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China Barrels Ahead in Oil Market

The country's hunt for the energy it needs to fuel its economy has led to deals in political hotspots, riling the U.S.

November 14, 2004|Don Lee | Times Staff Writer

SHANGHAI — About a three-hour drive south of Shanghai, along the East China Sea, workers are building 52 gigantic tanks, each capable of holding more than 25 million gallons of oil -- enough to supply every driver in China with gasoline for a month.

The storage tanks will help accommodate China's thirst for oil as it looks to fuel its booming economy. And it has plans to stockpile much, much more.

China, the world's second-largest consumer of oil after the United States, has plenty of cash to secure sources of petroleum and natural gas. But as aggressively as any nation, it is also cutting deals and forging alliances to get the energy it needs.

In South America and Africa, the Chinese government is helping build roads and ports in exchange for oil supply contracts. Beijing pledged to support oil-rich Russia in its bid to join the World Trade Organization as the two countries agreed that Russia would boost its exports of crude by rail to China.

And after a Chinese company's deal to develop an oil field in Iran, Beijing tacitly offered political support for Tehran's budding nuclear program. That put China in direct cross hairs of the Bush administration. The hunt for energy in the former Soviet Union and political hotspots such as Sudan is making China few friends in Washington.

China is "throwing around its economic muscle like crazy," said David Lampton, head of China studies at Johns Hopkins University's School of Advanced International Studies. "The Chinese are throwing incredible amounts of money to lock up long-term [energy] contracts.

Some Chinese officials dismiss the threat of increased friction over energy.

"Although oil trade plays an important role in every field, it has a limited influence in Sino-American relations," said Han Wenke, vice director of the energy institute affiliated with the National Development and Reform Commission, an important regulatory agency of the Chinese central government.

Beijing's pursuit of energy is all about maintaining the nation's strong economic growth, which Communist Party leaders believe is the linchpin to social stability and ultimately their legitimacy. Oil and natural gas, and lots of both, are needed to keep factories running and to power all the new cars hitting freshly paved streets.

Only a decade ago, China shipped out more crude than it imported. This year it has sharply reduced exports to meet domestic needs -- and it is now the world's second-largest importer of oil after the U.S.

Rising Demand

Surging Chinese demand, which has helped drive up oil prices to record levels in the last year, is expected to rise by double-digit growth rates annually for the next 15 years.

Although crude prices have settled back in recent days to less than $50 a barrel, China's rapid economic expansion is almost certain to add pricing pressure over the long haul. The country accounts for about 6% of world consumption; that's projected to rise to more than 9% in 2020, as Chinese oil fields dry up. (One-fifth of global oil demand comes from the United States.)

Wary of its increasing reliance on a few foreign oil suppliers, China has formulated a "go-out" strategy to diversify and expand its energy capabilities. The plan involves cooperating with 27 countries for oil exploration.

Beijing also is pouring money into developing its own pipelines and liquid natural gas terminals and launching an array of energy conservation programs at home, including imposing fuel economy standards on new cars.

One of China's biggest and latest energy ventures involves Iran, which the United States has sought to isolate for its alleged development of a covert nuclear arms program.

Late last month, Chinese and Iranian officials signed a preliminary deal in which China's Sinopec Group would develop Iran's Yadavarn oil field in exchange for Sinopec agreeing to buy millions of tons of Iranian liquefied natural gas. The Chinese government media valued the deal at $70 billion.

A few days later, Chinese Foreign Minister Li Zhaoxing gave Iran important political support in the standoff over the Islamic republic's nuclear program. Li said Beijing opposed efforts to have the matter referred to the United Nations Security Council, although he stopped short of saying China would use its veto power if the case were sent there.

U.S. diplomatic sources have been reluctant to comment on the deal. Some analysts said it was unlikely that Beijing would jeopardize U.S. relations over an energy pact with Iran.

But others aren't so sure.

"There is a rationale from Beijing that is very dominant: If you can supply oil and do business, we would like to sign a deal," said Wenran Jiang, a political scientist at the University of Alberta in Canada. "China is very non-ideological in that sense. They will think about it, but they're not driven by the strategic interest in Washington."

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