New Energy Game

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For all the rhapsodies on the advent of the New Silk Road, it may have come into effect for good last week, when China and Central Asia got together to open a crucial Pipelineistan node linking Turkmenistan to China's Xinjiang.

By 2013, Shanghai, Guangzhou and Hong Kong will be cruising to ever more dizzying heights courtesy of gas supplied by the 1,833-kilometer Central Asia Pipeline from Turkmenistan--operating at full capacity. The pipeline will even help China achieve its goals in terms of curbing carbon emissions, reported Asia Times.

In a few years China's big cities will also be cruising courtesy of oil from Iraq. China needs Iraqi oil.

But instead of spending more than $2 trillion on an illegal war, Chinese companies got some of the oil they needed from Iraq by bidding in a legal Iraqi oil auction.

In the New Great Game in Eurasia, instead of getting bogged down in Afghanistan, they made a direct deal with Turkmenistan, built a pipeline, profited from Turkmenistan's disagreements with Moscow (Gazprom stopped buying Turkmen gas last April, which cost the Central Asian "stan" $1 billion a month), and will get most of the gas they nee.

The running myth is that China is addicted to oil. Coal would be more like it. The No 1 global emitter of greenhouse gases, China still produces more than 70 percent of its energy from coal. Beijing will inevitably get deeper into biogas or solar energy, but in the short term most of the "factory of the world" runs on coal. Of its verified energy reserves, 96 percent are coal.

Oil Needs
Twenty-eight percent of the world's total proven oil reserves are in the Middle East.

China badly needs this oil--with its factories churning out everything from sneakers to laptops, its car market booming like there's no tomorrow (last month alone it produced 1.34 million vehicles), and Beijing is constantly increasing its strategic oil reserves.

Few may know that China is actually the world's fifth-largest oil producer, at 3.7 million barrels per day (bpd), just below Iran and slightly over Mexico. In 1980, China consumed only 3 percent of the world's oil. Now it's already around 10 percent--the world's second-largest consumer, overtaking Japan but still way behind the US at 27 percent.

According to the International Energy Agency (IEA), China will account for more than 40 percent of the increase in global oil demand up to 2030. And this assumes that China's gross domestic product will grow at "only" 6 percent. In 2009, even with the global financial crisis, China's GDP is expected to have grown 8 percent.

Saudi Arabia controls 13 percent of the world's oil production. It is the only swing producer capable of substantially increasing output. Not by accident, until recently it was China's main supplier--with 500,000 bpd.

China will get increasingly more oil from Iraq starting from 2013 or 2014. So from now on China National Petroleum Corp (CNPC) will be very well positioned.

Iranian Equation
Chinese companies committed to investing no less than a staggering $120 billion in Iran's energy sector over the past five years. Iran is already China's No 2 oil supplier. Sinopec has just signed another memorandum of understanding with the National Iranian Oil Refining and Distribution Company to invest an additional $6.5 billion to build oil refineries in Iran. Despite illegal sanctions, trade between China and Iran grew 35 percent in 2009, to $27 billion.

Arguably nothing will happen in January, when China takes over the presidency of the United Nations Security Council. No matter what's spun in the US, Russia as well as China won't agree to more sanctions against Iran.

Escape Routes
From Beijing's point of view, both the US vs Iran conflict and the simmering US vs China strategic competition boil down to what could be called "escape from Hormuz and Malacca".

The Strait of Hormuz at its narrowest is only 36km wide, with Iran to the north and Oman to the south.

Roughly 20 percent of China's oil imports travel through it. Beijing frets at the sight of US aircraft carriers patrolling nearby.

The Strait of Malacca at its narrowest is only 2.8km wide, with Singapore to the north and Indonesia to the south. As much as 80 percent of China's oil imports may travel through it.

The "escape" logic explains China's foray into Africa. China went to Africa because that continent is home to the few oilfields not owned by foreign oil giants. When Chinese state oil companies buy equity stakes in African oilfields, they are protecting China from increases in oil prices, with the added bonus of no hassle--as happened in 2005 when China National Offshore Oil Corp tried to buy Unocal in the US.

© Iran Daily 2009