On Common Ground 2007
Conference by the Forum for American/Chinese Exchange at Stanford University
Stanford, California
Panel on the Scarcity of Oil Resources: US, China, Africa and the Middle East
April 10, 2007

The Scarcity of Oil Resources

Remarks by David H. Shinn
Adjunct Professor
Elliott School of International Affairs
The George Washington University

Two Chinese academics wrote a year ago in the Far Eastern Economic Review that “energy security is already playing an increasingly important role in Sino-U.S. relations, intensifying friction on regional issues.” They cited policy disagreements between the US and China over Sudan and, especially, Iran. Although neither Sudan nor Iran is a source of crude for the US, together they supply about 20 percent of China’s imports. China also has significant energy investments in both countries. As the US tries to isolate or punish Iran and Sudan, China has concluded that they are important to its energy security and the rapid growth of its economy. The two Chinese academics argued that the legitimacy of the Chinese Communist Party depends on this continuing strong and sustained economic growth.

In the meantime, a senior US official warned that Beijing’s ties with “troublesome” states would have repercussions. Countries deemed troublesome by the US that export significant quantities of oil to China will probably continue to cause tension between the US and China. At the same time, there is no inherent reason why American and Chinese energy policy in Africa and the Middle East should result in conflict. Particularly in the case of Africa, there are opportunities for Sino-American cooperation on the development and security of oil reserves. It is in the interest of the US and China to develop a secure supply of crude and a reasonable international price.

US and Chinese Oil Consumption and Imports

The US is the largest and China the second largest consumer of oil in the world. China uses about 7 million barrels of oil a day while the US consumes about 20 million barrels. The International Energy Agency projects that Chinese demand will exceed 9 million barrels daily by 2011. China relies on locally available coal for most of its energy needs. Oil and gas account for only about 20 percent of its energy requirements and imported oil constitutes less than 10 percent of China’s total energy consumption. While it is important to keep this in perspective, China has had one of the sharpest increases in energy demand globally during the past two decades. Oil is replacing coal in some industries because of coal’s low efficiency and negative environmental impacts. China’s demand for oil and gas is rising faster than its demand for coal.

The US is the world’s largest importer of petroleum. China is the third largest oil importer after the US and Japan. On a per capita basis, however, China imports only about one-twentieth as much oil as the US. China’s 1.3 billion people, one-fifth of the world’s population, tend to diminish all per capita statistics. Nevertheless, China’s oil requirements are growing faster than those of the US. The sheer size of China’s population and its rapidly expanding economy are leading to increasing competition for access to oil with a variety of countries, including the US. China’s increased consumption is also contributing to the rising price of crude.

China’s crude oil imports have increased about 13 percent annually since 1994. In 2006, imports accounted for 47 percent of Chinese oil consumption while the figure for US oil imports was about 60 percent. China’s oil import bill soared to US$82 billion in 2006, up from only US$15 billion as recently as 2001. At current rates of oil consumption, China will need to import about two-thirds of its total requirement by 2015 while US imports will rise above 60 percent of total needs. In order to satisfy its growing consumption and higher oil imports, China is following the practice of other industrialized nations. It is diversifying its suppliers and encouraging its national oil companies to invest in Africa, the Middle East, and elsewhere. Chinese state companies increasingly are seeking to acquire stakes in African oilfields. China is pursuing a long-term policy of energy security rather than following the approach of Western companies that tends to emphasize short-term profits.

The Role of Oil from Africa

The 53 countries in Africa, including five in North Africa, possess only 9 percent of the world’s proven petroleum reserves compared to almost 62 percent for the Middle East. But Africa remains largely unexplored and may well be the location of significant future oil and gas discoveries. A disproportionate percentage of recent important oil finds has taken place in the Gulf of Guinea. Some energy experts predict, for example, that the swampy Sudd in southern Sudan contains 5 billion barrels of recoverable reserves. IHS Energy, an oil and gas consulting firm, believes that Africa will supply 30 percent of the world’s growth in hydrocarbon production by 2010. A US Department of Energy study projected that African oil production would rise 91 percent between 2002 and 2025, from 8.6 million to 16.4 million barrels per day. African oil also tends to be high quality and low in sulfur, making it particularly desirable to refiners. Although much less significant than the Middle East as a source of oil, Africa is no longer a marginal player and has become especially important to the US and China. Libya’s 39 billion barrels of oil reserves and Nigeria’s 36 billion barrels are both twice the size of China’s proven reserves and just under twice the size of American reserves.

China now obtains almost one-third of its imported oil from Africa; this compares with one-quarter as recently as 2004. About two-thirds of all African exports to China consist of oil. Twenty-two percent of US crude imports now come from Africa; this compares with only 15 percent in 2004. In fact, US oil imports from Africa have nearly doubled since 2002. Both China and the US are projected to increase their percentages of imports from Africa.

The Middle East also provided 22 percent of US imports in 2006. The flow of Middle East crude to the US has declined, however, in the past three years. The 22 percent share is the lowest since 1997 and may continue to decline. While Chinese imports from the Middle East have fluctuated around the 50 percent level in recent years, they are projected to increase. At the same time, China is reluctant to become excessively tied to the Middle East as a source of oil because of instability in the region that threatens to disrupt oil supply. China also lacks refinery capacity for the heavier crude that comes from the Middle East.

China’s strategy for securing oil in Africa includes efforts to obtain exclusive access and direct government support. China seeks long-term equity oil contracts and often proposes a package deal in return. This may include promises to build much needed infrastructure and an offer of unconditional bilateral aid. Debt relief, government to government assistance, and turnkey projects are also frequently part of the package. China enters into joint-ventures with national governments, state-controlled energy companies, and private enterprises to establish a long-term presence. China has had considerable success with this approach.

Some critics argue that China is a neocolonial power that is simply using Africa as a source of raw materials, especially petroleum. It is true that African oil, minerals, and timber are important to maintaining China’s economy and they constitute nearly all of Africa’s exports to China. But the argument is disingenuous. The same argument could be made for the US, Europe, and Japan. China purchased only 9 percent of Africa’s petroleum exports in 2006 while the US took 33 percent and Europe 36 percent. The four major African suppliers to China in 2006 in order of importance were Angola, Congo-Brazzaville, Equatorial Guinea, and Sudan. Angola was slightly behind Saudi Arabia as China’s single most important source of imported petroleum. The four largest African exporters of oil to the US were Nigeria, Angola, Algeria, and Gabon.

Three African Oil Suppliers

Three countries, Angola, Sudan, and Equatorial Guinea demonstrate the success and challenges of China’s oil diplomacy in Africa. Angola has been China’s most important African source of petroleum since the beginning of the 21st century while Sudan was until last year the second most important African supplier. China entered the Angolan market after major Western oil companies had developed a thriving oil export industry. Together with international partners, China revived Sudan’s moribund oil industry in the middle of a conflict zone. Although China has much less investment in the oil sector in Equatorial Guinea, the latter has become an important supplier of crude. Equatorial Guinea, whose oil production is controlled by American companies, has an especially unsavory human rights record.

All three countries have particularly low rankings on Transparency International’s 2006 corruption perception index. Out of 163 countries ranked, Angola occupies position 142, Equatorial Guinea 151, and Sudan 156. China’s access to African oil clearly trumps the various Western concerns about China’s engagement in each country. But in the case of Angola and Equatorial Guinea, the US has an even greater involvement than China in the oil sector.

Angola

Angola surpassed South Africa in 2006 as China’s largest trading partner in Africa, due primarily to the export of oil to China. Total Angolan exports to China nearly reached US$11 billion while Chinese exports to Angola were just under US$1 billion. China solidified its energy position in Angola in 2004 when it offered a US$2 billion loan with an interest rate of 1.5 percent over 17 years. China tied the loan to the import of Angolan oil and an agreement that 70 percent of all public enterprise contracts financed by Chinese money would be built by Chinese companies. China has extended and refinanced the loan several times with the interest rate lowered to one-quarter of one percent. The value of the loan has now reached an estimated US$6 billion. It is being used to rehabilitate railroads, build an airport, and modernize communications. One of China’s national oil companies, China Petroleum and Chemical Corporation (Sinopec), subsequently obtained an equity stake in two deep-water oil concessions. Angola’s national oil company began a partnership with Sinopec to build a US$3.7 billion refinery. Surprisingly, this deal recently fell apart because Angola concluded that China was interested primarily in using the refinery to provide fuel for the Chinese market.

The Chinese loan offer occurred when the International Monetary Fund was at a critical point in its negotiations with Angola for a new loan. Due to serious corruption associated with the oil industry, the IMF was determined to include transparency provisions to curb corruption and improve economic management. After China offered its loan without such measures, Angola ended negotiations with the IMF. The Angolan government explained that China’s loan contained “no humiliating conditions” and that it “greatly surpasses the contractual framework imposed on the Angolan government by European and traditional markets.” An Angolan government statement added that China “understands the difficulties faced by a country that has recently come out of more than three decades of war and that it trusts in Angola’s development potential and its ability to recover.” The IMF and Western countries were irritated that China disrupted efforts to reign in corruption in Angola. At the same time, China invested in much needed infrastructure projects that were highly desired by Angola.

China has invested heavily in Angola because the country is generally politically stable and its oil production has surged in recent years. Although some observers believe China’s investments in Angola are a threat to Western interests, Angola’s largest investors remain Western companies. ChevronTexaco and Exxon Mobil each produce about 500,000 barrels per day while BP and Total have major projects underway. Chinese involvement in Angolan oil does not seriously degrade US energy security. Unlike the situation in Sudan, there are no significant political policy differences between the US and China over Angola.

Sudan

Sudan dropped to Africa’s fourth largest supplier of oil to China in 2006 but remains important because of China’s US$4 billion investment in Sudan’s oil sector. The China National Petroleum Company (CNPC) entered Sudan in 1996. Together with others it acquired oil fields pioneered by Chevron, which it had abandoned because of civil war between northern and southern Sudan. CNPC’s operation, which also discovered additional oil, produced 500,000 barrels per day in 2006 and is expected to reach 750,000 barrels per day this year. CNPC has 40 percent equity and operator ship rights in three blocks in the Muglad Basin, a 41 percent equity and operator ship arrangement in two blocks in the Melut Basin, and a 95 percent equity in one block in the Muglad Basin. CNPC built and runs the pipeline from the oilfields to Port Sudan, the refinery, and the port facilities. China, India, and Malaysia dominate Sudan’s oil industry. The US is not engaged in Sudan as a result of its sanction’s policy.

Sudan originally became an issue in Sino-American relations because of Sudan’s ongoing civil war and its poor record on human rights. China is one of Sudan’s most important suppliers of military equipment, which Khartoum can easily purchase using revenue from the oil that China helped develop. Sudan used this weaponry against the forces in southern Sudan, which had the sympathy if not outright support of Washington. This dilemma ended in 2005 following a peace agreement, which the US helped to broker and China welcomed, between northern and southern Sudan. In fact, China now contributes personnel to the United Nations peacekeeping operation that is designed to implement the north-south peace agreement.

In the meantime, Sudan’s record on human rights did not improve. The situation in Darfur in western Sudan actually worsened significantly. Two rebel groups, now further divided, attacked government forces in 2003. Khartoum initially relied on local Janjaweed militia groups to put down the rebellion. They used horrific tactics that resulted in between 200,000 and 400,000 deaths, 2 million displaced persons, and more than a quarter million refugees in neighboring Chad. The US declared the situation genocide and has been trying for several years to enlist China to put more pressure on Khartoum to end the human rights abuses and to accept a United Nations peacekeeping force for Darfur. Khartoum has resisted Western pressure and China only reluctantly and tentatively has used its considerable leverage with Sudan’s government.

Late in 2006 China was instrumental in gaining Sudanese acceptance for a plan that committed Khartoum to a ceasefire and three phase expansion adding United Nations personnel to the existing African Union peacekeeping force in Darfur. President Hu Jintao met with Sudanese President Omar al-Bashir in Khartoum in February when he reportedly pressed al-Bashir to comply with this plan. At the same time, however, he announced the cancellation of Sudanese debt and promised to build a presidential palace. The US complained that this sent mixed signals to Sudan. In early March China removed Sudan from the list of countries that can receive financial incentives for investing in oil and gas ventures. This decision may indicate that China is unhappy with Sudan’s unwillingness to comply with the creation of a United Nations peacekeeping force for Darfur. In early April China’s minister of defense offered Sudan’ s joint chief of staff stronger military cooperation but also expressed hope Sudan will show more flexibility in resolving the crisis in Darfur. Sudan remains a contentious issue in Sino-American relations; oil plays a critical role.

Equatorial Guinea

Each year since 1999 Equatorial Guinea has been China's third or fourth largest African supplier of crude. In 2006, Equatorial Guinea’s oil exports to China exceeded US$2.5 billion. This trade occurred as the US State Department’s human rights report on Equatorial Guinea for 2000 stated that “the government’s human rights record remained poor, and it continued to commit numerous serious abuses.” The report added: “The security forces committed a number of abuses, including torture, beating and other physical abuse of prisoners, suspects, and opposition political members.” The report for 2006 commented that “the government’s human rights record remained poor, and the government continued to commit and condone serious abuses.”

Chinese involvement with Equatorial Guinea broadened in 2003 when engineers from China began a rehabilitation of the government media center and a Chinese Communist Party delegation visited the country and praised mutual cooperation. Equatorial Guinea’s President Teodoro Obiang Nguema Mbasogo met with President Hu Jintao in Beijing in 2005. Following the signing of three cooperation agreements and the cancellation of much of Equatorial Guinea’s debt to China, President Obiang announced that China had become his country’s “main development partner.” The China National Offshore Oil Corporation Africa Limited signed in 2006 a production sharing contract for an oil block in Equatorial Guinea. The company agreed to conduct seismic data interpretation and drill exploration wells.

China promised to construct 10,000 moderate-rent housing units and undertake road construction. President Obiang made another visit to China in 2006 and met again with President Hu. China’s foreign minister visited Equatorial Guinea in 2007 when he cancelled US$75 million in debt, opened the Chinese-built headquarters of the state radio and television station, and promised a grant of about US$2 million. He described China as a major cooperation partner and Equatorial Guinea’s “best friend.”

It should be noted, however, that Equatorial Guinea is also a major supplier of oil to the US. About 20 US oil companies dominate oil production in the country. Although personal relations between US and Equatorial Guinean leaders are not as effusive as in the case of China, President Obiang visited Washington in 2004 when he met with former Secretary of State Colin Powell. President Obiang returned to Washington in 2006 when Secretary of State Condoleezza Rice welcomed him as a “good friend.” President Obiang’s son once told a reporter that “the United States, like China, is careful not to get into internal issues.” The US has not been critical of Chinese relations with Equatorial Guinea, probably for obvious reasons. The lesson here is that the US should be careful about taking a high minded approach on human rights issues when its own policy sometimes makes compromises in the name of petroleum reality.

US, China, and African Oil: Competition or Cooperation?

Both the US and China now depend heavily on Africa for their imported crude and the projections suggest imports from Africa will increase. In countries like Angola and Equatorial Guinea, China and the US compete for the same supply. Over the long-term, it is in the interest of both China and the US to promote political stability, good governance, fewer human rights abuses, and less corruption in African oil producing nations. Both the US and China agree on the need for political stability and hence better security for access to oil. Because of its reluctance to interfere in the internal affairs of other countries, China has not yet been willing to support the other US goals. Even the US has been selective where it pushes hard in Africa to improve governance and human rights and to reduce corruption. For the moment, it is in the area of political stability where the US and China have overlapping interests and the best opportunity for cooperation.

The deputy assistant secretary of state for African affairs told the House International Relations Committee in 2005 that China’s pursuit of African oil “should not be read as a threat.” He added that efforts by others to seek African energy can work to advance US goals in Africa by increasing prosperity and stability. A 2006 US Department of Energy report concluded that Chinese energy demands do not per se threaten US national security interests but rather serve to increase world oil supplies. The then majority leader of the Senate Foreign Relations Committee, Richard Lugar, said early in 2006 that it was crucial for Washington to broaden its energy cooperation with China.

A spokesperson for the Chinese foreign ministry came to the same conclusion in 2006, stating that “in the field of energy, China and the US are not competitors.” The spokesperson added that “China stands ready to cooperate with the US and other countries . . . on the basis of equality and mutual benefit.” The vice chairman of China’s National Development and Reform Commission argued in 2006 that the US and China “need to oppose the cold war mentality” and work together to guarantee stable world oil supplies and prices.

Some US officials believe that China’s efforts to control energy sources in Africa and elsewhere could exclude US oil companies and undermine US foreign policy. There may well be Chinese officials who feel the same way about the activities of American companies. But logic and prevailing sentiment in both countries suggest there is more room for cooperation than competition. Washington and Beijing can start by looking at ways to collaborate on the discovery and development of additional oil sources in Africa. They can also work to improve political stability and the security of petroleum supply. At the same time, Washington should consult quietly with Beijing in an effort to underscore the benefits of China’s support for better governance, more transparency, less corruption, and improved human rights practices in Africa. This will take time, lots of it, but it is worth the effort.