of oil producing countries. Instead China should be further encouraged to engage in international petroleum markets. It is in the West’s best interest to promote multilateralism and commitment to open markets to China. China has begun dialogue with major international energy organizations, the International Energy Agency and the Energy Charter Treaty secretariat. This dialogue should be encouraged. It will act to promote free market policies which will help discourage development of a trading bloc opposed to the West. Engagement is key.

Canadian Opportunities:

It is in this environment which a middle-power such as Canada may be able to leverage its diplomatic clout by utilizing the growing Chinese demand for energy and cultivating good energy trading relations. By encouraging investment by Chinese energy companies, Canada stands to benefit in a number of ways. Increased Chinese investment in Canadian oil reserves will improve relations between the two countries. Furthermore, it will have the rather mundane, but not insignificant, effect of attracting new sources of significant foreign investment in Canada. Diversifying Canada’s energy customers so that the market is not so heavily focused on American consumption will also act to further secure the Canadian economy.

One of the major issues when considering further Chinese investment in Canadian oil companies is the fact that it is difficult to determine to what degree Chinese energy companies are influenced by Chinese politics and to what degree they are free-market actors. Therefore direct investment by foreign corporations should be subject to restrictions. A forty-nine percent ownership cap should be enforced on corporations which cannot fulfill a series of criteria demonstrating their independence from political control. Once this independence is demonstrated, foreign corporations should all be treated equally. The West’s insistence on the value of free markets is only undermined when free markets are impeded by xenophobia.

Beyond petroleum relations, Canada could benefit from China’s growing demand for energy by more active marketing of CANDU reactors to China and by offering to supply Uranium to a growing Chinese nuclear industry. Taking a holier-than-thou approach with the Chinese has not been successful for Canadian-Chinese relations. Instead the Canadian government would be well served by accepting the fact that the Chinese nuclear arsenal is already quite extensive, therefore technology transfer and uranium supply are no real security threat. Provided China fulfills its non-proliferation responsibilities there should be no problem. There are international frameworks in place to ensure that these responsibilities are fulfilled. It is not the role of the Canadian government to do so. Instead Canada should work hard to increase its penetration in the Chinese nuclear industry. By becoming a major supplier of uranium, and increasing its supply of nuclear technology Canada will necessarily become more important to the Chinese. It is this closer relationship that will enable Canada to better pursue its diplomatic goals with China. And it is this sort of positive formal relations with Western countries that will act to keep China engaged in an open energy market, thereby reducing the potential of conflict over resources in the future.

Conclusion:

There are two ways the West can react to China’s relatively new status as a major energy consumer. It can either embrace China in a free energy market, thereby increasing China’s global integration. Or the West can try to hedge in China’s growth and oppose investment by Chinese petroleum companies in Western and Western-controlled markets. Opposing China or trying to control its growth by limiting its access to oil markets and monopolizing security over global sea lanes will only antagonize China. This antagonism runs the risk of further encouraging China to position itself outside the free petroleum market, and developing a trading bloc of its own. However, by actively encouraging Chinese participation in a free and open energy markets, the West will not only ensure greater stability of global energy supply but also further integrate China into the global economy. In regards to free market reforms, the Chinese have made huge strides in the past quarter century. But energy, due to its significance to national security and economic development, has not been as affected by reforms as other market segments. The West owes it to both itself and China to see that these reforms take place, and allow China to play the role it deserves to play in international energy markets.

Henrich Kraft, “China’s Quest for Energy” in Policy Review Sep/Oct 2006, issue 139, p. 62.
Charles E. Ziegler, “The Energy Factor in China’s Foreign Policy” in Journal of Chinese Political Science vol. 11, issue 1, Spring 2006, p. 8.
Ibid., p. 6.
People’s Daily Online, “Action plan adopted at China-Africa summit, mapping cooperation course” http://english.people.com.cn/200611/06/eng20061106_318572.html, accessed on December 7, 2006.
Pak K. Lee, “China’s Quest for Oil Security: oil (wars) in the pipeline?” in Pacific Review, vol. 18, issue 2, June 2005, p. 270
Ziegler, p. 5.
“Meeting the superpower” in The Economist, vol. 377, issue 8543, 11/19/2005, p. 11.
Philip Andrews-Speed, Energy Policy and Regulation in the PeopPeople’s Republic of China, (New York: Kluwer Law International, 2004), p. 353.