China never fails to impress as the most populous country is now the world’s manufacturing workshop. It has transformed its economy with an impressive 10 per cent annual GDP growth in the first decade of this century.
The drop towards 7.4 per cent now is perhaps a welcome slowdown to absorb the progress made and avoid higher inflation.
The examples are many and I will concentrate on the oil situation in China as a stark example in what was thought to be unbelievable 20 years ago.
Until the early 1990s China was a net oil exporter. In 1990 production was 2.774 million barrels a day (mbd) and consumption 2.320 mbd, according to BP Statistical Review.
In a detailed study about China, the US Energy Information Administration (EIA) tells us that in 2014 production was 4.6 mbd and consumption 10.7 mbd. All this happened due to the enormous expansion and liberalisation of the economy and the continued rise in population.
This development necessitated the import of rising quantities of crude oil to 6.1 mbd in 2014. Thus China in 2011 became “the world’s second-largest oil consumer behind the US” and “the world’s second-largest net importer of crude oil and petroleum products in 2009”, the EIA said. Since 2013, China has become “the world’s largest net importer of petroleum and other liquids, in part because of China’s rising oil consumption”.
Although China’s energy requirement is reliant on coal to the extent of 66 per cent — and this share is unlikely to change much — demand for oil will still grow due to economic and population growth, that in the transportation sector and the rising volumes in strategic reserves.
These may be ameliorated by China’s move towards market prices for oil products and energy efficiency measures, in addition to its quest for renewable energy. Therefore, oil demand is forecast by EIA to rise to 18.5 mbd in 2035 and 20 mbd in 2040.
China’s oil production from the traditional fields is likely to remain steady or decline, but the use of secondary recovery methods, the competition among China’s oil companies and the “greater investments in more technically challenging upstream hydrocarbon areas” are likely to boost production to 5.6 and 5.7 mbd in 2035 and 2040 respectively.
Other forecasters such as Opec and IEA often have different numbers, but the three organisations come largely to an average ballpark figure for oil imports of 13 and 14 mbd in 2035 and 2040 respectively.
Overseas equity shares
The unprecedented rise in imports has led China’s oil companies to invest worldwide whenever they find the opportunity. Import dependency has risen from 30 per cent in 2000 to 57 per cent in 2014, and China invested $73 billion in overseas oil and gas assets between 2011 and 2013.
According to IEA, “China’s oil production from its overseas equity shares and acquisitions grew significantly over the past several years, from 1.36 mbd in 2010 to an estimated 2.1 mbd in 2013”. China’s participation now spans 42 countries.
Iraq is a good example where Chinese companies are participating in developing large oilfields such as Rumaila, Halfaya and Ahdab.
Obviously the Middle East is the largest supplier of oil to China such that last year it imported 3.2 mbd, or 52 per cent of its imports from the region. Saudi Arabia and Iraq supplied 16.1 & 9.3 per cent of Chinese imports respectively.
At the same time, Saudi Arabia, Kuwait and Qatar entered joint ventures “to build integrated refinery and petrochemical projects and to gain a foothold in China’s downstream oil sector”. Sinopec has a joint venture with Aramco in the 400,000 barrels a day Yanbu refinery.
Chinese investment worldwide is not limited to the energy sector but also in metals, engineering projects and other minerals as well as lending large amounts of money for infrastructure projects. Total investment was said to be $870 billion by the end of 2014 according to a Reuters report.
Almost half of it is in the energy sector. China is also creating two international financial institutions to finance development (much to the dislike of the IMF and the World Bank.)
Needless to say that this financial clout is likely to result in political influence as well, especially in our region. The Economist quoted a source as saying the Gulf, “is looking to diversify our political relations” and “China is foremost among the targets”.
As China oil imports from the Middle East are likely to double by 2035, let us hope that its economic and political influence are positive in solving the many problems the region is facing.
The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.