China's Rise and the Geopolitics of Energy - Pacific Council on

CHINA’S “ENERGY RISE”, THE U.S., AND THE NEW

GEOPOLITICS OF ENERGY

MIKKAL E. HERBERG

DAVID ZWEIG

April 2010

About PCIPThe non-partisan Pacific Council is the premier membership-based international affairs organization focused on policy issues of special resonance on and to the West Coast. The Council’s membership consists of a diverse network of leaders from a broad range of professions and business sectors; our members are heavily invested in understanding international affairs and affecting public policy. The Pacific Council provides them with opportunities to enhance their knowledge of global issues and their effectiveness in the international arena both professionally and personally.

Mission

Powerful forces are transforming the world and the place of the United States in it. The economic and demographic center of gravity is moving west in North America; extremism is destabilizing international security; and the Cold War’s nuclear non-proliferation regime is unraveling. International affairs are affected as much by business action as by government policy. Globalization is moving from low-cost production to innovation in emerging markets, exacerbating social dislocations and political backlashes. Rising demand for energy and control of resources is threatening not only the global economy but also the environment and international security.

The Mission of the Pacific Council on International Policy is to address these global transfor-mations by giving more effective voice to West Coast perspectives on them. We achieve this by:

• Building our network of globally-oriented business, civic, and government leaders• Convening exchanges with global policy makers and opinion leaders• Generating fresh ideas, timely research, and innovative proposals on the key issues shaping the

global agenda• Partnering with organizations around the world to promote mutual understanding and coordi-

nated action• Informing policy elites and the public about global challenges and opportunities.

Governance

The Pacific Council on International Policy is a non-partisan organization headquartered in Los Angeles with members and activities throughout the West Coast of the United States and internationally. The Council is governed by a Board of Directors chaired by John E. Bryson, former Chairman and CEO of Edison International. Jerrold D. Green is the President and CEO of the Pacific Council. Founded in 1995 in partnership with the Council on Foreign Relations, the Pacific Council is a 501c(3) not-profit organization whose work is made possible by financial contributions and in-kind support from individuals, corporations, foundations, and other organizations.

Table of Contents

Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iiiby Robert A. Kapp

Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi

China’s “Energy Rise”, the U.S., and the New Geopolitics of Energy by Mikkal E. Herberg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

The End of U.S. Global Energy Primacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Oil Markets, Energy Security, and Energy Governance . . . . . . . . . . . . . . . . . 6

China’s Expanding Energy and Geopolitical Footprint . . . . . . . . . . . . . . . 14

China and the Climate Change Challenge . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Implications for the U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

The Need for a U.S.-China Energy Partnership . . . . . . . . . . . . . . . . . . . . . . . . . 29

“Resource Diplomacy” Under Hegemony: Foreign Policy ‘Triangularism’ and Sino-American Energy Competition in the 21st Century by David Zweig . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

International Relations Theory and Sino-U.S. ties . . . . . . . . . . . . . . . . . . . . 36

Energy Diplomacy and China’s Rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

China’s Resource Diplomacy and Energy Strategy . . . . . . . . . . . . . . . . . . . . . 38

Does the U.S. Behave like a Threatened Hegemon? . . . . . . . . . . . . . . . . . . . . . 45

Pariahs, Neutral and Allies: Three Types of U.S. Partners . . . . . . . . . . . . . . 47

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Foreign Policy Triangularism and U.S. Hegemony . . . . . . . . . . . . . . . . . . . . 51

Courting America’s Allies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

A U.S. Neutral: Angola . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Energy in Sino-American Relations: Nodes of Cooperation or Conflict? . . 68

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

About the Authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

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FOREWORDWith the first year of a new American presidency behind us, Americans look back on twelve months of riveting trauma. A crippled economy; the emergency extension of American government intervention in the national economy at unprecedented levels; the demise or disgrace of iconic American business institutions; the skyrocketing of U.S. unemployment; the high- decibel and seemingly endless struggle over reform of the American health care system; the unraveling of the Global War on Terror, Afghanistan Branch; all accompanied by merciless partisan trench warfare on every imaginable public policy issue: as one of my favorite songs from my youth said (talking about the horrors of high school), “It’s a wonder I can think at all.”

Well, think we must. And act, too. The world waits in dismay when the United States, with its immense impact on the global commons, turns inward and spins its wheels

The papers in this Combination Pack from the Pacific Council on International Policy are helpful contributions to the expanding discourse on two of the biggest and most challenging issues facing United States and the international order: the challenge of global warming and global energy consumption, on the one hand, and the definitive arrival of the People’s Republic of China as a certified Major League player, alongside the United States, in virtually all global concerns, on the other.

The speed of China’s ascent to the many top-ranked global roles of globe-affecting nations no longer amazes quite as breathtakingly as it did a decade ago; the front matter in both papers here offers countless examples of China’s current stature. But the careening advance of the Chinese economy on the world stage, from the carpets-and-fireworks era to the Workshop of the World era, has often left the established “owners” of global economics bewitched, bothered, and bewildered.

Americans, whose national history began, at the end of the 18th century, just as the last imperial dynasty in China began its crashing descent from limitless splendor to disintegration and impotence, were not equipped for a world in which China so suddenly became a force to be reckoned with. Deep-seated American ideas of China revolved around notions of charity, of care-taking, of pity, of guidance, of contempt and revulsion, of romance – but not of co-responsibility for the future of the world. Today’s stock phrase for the U.S.-China relationship – “joined at the hip” – would have been unimaginable even a decade ago.

A new American president and a not-so-new Congress must therefore place both China policies and climate change on an overloaded public policy agenda, while remaining in touch with the American people, whose decisions in the voting booth normally reflect a subtle mixture of under-standing and confusion, hope and fear.

Climate change has been percolating in U.S. policy circles for years, but the United States has thus far failed to find political consensus, or to act decisively, in spite of increasingly vivid steps taken in Asia and in Europe.

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Discussion of China’s increasing global presence usually revolves around two divergent views: one, that increasing Chinese prosperity is good for the U.S. and the world, since it increases the likelihood that China will remain stable and “contented,” and, two, that the growth of Chinese economic and military power will inevitably pose existential challenges to America’s most fun-damental interests.

What is relatively new, though, is the merging of two strands of discourse, one dealing with the future of the planet’s ability to sustain life, and the other with the future relationship of the two countries with the biggest impact on global ecological survival, the U.S. and China.

For their part, China’s leadership a few years ago turned a critical intellectual corner and declared that growth for growth’s sake was no longer acceptable as basic national policy, opting instead for a long-term effort to “rebalance” the Chinese economy, slow the rate of environmental degradation, raise the miserable rates of energy efficiency throughout the economy, improve the dismal social service systems so desperately needed by China’s millions, and build a “harmonious society” characterized by diminished regional and social inequalities of wealth and income and by greater concern for “quality of life” issues.

By the time the new American administration set about engaging with China in the newly expanded “US-China Strategic and Economic Dialogue” in 2009, the two sides had laid the foundations of a wide-ranging government-to-government dialogue predicated on the assumption that these two nations, among all the countries on earth, had special responsibilities and special opportunities to find common and cooperative approaches to global issues that simply could no longer wait for scraps of attention from the world’s overloaded banquet table. The visit of President Obama to Beijing in November, 2009 produced a multi-point bilateral agreement on cooperative programs, particularly in clean energy.

The December, 2009 Copenhagen Conference on Climate Change, which barely produced a modest statement of intent, hastily thrown together at the last moment by the U.S., China, and a few other large emerging economies amid rancor and finger-pointing, was a reminder, however, of how difficult it will be to put US-China cooperative intentions into concrete, programmatic execution.

Against this background, these papers presented here by Mikkal Herberg and David Zweig are timely additions both the public and the policy discourse.

Herberg argues forcefully that nothing short of a transcendent partnership to build US-China cooperation on energy issues will do, and that progress in building that partnership will have stabilizing, even transformative, effects on other components of the US-China relationship. Herberg’s essay does not get down to detailed “action agenda” items for this or that bilateral meeting, whether at the presidential level or at agency levels, and it does not attempt to write Congressional legislation. But for those who do undertake the hard work of bilateral engage-ment, or of legislation, or of interpreting these difficult issues to broader public audiences, his succinct and tightly structured paper will be a major asset.

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Where Herberg’s paper is, at bottom, an “energy” paper, reflecting the author’s rich and varied background in the global energy field, Professor Zweig’s paper is a “China paper,” developed from his decades of thoughtful research and analysis of contemporary Chinese politics, economics, and international relations. Zweig’s analysis gets well into the sources, and the mani-festations, of the mutual distrust that repeatedly surfaces in Sino-American relations.

Zweig ranges widely, exploring in particular what he dubs the new “triangularism” among the United States, oil-producing countries with whom the U.S. has one or another kind of relations (some close, some not), and now China, with its vigorous push into energy-based engagement with the very same states. He argues broadly for the development of a new category of triangular engagements, mainly as a way of preventing China’s sudden arrival at the world’s energy counters from further damaging US-China ties..

Many Americans remember the final, antic frames of the great Peter Sellers cold war satire, “Dr. Strangelove,” showing the Americans and the Soviets still playing out their petty machinations even as The Bomb glides downward upon its Russian target and the world approaches the cataclysm. The United States and China must do better – on energy and climate, and on just about everything else. Whether they can, though, is on the line with exploding urgency. Neither Mikkal Herberg nor David Zweig offers recipes for guaranteed success, but each points out the some important paths which our two great nations must travel without delay.

Robert A. KappChairChina Member CommitteePacific Council on International Policy

President, Robert A. Kapp & Associates, Inc.Port Townsend, WA

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Acknowledgements

The Pacific Council gratefully acknowledges the support of the BP Foundation, a principal underwriter

of the Council's International Fellows and Energy, Environment & Security programs.

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China’s “Energy Rise”, the U.S., and the New Geopolitics of Energy

Mikkal E. HerbergSenior Research Fellow for International Energy

Pacific Council on International Policy

China is on a trajectory to become the emerging new superpower of global energy

and geopolitics. The enormous scale and gathering pace of China’s future energy and oil

needs and its carbon emissions, combined with Beijing’s expanding energy diplomacy and

investments are likely to have a defining impact over the next two decades on global en-

ergy markets, energy geopolitics, and climate change negotiations. China has the potential

to reshape the global energy and oil landscape in the same way its broader “peaceful rise”

promises to transform the economic and strategic landscape.

China’s rising energy impact is rooted in the convergence of its growing global

energy impact and broader economic and political rise. Growing dependence on imported

energy supplies and Beijing’s reach outward to secure those supplies and transportation

links are accelerating and reinforcing the pace, scale, and scope

of China’s political and economic ambitions, while reshaping

the constellation of Beijing’s vital global economic and energy

interests. Beijing’s growing impact reflects the enormous gravi-

tational force of its demand growth along with the emergence

of its companies as major competitive players supported by

aggressive energy diplomacy. Not since the early postwar era

and the rise of American oil and energy demand and import de-

pendence, converged with America’s strategic power have rising energy and political power

converged so strongly, and with such significant consequences for global energy geopolitics.

As China’s energy rise mirrors its broader strategic rise, it poses similar challenges

for the United States (U.S.) and the established Western-dominated energy markets and in-

Beijing’s growing impact reflects the enormous

gravitational force of its demand growth along with the emergence of its companies as major

competitive players supported by aggressive

energy diplomacy.

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stitutions. China will be crucial in three central energy arenas. The first revolves around

its burgeoning impact on global oil demand and prices, as well as on oil market gover-

nance. China has replaced the U.S. as the growth engine for global oil demand with some

now calling China the new oil “swing consumer.” Beijing’s future decisions about oil use

and efficiency are now deeply consequential for world oil prices and the energy security

of the U.S. and other major oil importers. China’s domestic oil agenda is no longer mere-

ly an internal affair – decisions made in Beijing have profound global energy security

implications. China’s growing impact is vital for the future of global energy governance;

will China seek to build its future energy security on markets or mercantilism? Will

China support the West’s efforts to maintain open global

oil markets and boost investment and access to global oil

supplies through participation in the existing institutions of

multilateral oil governance? Or will Beijing continue along

its current path of seeking privileged access to oil supplies

through close collaboration with its national oil companies

(NOCs), bilateral energy and financial diplomacy, and a

highly political approach to securing oil supplies? Beijing’s choices could powerfully re-

shape the flexible, competitive open oil market structures and institutional arrangements

of the world energy system that evolved in the wake of the 1970’s oil shocks.

A second set of concerns involve the diplomatic and geopolitical implications of

China’s expanding global energy footprint. With the rapidly expanding investments of its

national oil companies, long-term oil and liquefied natural gas (LNG) supply deals, and

active energy and pipeline diplomacy, China will inevitably become a key diplomatic

player in virtually every major oil and gas exporting region of the world. How will China

use its growing capability to influence developments in these critical regions? Will its

diplomacy evolve to strengthen U.S. and Western energy security, economic, and secu-

rity policies or, alternatively, will it use its influence to challenge and re-shape western

Will China support the West’s efforts to maintain open global oil markets

and boost investment and access to global oil supplies through participation in

the existing institutions of multilateral oil governance?

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interests and energy diplomacy? In the vernacular of the “rising China” debate, will China

be a status quo or revisionist energy power?

A third arena where China has most obviously become a critical driving force in-

volves carbon emissions and climate change. China is on a path to generate a virtual tsunami

of carbon over the next 25 years, making progress on climate change negotiations virtually

impossible without its strong and constructive participation. However, Beijing fears that

international pressure to slow emissions will inevitably undermine economic growth, slow

job creation, and threaten social stability. As the recent Copenhagen climate meetings amply

demonstrated, Beijing’s choice of negotiating strategy in global climate negotiations and

about the pace and mechanisms for reducing growth in its own carbon emissions have now

become central in determining whether the next round of climate negotiations will succeed.

The End of U.S. Global Energy Primacy

We have become accustomed to the notion of China’s growing influence on the

world economy and security affairs. However, China’s energy influence remains very un-

even and the true scope, weight, and gravitational force of its impact on global energy are

only beginning to be felt. Certain aspects of its global energy expansion have been hotly

debated, such as the implications of its booming energy investments in Africa and in key

“pariah” states, or whether China’s predilection for national ownership and physical control

of oil fields abroad threatens the energy security of other countries.

But the cumulative scale of China’s looming global energy impact is not yet well

understood in Washington, D.C. China’s energy rise is bringing to an end American pri-

macy in global energy affairs. The U.S. has been the superpower of the energy world just as

it has been in strategic affairs. As noted energy expert John Mitchell wrote, “For every issue

on the energy geopolitical agenda, there is at least one telephone line to Washington.” But if

the U.S. is the reigning 800 pound gorilla of global energy markets and geopolitics, it will

increasingly have to come to terms with the new 800 pound dragon. The U.S. will no longer

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be the dominant market driving force, rule-maker, institution builder, and diplomatic

power in global energy. China is the only new consumer and investor large enough to

alter unilaterally the terrain of energy geopolitics and to become a major competitor for

influence in global energy affairs. Although Russia and Saudi Arabia are the world’s two

largest energy exporters, and each certainly aspires to energy su-

perpower status, both lack the comprehensive national economic

power or the considerable “soft power” that China wields. As

we have seen in Iran and Sudan, China will acquire the capa-

bility, whether inadvertently or intentionally, to frustrate U.S.

diplomacy in key energy exporting regions. It will also have the

ability to undermine significantly the open and transparent oil market and institutional ar-

rangements that have evolved under U.S. leadership since the 1970’s oil shocks. A vague

sense of this changing terrain has been percolating to the surface in Washington. Former

Secetary of State Condoleeza Rice confessed to this rather shapeless sense of discomfort

in a 2006 Senate testimony when she said,

I can tell you that nothing has really taken me aback more as secretary of state than the way that the politics of energy is – I will use the word ‘warp-ing’ – diplomacy around the world. It is sending some states that are grow-ing very rapidly in an all-out search for energy – states like China, states like India – that is, really sending them into parts of the world where they’ve not been seen before, and challenging, I think, for our diplomacy.1

The challenge will be whether the U.S. can forge a constructive and coopera-

tive approach toward China’s energy emergence to enable us to pursue our mutual core

interests in stable energy markets, stability in key exporting regions, and a successful and

cost-effective approach to climate change.

Not surprisingly, China’s leaders also do not yet appear to have a comprehensive

sense of the implications of their burgeoning energy weight and influence. For the most

China is the only new consumer and investor

large enough to alter unilaterally the

terrain of energy geopolitics...

4

part, Beijing has reacted warily and defensively to criticisms of its booming oil demand,

alleged predatory energy investments abroad, and rising carbon emissions. It has struggled

to balance its instincts for a deeply statist vision of energy security, with its expanding and

increasingly complex and nuanced set of energy interests and global diplomacy. In describ-

ing China’s broader international posture recently, Kenneth Lieberthal also aptly described

its cautious and uncertain approach to its energy emergence,

China’s international influence is growing rapidly… but in many areas China’s government is still trying to figure out what its posture should be. It is not correct to assume that China’s policies in various areas are rigid and are necessarily the result of strategic planning. Often, they are cautious increments of past behavior designed to feel their way along as they try to figure out how best to handle the country’s increasing capabilities and international obligations.2

And even if the U.S. is ready to truly engage China on energy, the question remains

whether China is ready to engage the U.S. constructively to pursue our collective mutual

energy interests.

In energy, as in the global economy, the U.S. and China are now increasingly joined

at the hip, the new E-2 of global energy. We are by far the two largest energy consumers

(each is larger than the entire European Union (EU)), the two largest oil consumers, the

two largest vehicle markets, the two largest coal producers and

consumers, the two largest electricity consumers, and the two

largest carbon emitters. The U.S. remains the key strategic power

of global energy diplomacy, markets, and institutions but China

seems destined to become the new diplomatic and economic force

in these regions and institutions. Hence, whether the U.S. and Chi-

na can work together will determine whether we will successfully address the most press-

ing energy security and sustainability questions we face today. Yet distrust and suspicion

between Beijing and Washington over each other’s long-term strategic and energy intentions

In energy, as in the global economy, the

U.S. and China are now increasingly joined at

the hip, the new E-2 of global energy.

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remains a profound obstacle to cooperation. Beijing’s energy choices promise to have

powerful effects on U.S. energy security, diplomatic, and energy goals in key energy

exporting regions, as well as powerful implications for the other Asian importing coun-

tries and regional powers: Japan, India, and South Korea. Yet neither the U.S. nor China

yet seems to have a coherent sense of the scale of the stakes involved or a sense of how

these dynamics might be shaped into cooperative rather than competitive approaches to

our common energy security challenges.

Oil Markets, Energy Security, and Energy Governance

China’s emergence as a driving force in global energy markets is a product of the

enormous scale and torrid pace of oil demand growth combined with rising dependence

on imported oil. Over just 15 years, China has emerged as the world’s second largest oil

consumer, the third largest oil importer, and the new engine of global oil demand growth.

China’s oil consumption has more than tripled since 1990, to nearly eight million bar-

rels per day (mmd/d) in 2008, accounting for 30% of all global

oil demand growth since 1990.3 During the recent 2001–2007

economic boom, China accounted for well over one-third of

global demand growth while oil import dependence zoomed

from 30% to 50%. Surging oil import needs have now put China

in the same import dependence league as the U.S., which daily

consumes two and half times China’s oil demand and whose ris-

ing oil imports have been the other key driver of world oil prices. The combined rise or

fall in U.S. and Chinese oil demand and imports now dwarf most other demand factors

in the course of oil prices. For example, since 1985, U.S. oil imports have risen by 8.7

mmbd, far more than any other country or even continent, and more than China’s total

2008 oil consumption of 7.9 mmbd. However, this is changing rapidly. From 2000–2007,

China’s accelerating demand meant that imports rose by 2.8 mmbd, compared with a 2.0

The combined rise or fall in U.S. and

Chinese oil demand and imports now dwarf

most other demand factors in the course of

oil prices.

6

mmbd U.S. import increase. Nevertheless, because of its titanic size, the U.S. oil market still

looms like a leviathan over global oil prices. If there is any doubt, consider that as world oil

prices collapsed from $147 to $35, the 2 million barrel per day decline in annual U.S. oil

consumption from 2007 to 2009 accounted for more than the entire net decline in global oil

demand from its 2007 peak to the 2009 trough.4 In other words, in the rest of the world net

oil demand still grew by three hundred thousand barrels per day.

China’s future demand impact combined with its rising dependence on imported oil,

means that China’s future decisions will have major global oil market consequences. The

International Energy Agency (IEA) forecasts that China is likely to account for over 40% of

net global oil demand growth from 2007–2030. Its oil imports alone are on a trajectory to

rise by an amount roughly equal to Saudi Arabia’s recent oil production.5 As the new engine

for oil demand growth, Beijing’s oil demand and transportation poli-

cies now have major implications for world oil prices. China has been

the world’s second largest vehicle market in annual sales behind the

U.S. and had been expected to surpass the U.S. as the largest market

annually by 2015. But with the collapse of the U.S. vehicle market

due to the economic crisis and an acceleration in Chinese vehicle demand, China suddenly

emerged in 2009 as the largest market.6 China is likely to account for nearly one-third of the

entire global increase in light duty vehicles between 2005 and 2030, rising from roughly 25

million to nearly 230 million vehicles. Oil use for transportation in China is on a path to rise

by five-fold by 2030.

Hence, Beijing’s decisions about the long-term growth of its vehicle industry, engine

technology, vehicle efficiency and mileage standards, mass transit, and urban planning will

have powerful consequences for global oil demand, prices, and therefore, the energy secu-

rity of other major importers. Demand growth on this scale will put severe pressure on the

future availability of oil supplies. Beijing is beginning to implement policies that could slow

oil demand increases, such as taxes on larger engines, improved vehicle mileage standards,

Beijing’s oil demand and transportation policies now have major implications for world oil prices.

7


promoting hybrid and electric car development, and accelerating mass transit infrastructure.

On the other hand, pump prices for fuel continue to be controlled by the government, and

chronic coal and electricity shortages during boom economic times tend to encourage the

widespread use of small, diesel-fired generators by factories to ensure adequate electricity

supplies, thereby driving up oil consumption sharply. In sum, the U.S. and the rest of the

world have a major stake in whether China moves rapidly to slow the growth in its oil de-

mand, particularly its decisions about the scale, pace, and technology level of rapid motor-

ization, or not.

A second set of oil market issues revolves around Beijing’s approach to energy

security. Oil import dependence will rise toward 75–80% over the next two decades, and

the growing sense of vulnerability to external supply disruptions has catalyzed Beijing’s

intense focus on energy security as a key national strategic goal. Energy security is now too

important to be left to the markets. China will become ever more

heavily dependent on OPEC and the major Gulf exporters for its

future oil needs, and the vast majority will have to transit long

distances through vulnerable maritime choke points, by pipeline

and rail from Russia, and by pipeline from Central Asia. Within

15 years, 60-70% of China’s total oil needs will likely have to

transit the Malacca Straits and the sea lanes of the Indian Ocean

and Southeast Asia. The manner in which China pursues energy security will have important

implications for the shape and competitiveness of future energy diplomacy, as well as the

effectiveness of today’s global oil market management institutions.

Beijing’s energy security angst reflects visceral fears among the leadership that

future oil supply disruptions and high prices could undermine economic growth and the

job-creating machine that the leadership sees as crucial to social and political stability and

to its own mandate to legitimate rule. In response, Beijing has pursued a relatively statist,

mercantilist set of policies and coordinated efforts to try to reduce China’s vulnerability

The growing sense of vulnerability to exter-nal supply disruptions has catalyzed Beijing’s intense focus on energy

security as a key national strategic goal.

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to future oil supply and price shocks. This includes an active, energy-centric form of com-

mercial and financial diplomacy by Beijing’s leaders in the key energy exporting regions,

combined with the commercially-driven expansion of China’s three major NOCs – CNPC,

Sinopec, and CNOOC – to secure equity investments in oil and gas fields abroad, with an

emphasis on physical control over oil supplies. China’s NOCs have acquired a lengthening

list of large equity oil stakes and have signed long-term crude oil and LNG supply contracts

in virtually every major energy-exporting region. By the end of 2008, China’s NOCs boasted

equity oil production overseas of roughly 850 thousand barrels per day (mbd), equivalent

to approximately 20% of China’s oil imports. China’s NOCs

are also pursuing an expanding slate of long-term crude oil

supply contracts and LNG supply contracts from a broad range

of exporters. Beijing diplomacy and NOC investments have

also been closely coordinated to promote new overland oil and

natural gas pipelines that will diversify future transport routes

for energy imports. Most recently, in the wake of the global

financial crisis, China has also begun to mobilize its enormous

foreign exchange reserves as an energy security tool by providing investment capital to its

NOCs, as well as cheap loans to a number of increasingly cash-strapped oil producers in

return for long-term guaranteed oil supplies.

Beijing’s sense of weakness and vulnerability has fueled this “go-out” policy and

has been very much about ownership and physical control of barrels rather than just access.

Mistrust of global energy markets remains deeply ingrained amid a concern that the mar-

ket alone cannot be counted on to provide reliable oil supplies at reasonable prices. This is

reinforced by the belief that these markets are dominated by the U.S., which is out to exploit

China’s energy weakness in its efforts to ‘contain’ China. U.S. strategic power in the Persian

Gulf, the U.S. Navy’s control over critical energy transport sea lanes, and what is perceived

to be the power of the U.S. in the global oil industry and institutions, foster a perception in

In the wake of the global financial crisis,

China has also begun to mobilize its enormous

foreign exchange reserves as an energy security tool by providing investment

capital to its NOCs...

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Beijing that the U.S. exerts a dominating influence on global oil prices and flows. Strident

rhetoric in the U.S. during the 2005 CNOOC-Unocal episode reinforced the perception that

the U.S. seeks to undermine China’s access to secure supplies and that it sees energy as an

arena of strategic competition.

All these factors have combined to give a strongly mercantilist impulse to China’s

energy security drive and rhetoric and a decidedly strategic approach that has fueled a

sharpening image of China Energy Inc. among other major oil importing countries and the

oil industry. Regional or multilateral approaches to energy security based on collaboration

to ensure open access to oil supplies, boosting investment in new oil supplies, and regional

or multilateral cooperation on sharing emergency oil stocks, for example, have been low on

Beijing’s agenda.

All these attributes have contributed to a more politicized, competitive, and zero-

sum environment towards control over energy supplies, particularly in Asia where the at-

mosphere of competition over control of oil supplies is reinforcing strategic rivalries among

China, Japan, India, and South Korea. In fairness, other Asian oil importers, as well as the

U.S., have strongly fueled and fed this atmosphere of energy nationalism. The U.S. has con-

tributed to this atmosphere with the constant drumbeat of nationalistic rhetoric coming from

Congress, the Pentagon, and conservative think tanks about China’s energy strategy. Japan,

India, and South Korea have all stepped up their energy diplomacy, rhetoric, and support for

the national oil companies and have sharply raised their targets for acquiring “equity” oil.

Nevertheless, the size of China’s impact on oil markets, on the scale and direction

of oil investment, and on prospects for international energy cooperation means that Beijing’s

future choices on how to approach energy security will have uniquely important conse-

quences. China’s energy security drive is on a scale and scope that dwarfs the other Asian

countries’ efforts. It has also been in sharp contrast to the largely multilateral energy security

policies and institutions developed by the West since the oil shocks of the 1970s. The major

oil-importing industrial countries have built their concept of energy security largely around

10

two goals. The first was developing transparent and flexible global oil markets that could

adjust quickly to changing supply and demand conditions. The result is today’s dynamic oil

market that, although recently plagued by enormous imbalances and price volatility, none-

theless rapidly readjusts oil flows to reflect fundamental supply and demand conditions.

In return for substantial price volatility, this ends the era of

actual physical oil shortages. The second was the develop-

ment of multilateral energy cooperation through the IEA to

create collectively managed emergency oil stocks to provide

an insurance policy in the event of severe supply disruptions.

These efforts have been aimed at bolstering the stability and

flexibility of the global oil markets and ensuring open access

to supplies rather than each country competitively seeking

to ensure its own privileged access to supplies through political and bilateral deals. The

importing countries learned the hard way during the oil shocks of the 1970s that a national

scramble for supplies led only to inventory hoarding, higher prices, political tensions, and

supply insecurity.

In this context, China’s choices on pursuing energy security through either markets

and multilateral collaboration, or through mercantilism, and the impulse toward seeking

privileged resource access will matter greatly. Recent signs remain mixed. On the one hand,

signs are emerging that China’s approach may be evolving toward a more market-oriented

posture, moving in the cautious, incremental process of feeling its way towards taking on

greater international responsibilities. A growing number in Beijing believe that the current

strategy may not be fundamentally improving China’s energy security, and that the need for

oil imports is simply growing too quickly to be met through equity investments and bilateral

deals with producing countries. There are also some in Beijing who feel that the overseas

investment interests of China’s NOCs are not necessarily synonymous with China’s energy

security interests. For example, most of the oil produced by China’s NOCs abroad is not

Today’s dynamic oil market that, although recently plagued by

enormous imbalances and price volatility, nonetheless rapidly readjusts oil flows to reflect fundamental supply

and demand conditions.

11


shipped back to China, but sold into the global market in the same way other commercial

oil companies do. The crude that is shipped to China reflects its particular value in China’s

refining system, which needs mainly light, sweet crude. In a recent article, Trevor Houser

makes the point that for most months during 2008, more of China’s equity oil produced in

Sudan was exported to Japan than to China.7 Consequently, while China should have strong,

globally competitive national oil companies commensurate with other global powers,

China’s energy security interests are not served by physical control of crude supplies nor by

constant state support or unnecessarily controversial financial and diplomatic support for

their NOCs.

There also are signs the leadership is concerned that a blind pursuit of energy sup-

plies abroad is seriously complicating other foreign policy goals and unnecessarily feeding

apprehension in Washington DC, Tokyo, New Delhi, and Brussels about China’s strategic

long-term intentions. As China seeks to reassure Washington and other world powers that

China’s rise will be peaceful and non-threatening, the management of the global energy

system is one area where China could begin demonstrating a more a multilateral posture as a

“responsible stakeholder.”

Finally, China has recognized the importance of emergency oil stocks which has

increased awareness of the potential value of working more closely with the IEA and other

large oil importers. China has built four large strategic petroleum reserves (SPR) near major

refining centers along the east coast that are approaching 100 million barrels, and a second

phase expansion of new SPR locations is underway. At the same time Beijing has become

more engaged in discussions on potential cooperation with the IEA. Institutionally, China

cannot be a member of the IEA because it is not a member of the OECD. But in recent

meetings, it has suggested that it was favorably inclined toward coordinating strategic stock

releases with the IEA during global market disruptions. Moreover, the U.S. recently went on

record as saying that China should become a member of the IEA, and the Japanese Execu-

tive Director of the IEA has said that closer cooperation with China and India were essential

12

to the future effectiveness of the IEA. But prospects for China’s inclusion ultimately remain

unclear. China cannot necessarily be expected to join the IEA and simply accept the rules

and norms of the system without having some say in how the IEA is run. This will be a chal-

lenge in gaining the support of many of the IEA’s members. Second, as in many other areas

of potential future international cooperation, it is clear that Beijing remains uncomfortable

with the prospect of taking on the greater international responsibilities that closer collabora-

tion with the IEA would entail.

There have also been positive signs on regional and bilateral energy cooperation.

In December 2006, China convened a ministerial-level meeting of the major Asian energy

importing countries, including the U.S., Japan, South Korea, and India, to discuss common

approaches to the importing countries’ energy security concerns. In recent bilateral meet-

ings with the U.S., China expressed a much stronger interest in

cooperation with the U.S. on climate, coal, and oil issues. Bei-

jing has also made efforts to resolve energy disputes with Japan,

in particular a long-running dispute over natural gas fields in

the East China Sea. Recent China-Japan bilateral energy discus-

sions also made substantial new progress on cooperation on

energy technology, efficiency, and energy/environmental issues.

In Southeast Asia, China has begun to take a more cooperative regional approach to main-

taining the security of regional sea lanes and the Straits of Malacca from the threats from

piracy and terrorism.

Nevertheless, despite these signs of change, Beijing’s impulse to seek privileged

access, physical control, and bilateral political, economic, and financial ties to secure oil

supplies remains deeply ingrained. During 2009 Beijing and its NOCs went on a shopping

spree acquiring oil companies and fields in Africa, Russia, Kazakhstan, and the Middle East.

The government also signed a flurry of huge loan deals with Russia ($25 billion), Brazil

($10 billion), Kazakhstan ($5 billion), Venezuela ($4 billion), Angola ($1 billion), and Ec-

Beijing’s impulse to seek privileged access, physical control, and

bilateral political, economic, and financial ties to secure oil supplies remains deeply ingrained.

13


uador ($1 billion) funded by the state banks and investment authorities to secure long-term

oil supply contracts, to backstop new oil field acquisitions, and to cement a major, long-

delayed Russian oil pipeline deal. Senior energy and financial officials, including the China

Investment Corporation (CIC), have repeatedly stated their intent to move rapidly to secure

oil resources while asset prices are low and better quality assets hit the market. This feeds

concerns among the other large oil importers that Beijing financial reserves are becoming a

“piggy bank” to fund acquisitions to continue to get control over oil supplies and potentially

weaken others’ access to future supplies.

Hence, it would be premature to say that China’s approach to energy security and

energy cooperation has changed decisively from its more politicized, “go-it-along” pat-

tern of the past decade. However, there are some indications that policy may be evolving

toward promoting the stability of the global oil markets and reliable transport flows. As this

develops, it could lead to policies that increasingly support market stability and global and

regional energy cooperation rather than a balkanized market and privileged access. Conse-

quently, it is vital that the Obama administration make strong efforts to engage China across

the board on energy cooperation internationally and bilaterally in order to encourage the

positive evolution of these policies.

China’s Expanding Energy and Geopolitical Footprint

Beijing’s energy security drive is accelerating its emergence as a regional and global

power. With expanding investments, oil import and LNG supply deals, and active pipeline

diplomacy, China will inevitably become a key diplomatic and economic player in virtually

every major oil and gas-exporting region of the world. Beijing will gradually acquire the ca-

pability to influence developments in these strategic energy regions significantly. But it will

also be exposed to new pressures from the U.S. and the West to take greater responsibility

for regional developments. This raises the question of whether Beijing’s future diplomacy is

14

likely to support U.S. and Western energy, economic, and security policies in these regions

or, alternatively, to what extent and where is Beijing likely to challenge and seek to re-shape

diplomacy in these regions?

The first decade of energy emergence has been challenging for Beijing as it tries

to reconcile its pursuit of energy resources with the new diplomatic pressures in many of

the countries and regions where it must go to secure those supplies. While China’s NOCs

are active in over 30 countries, U.S. and Western attention have focused intently on their

involvement in a small number of “pariah” states, Iran, Sudan, and Myanmar, as well as in

Africa, where China’s involvement directly intersects with Western strategic, human rights,

and governance interests. Although these countries offer extremely attractive opportunities

for less competitive access to large oil and natural gas resources, Beijing has come under

withering criticism for its reluctance to support fully Western efforts to isolate these govern-

ments or to press for reforms. For the most part, Beijing has reacted defensively, citing its

traditional policy of non-intervention in the sovereign internal affairs of other states. Despite

the fact that non-intervention is a strongly held long-term policy position for China, it ex-

poses Beijing to the charge that it is a rationalization for blindly pursuing its energy interests

at the expense of human rights and nuclear proliferation, as well as governance, economic,

and financial reforms in Africa.

Beijing has begun to respond more proactively to these

new pressures as it seeks to manage the trade-offs between its

conception of energy security and its broader interests in being

seen as a responsible global power.8 In Sudan, China has ap-

pointed a special envoy to respond to concerns over Darfur, and

Beijing has recently publicly expressed new concerns to Sudan’s

government over human rights problems. During Hu Jintao’s visit

to Khartoum in February 2007 he urged Sudan to comply with

international demands. A recent report by the International Crisis Group argues that China

Beijing has begun to respond more proactively to manage the trade-offs between its conception

of energy security and its broader interests in

being seen as a responsible global power.

15


has become a much more constructive player in Sudan.9 While China continues to oppose

the most severe U.S. proposed UN sanctions on Iran, it has supported many efforts to press

Iran to open up its nuclear program to outside inspections. Beijing has also strongly resisted

Iran’s efforts to use offers of special access to energy supplies to draw China into a broader

anti-U.S. alliance.

Nevertheless, there are limits to Beijing’s interest in joining Western and U.S.

efforts against many of these regimes that suggest that

China’s growing involvement in many key energy export-

ing countries will continue to cause significant tensions

with the West, particularly the U.S. Beijing has funda-

mentally different views of the most effective means to

manage Iran’s nuclear development and the priority of

economic development, human rights, and governance is-

sues in places like Sudan, Myanmar, and Africa. In recent

months, China has significantly stepped up commitments

for new oil investments in Iran, has started construction of new oil and gas pipelines across

Myanmar to South China, and in Sudan, China’s NOCs are continuing to expand their in-

vestments.

These issues will continue to be important sources of tension with the U.S. But

what is less appreciated in Washington is that China’s diplomatic influence in these energy-

rich states is only a glimpse of the longer-term implications of China’s energy rise. China’s

energy reach will increasingly intersect with the long-term energy and strategic interests

of the U.S. in virtually every key energy exporting region. Moreover, Beijing’s growing

dependence on seaborne energy imports has already begun to shape and accelerate China’s

naval modernization with major long-term implications for U.S. maritime supremacy in the

world’s energy exporting and transit regions.

There are limits to Beijing’s interest in joining Western

and U.S. efforts against many of these regimes that

suggest that China’s growing involvement in many key

energy exporting countries will continue to cause significant

tensions with the West...

16

In the Middle East, China’s involvement is growing rapidly as oil imports from the

region mushroom and NOC investments expand. The Middle East now accounts for 50%

of China’s crude oil imports, or 25% of its total oil consumption. Within five years, China

will import more Middle East oil than the U.S., even though total U.S. oil imports will still

be double those of China. China’s strongest energy relationship in the region is with Iran,

which has been widely analyzed, and will likely remain a seri-

ous source of bilateral disagreement. However, Saudi Arabia is

now China’s largest source of imported oil and the two coun-

tries are developing wide-ranging reciprocal energy investment

and trade ties in oil refining, natural gas, and petrochemicals.

Riyadh recognizes that China will be its largest and most

rapidly growing oil and petrochemicals customer in the future

and, therefore, is “looking East” towards a much deeper political and diplomatic relationship

with China as it hedges against its dependence on the U.S. in the face of an increasingly dif-

ficult relationship in the wake of 9/11. Chas Freeman, former Ambassador to Saudi Arabia

and a diplomat with extensive experience in China, suggests that, “Saudi Arabia is taking a

Chinese wife. The Saudis are not divorcing us. In Islam you can have more than one wife

and they can manage that.”10

China is also becoming a major oil investor in Iraq as Baghdad seeks to rebuild

its large, under-developed oil and gas fields. During 2009 Chinese NOCs were successful

in bidding for two very large oilfield development projects, the enormous South Rumaila

field and the Halfaya field. CNPC also had earlier in 2008 signed a major deal to develop

the Al-Ahdab field in the Central part of the country. Iraq is a potentially huge opportunity

for China’s NOCs and they are certain to play a large role there, inevitably drawing much

greater attention from Beijing.

Nevertheless, China’s diplomatic posture in the region so far has remained relatively

modest. A recent CSIS study by Jon Alterman and John Garver documents the fairly limited

China’s strongest energy relationship in the region is with Iran, which has been widely analyzed,

and will likely remain a serious source of bilateral

disagreement.

17


role that China seems to want to play in the region at present.11 China’s leaders appear to be

willing to “free ride” on U.S. efforts to manage stability in the region, despite their misgiv-

ings about U.S. influence. However, as its vital energy and economic interests inexorably

grow over the long-term, it seems implausible that Beijing will not begin to feel compelled

to project a stronger presence in the region, despite its concerns over the complexity and the

risks of raising its profile in a region they see as dominated by the U.S.

Consequently, the U.S. needs to begin planning for ways to forge a constructive

relationship with China on a foundation of mutual interests in ensuring stability in the Gulf.

Most importantly, stronger Sino-U.S. consensus is required on

dealing with Iran. For the U.S. this is a touchstone strategic issue,

whereas China seems to have no clear long-term strategy and

is instead much more focused on avoiding the near-term risk of

instability that would be potentially caused by a U.S. or Israeli

attack on Iran. As China’s NOCs become ever larger investors in

Iran, apprehension will increase in Washington over China’s role.

Second, the U.S. and China need to avoid an escalating competi-

tion for influence in Saudi Arabia and the bilateral distrust possibly engendered by growing

Chinese influence in the kingdom. Many in Washington believe strengthening Sino-Saudi

ties are undermining the Saudi-U.S. strategic alliance and U.S. influence in the Kingdom.

Third, the U.S. and China need to find common ground on the future of Iraq. The prodigious

scale of new oil investment opportunities in Iraq – easily the largest potential in the world –

will inevitably draw Chinese NOCs into a large and important energy role in Iraq and will,

inexorably attract much greater Chinese diplomatic and economic attention. Beijing opposed

the U.S. war in Iraq and views U.S. influence there with deep suspicion. Conversely, the

U.S. is likely to see China increasingly as a competitor for influence with a critical U.S. ally

in the Gulf.

The U.S. needs to begin planning for ways to forge a constructive

relationship with China on a foundation of mutual interests in ensuring stability in

the Gulf.

18

Central Asia also stands out as another important region where China’s growing

involvement will impact important U.S. strategic and energy interests. China’s strategic

engagement in Central Asia and its energy development is in sharp contrast to its mod-

est diplomatic attention so far to the Middle East, which it sees as strategically much more

peripheral. Central Asia provides a critical opportunity for China to diversify its oil and gas

imports by developing overland pipeline supplies that could reduce future dependence on

maritime supplies from the Middle East and Africa. Its energy diplomacy is anchored by a

strong relationship with Kazakhstan. China’s NOCs are major

investors and oil producers in Kazakhstan, and China has built a

large oil pipeline, currently being expanded, to bring Kazakh oil

to western China. In March 2009, China extended a $5 billion

loan to state oil company KazMunaiGas, which was coordi-

nated with a new $3.3 billion CNPC acquisition of a 49% stake

in MangistauMunaiGas, a major Kazakh oil producer. Beijing

is also negotiating with Kazakhstan to build a large natural gas

pipeline to western China parallel to the oil pipeline. A very strong energy relationship is

also being developed with Turkmenistan, one of the largest natural gas reserve holders in the

world, through a combined deal to gain a stake in developing large new natural gas fields

that will supply a large, long-distance gas pipeline recently inaugurated to western China.

Beijing’s NOCs are also increasingly active in Uzbekistan’s promising natural gas industry.

Energy is also a central driver for U.S. involvement in Central Asia, setting the

stage for a complex trilateral strategic and energy competition, rightly or wrongly dubbed

the “new Great Game.” As China increasingly succeeds in building infrastructure to move

Central Asian energy to the East, the U.S. has been working diligently over the past 15 years

to promote the development of Central Asia and Caspian energy resources and new pipelines

to Western markets via Azerbaijan, Georgia, and Turkey, with the pipelines independent of

Russian or Iranian control. Conversely, Russia has worked to reassert its historic control

Central Asia provides a critical opportunity to diversify its oil and gas

imports that could reduce its future dependence on maritime supplies

from the Middle East and Africa.

19


over the region’s oil and gas resources by promoting new pipelines to draw these flows

northward into Russia, while seeking to frustrate plans for independent Caspian pipeline

capacity to the West or China. Russia desperately needs to maintain control over Central

Asia gas supplies to meet its future gas export commitments to Europe. This competitive

trilateral “pipeline diplomacy” reinforces the broader trilateral strategic competition in the

region, whereby China and Russia compete with one another for regional and energy influ-

ence, while at the same time, collaborating to exclude the U.S. from the region as much as

possible.

Energy has also become a critical dimension in the relationship between China and

Russia, although the process has been anything but smooth. There would appear to be a

natural energy alliance between the two, with Russia’s enormous oil and gas supplies per-

fectly situated to help meet China’s large and growing appetite

for oil and gas, which has led many analysts to expect energy

to cement the basis for a much stronger strategic alliance.

Flynt Leverett coined the term “Axis of Oil” for the potential

for energy interests to support an alliance that could present

new challenges for U.S. diplomacy.12 Others have speculated

on the possibilities for a broader, energy and politically driven

consumer-producer alliance among China, Russia, India, and key OPEC producers like

Venezuela, dubbed the “Axis of Diesel.” In reality, however, Moscow’s recentralization and

partial re-nationalization of the oil industry under Vladimir Putin, its reluctance to make the

large infrastructure investments to move energy supplies to the East, combined with China’s

resistance to high Russian gas prices have all joined to frustrate China’s quest for Russian

energy supplies.

However, the global recession and declining energy prices have scuttled Moscow’s

long-term plans to develop East Siberian energy on its own and seriously weakened the

financial capacity of highly leveraged Gazprom, Rosneft, and Transneft. This has given Bei-

Energy has become a critical dimension in the

relationship between China and Russia, there

would appear to be a natural energy alliance

between the two…

20

jing, with its enormous reserves of cheap investment capital, the opening it needed to exploit

a new Russian willingness to allow China’s long-coveted access to energy from the region.

After years of delays, China recently finalized a deal for construction of a large oil pipeline

from East Siberia to northeastern China by offering $25 billion in loans to cash-strapped

Rosneft and Transneft. After numerous efforts by China’s NOCs to invest in Russia were

snubbed, Sinopec was able to acquire China’s first equity interest in Russia’s Urdmurtnefte-

gas, along with a coveted interest in the promising Sakhalin 3 offshore oil exploration block

in partnership with Rosneft. Nevertheless, protracted negotiations to bring East Siberian

natural gas to China have continued to stall. So the energy relationship continues to progress

unevenly. However, in the long-run, energy trade and investment that align Russian energy

investment and export revenue needs with China’s enormous financial resources and market

power make it inevitable that energy will become more important in supporting closer Sino-

Russian collaboration.

China’s energy rise is accelerating the expansion of its broader influence in other

key energy exporting regions as well, with implications for U.S. power and influence. Africa

has become China’s second largest regional source of imported oil, accounting for roughly

one-third of its oil imports, mainly from Angola and from its

own large equity oil production in Sudan. In addition to their

large Sudan operations, China’s NOCs have also recently made

a number of significant acquisitions of interests in large, offshore

oil fields in Nigeria and Angola and have exploration licenses in

a rapidly growing list of other African states.13 Combined with

its minerals and timber investments, this has made Africa a key

source of raw materials and a major focus of attention from Beijing. However, the focus

on its energy investments in Africa has been somewhat exaggerated. According to Wood

MacKenzie, a noted energy consultancy, despite their efforts, China’s NOCs presently have

Africa remains one of the few regions with

huge potential for new discoveries and where Beijing feels it is not

confronting entrenched U.S. power and influence.

21


accumulated ownership of only about 3% of Africa’s proven oil reserves, and many recent

investment forays have been notably unsuccessful.14

But in the long-term, Africa remains one of the few regions of the world with huge

potential for new discoveries, which is still relatively open to new investment, and where

Beijing feels it is not confronting entrenched U.S. power and influence. China’s NOCs are

now going after increasingly attractive oil deals in direct competition with the global oil

majors. CNOOC recently approached Nigeria to acquire a huge block of existing oil field

licenses currently involved in an acrimonious renegotiation between Lagos and a group of

oil majors.15 It has made a similar aggressive move in Ghana seeking to buy into the large

offshore Jubilee field. Consequently, China’s NOCs, backed by Beijing’s huge investment

war chest, are destined to become major oil players in Africa, and Beijing’s already

considerable diplomatic and economic engagement and influence will grow.

China’s energy rise raises similar issues in Latin America. Despite much hoopla,

China today only receives about 7% of its oil imports from Latin America, largely from

Venezuela, and Beijing’s NOCs have relatively modest

investments so far in the region, in Venezuela, Ecuador,

and Colombia. Despite the rhetoric of Hugo Chavez and

hand wringing in Washington, D.C., China’s oil trade and

investments have been limited by Venezuela’s heavy crudes,

which are largely unsuitable for China’s refineries, as well as

the concentration of its main investment opportunities in extra-

heavy oil in the Orinoco Belt. Other efforts by CNOOC and

Sinopec over the past five years to get access to Brazil’s offshore oil reserves have also not

panned out, Ecuador and Colombia have very modest potential, and Mexico is closed to

private investment.

However, conditions in the region are changing rapidly to China’s advantage.

Brazil’s ability to finance the $100 billion plus investment required to develop its huge new

China today only receives about 7% of its oil imports

from Latin America, largely from Venezuela,

and Beijing’s NOCs have relatively modest

investments so far in the region...

22

“pre-salt” offshore oil discoveries evaporated with the global financial crisis and tightening

credit markets. Beijing astutely stepped in with $10 billion in low-cost loans to help finance

Petrobras’ oil development program, which was tied to an agreement to guarantee a huge

boost in future oil exports to China. The loan is also very likely to jump-start significant

new investment opportunities offshore and elsewhere in Brazil for China’s NOCs, at the

same time that CNOOC is rapidly sharpening its deepwater technology capability essential

for offshore Brazilian opportunities. Beijing has also become a source of large new loans

to Venezuela, helping Chavez fund his social programs during the recent period of low

prices, loans tied to guaranteeing future oil exports to China, as China’s NOCs build new

domestic refineries capable of handling heavy Venezuelan crudes. At the same time, CNPC

is making a commitment to become a major player in extra-heavy oil field development in

Venezuela’s Orinoco Belt and western Canada’s oil sands belt. Consequently, China and its

NOCs are likely to become far more influential energy players in Latin America, bringing

progressively greater Beijing engagement to a region traditionally dominated by U.S. energy

and geo-strategic interests.

Finally, energy security angst is also sharply accelerating the expansion of China’s

strategic maritime footprint. While China’s rapidly expanding naval modernization is mainly

aimed at strengthening its hand in any potential future confrontation

over Taiwan, securing China’s lengthening energy transit supply lines

has now become an important factor in Beijing’s drive to develop a

“Blue Water” navy. The PLA Navy now includes securing China’s

maritime energy supply lines and the SLOCs of Southeast Asia

and the Indian Ocean as a major new mission. While expanding

the quality and reach of its Southeast Asian maritime power projection, Beijing has also

been increasingly active in the Indian Ocean, building ports and establishing port access

agreements with Pakistan, Bangladesh, Sri Lanka, Myanmar, and Cambodia. The combined

Energy security angst is also sharply

accelerating the expansion of China’s

strategic maritime footprint...

23


naval expansion and port access effort promises to gradually transform China’s maritime

capabilities in the region and has set off alarm bells in both Washington, New Delhi,

Canberra, Tokyo, and elsewhere in the region.

China and the Climate Change Challenge

In the turbulent wake of the December 2009 Copenhagen meetings to forge a

successor to the Kyoto Protocol, it has become profoundly clear that China has become

a critical factor in global efforts to reduce carbon emissions and climate change. China is

on a path to generate a virtual tsunami of carbon over the next 25 years making progress

on climate change negotiations virtually impossible without

its strong and constructive participation. China’s importance

for managing future carbon emissions is hard to overstate. In

2007, China overtook the U.S. as the largest source of carbon

emissions and the likely growth rate in emissions over the next

25 years is stunning. For example, the latest IEA World En-

ergy Outlook 2009 forecasts that on its current trajectory, China’s emissions will more than

double and account for nearly one-half of the total growth in global emissions between 2006

and 2030. This is driven most importantly by the enormous prospective increase in coal use

to meet rising electricity demand. From 2001–2006, China’s coal use more than doubled,

rising by one and half times the entire annual coal consumption of the U.S., the world’s

second largest coal consumer. China’s coal consumption is expected to nearly double again

between 2006 and 2030, accounting for almost two-thirds of the global increase in coal con-

sumption, while electricity demand is expected to increase by two and half times.

On the other hand, China’s carbon emissions are relatively low historically and in

relation to its population. According to the IEA’s World Energy Outlook 2009, emissions in

2007 were about 4.6 tons per capita compared to 19.0 tons for the U.S., 9.6 for Japan, and

7.8 tons for the EU. By 2030, China’s per capita emissions are expected to nearly double

China’s emissions will more than double and

account for nearly one-half of the total growth in global emissions between

2006 and 2030...

24

to 8 tons, likely surpassing the EU at 7.0, while U.S. emissions drop to 15.8. And histori-

cally China has only accounted for 9% of cumulative global emissions while the U.S. has

accounted for 28%. However, by 2030, China’s share is likely to rise to 16% of cumula-

tive emissions, nearly equaling the EU’s cumulative emissions by 2030, while the U.S. will

likely decline toward 23%. This divergence between the huge scale of China’s likely future

emissions, which makes it an indispensable participant in any effective climate regime, and

its low per capita and historical emissions, which shifts attention on the high emitters, espe-

cially the U.S., brings into sharp relief the political dilemma for China’s leadership and the

global community’s efforts to slow the growth of global carbon emissions.

China will inevitably confront ever-stronger international pressure on carbon and

climate change. However, Beijing fears that international pressure to slow emissions could

undermine economic growth and slow job creation and, that it is being unfairly singled out

on carbon emissions. Pang Zhongying of Nankai University, after acknowledging the impor-

tance of climate change issues, puts China’s views succinctly, “This said, it is a legitimate

right of the Chinese people to modernize their country. Given its

size and economic growth rate, China cannot help but be one of

the world’s largest emitters of greenhouse gases. International

pressure over global warming has put China under unfair scru-

tiny.”16

Caught between this proverbial Scylla and Charybdis,

Beijing has begun to respond with its own increasingly ambi-

tious energy and emissions policies while continuing to assert the

Kyoto principle of “common but differentiated responsibilities”,

i.e. that the solution to the climate change problem is fundamentally the responsibility of the

developed countries, which have gotten rich filling the atmosphere with carbon over the past

150 years. Domestically, Joanna Lewis, from the Pew Center on Global Climate Change,

has written, “increased international attention to the issue is reflected in China’s domestic

Beijing has begun to respond with its own

increasingly ambitious energy and emissions

policies while continuing to assert the Kyoto

principle of “common but differentiated responsibilities”...

25


policy circles... primarily through institutional restructuring aimed at better government co-

ordination on climate-related policy activities.”17 The government released a White Paper on

Climate Change in 2007, created a new Leadership Group on Climate Change to coordinate

climate policies across the government ministries and industry, and, in late 2008, released a

new White Paper on its Climate Change policies. Over the course of 2009, in the run-up to

Copenhagen, Beijing took an increasingly proactive stance in making general commitments

to reduce the rate of growth in its carbon emissions through its domestic energy efficiency

policies and strong promotion of renewables energy development, while resisting pressure

to announce specific targets or numerical limits, fearing this would box China in for the fu-

ture. Beijing has tried to steer a course between continuing to pressure the rich countries to

take increased responsibility for climate change efforts while avoiding becoming the climate

villain by responding to international pressure through a range of domestic energy policies

to reduce emissions growth without undermining economic growth and job creation.

The Copenhagen meeting amply demonstrated that China, however reluctantly, is

now at the center of the geopolitics of climate policy, along with the U.S. Beijing’s late

November commitment to reducing its carbon intensity by 40-45% between 2005 and 2020

was hailed as an important breakthrough, although the goal was essentially already baked

into domestic energy efficiency measures already announced. The

U.S. for the first time committed to specific numerical targets of a

17% emission reduction in its own emissions by 2020, about the

most the Obama administration could credibly promise given the

lack of Congressional authorization of new climate legislation.

However, despite these two important new developments, the meet-

ing ultimately distilled down to a corrosive confrontation between

Washington and Beijing over outside verification of China’s promised emission cuts vs.

what Beijing saw as inadequate U.S. and rich country commitments for financial assistance

to developing countries. Beijing effectively led the effort to prevent any agreement that

The U.S. for the first time committed to specific numerical targets of a 17%

emission reduction in its own emissions

by 2020...

26

would enshrine specific long-term commitments for global emission reductions that might

constrain their latitude in the future. Later, Chinese negotiators further undermined the

credibility of the anemic “Copenhagen Accord” by stating that the accord was not a formal

agreement and was not legally binding.

The outcome of the Copenhagen meeting is perhaps the most powerful example of

how China and the U.S. are increasingly joined at the hip as the two central global energy

powers whose cooperation is indispensible to address many of today’s global energy chal-

lenges. But this suggests prospects for an effective new global climate

agreement are highly uncertain. The Obama administration’s efforts to

join in global efforts to address the problem remain deeply uncertain

in the face of serious opposition on Capitol Hill to potentially costly

climate change efforts and tightening 2010 electoral pressures. If

meaningful cap-and-trade legislation to cut future U.S. emissions is to pass it seems likely

to be severely watered-down. Perhaps more importantly, if China does not move in a much

more forceful way to support a pact to reduce global emissions, there is likely to be little

real progress in the aftermath of Copenhagen. As chief U.S. climate negotiator Todd Stern

suggested in a Washington D.C. speech in June, “China may not be the alpha and omega of

the international negotiations, but it is close.” Conversely, Beijing is also very unlikely to

tackle its domestic energy consumption pressures unless the U.S. moves more decisively

to reduce its own emissions and join in a global consensus to adequately fund reductions in

the developing world. In short, if the U.S. and China fail to come to a consensus that each is

doing its fair share in reducing emissions, neither is likely to move enough to salvage a new

global emissions deal.

Implications for the U.S.

The “energy rise” of China means that U.S. primacy in global energy affairs is grad-

ually coming to an end. Increasingly, the U.S. will need to adapt to China’s growing capa-

“China may not be the alpha and omega of the international

negotiations, but it is close.”

27


bility to affect U.S. vital interests powerfully across the range of key energy market and

energy geopolitical issues. Ironically, in an era of growing political and economic multi-

polarity, we are moving toward a more bi-polar energy-environmental era characterized

by two global energy superpowers, an “E-2,” each with an enormous capacity to shape

and influence energy markets, prices, and geopolitical developments in major energy

exporting regions. Neither of these two energy leviathans is very self-aware of the scale

of its cumulative global energy weight nor does either have the institutional capacity and

coherence to wield that power to integrate energy and strategic goals. Ed Morse, one of

the most trenchant energy analysts of our day, describes U.S. energy power as “mostly

brawn, not much brain,” a description that in many ways can also be applied to China. It

is hard to avoid the image of two clumsy, wary leviathans stumbling toward one another

with energy confrontation or cooperation in the balance.

In oil markets, China is increasingly the engine of global oil demand growth but

the U.S. remains the single most important market force in determining global oil prices.

Consequently, bilateral oil and vehicle efficiency and technologi-

cal cooperation in the two capitols will decisively shape global oil

demand trends, especially, transportation technology development

and diffusion. The U.S. is the central player in promoting energy

security through an open and flexible global market for oil and in

multilateral institutions of energy management while China has been the leading practi-

tioner of a more unilateral, mercantilist approach to energy security. The predominance

of Western market approaches to energy security, as well as these institutions’ long-term

effectiveness will erode unless China is drawn into a more constructive role. Although

the U.S. remains the dominant strategic power in the Middle East and most other export-

ing regions of the world, China’s economic influence and diplomatic power are growing

rapidly, increasingly undermining U.S. influence across the energy-exporting world. And

China’s maritime expansion and modernization seems almost certain to generate serious

China has been the leading practitioner of a more unilateral,

mercantilist approach to energy security.

28

new risks of confrontations over control of critical SLOCs that are vital energy transporta-

tion highways. Finally, the duality of the growing importance of China in climate change

efforts combined with the U.S. historic responsibilities for cumulative carbon emissions

highlight the strongest example of how these two powers have become reluctant but never-

theless, indispensable partners for addressing many of our most serious energy and environ-

mental challenges.

The Need for a U.S.-China Energy Partnership

Success in meeting today’s global energy security and environmental challenges will

depend heavily on the energy relationship between these two energy giants and on whether

it will be fundamentally cooperative or competitive. This is a mirror image of the question

at the center of the China rising debate at a broader strategic level. If the energy relationship

continues to drift towards competition and distrust, China and the U.S. will each have the

ability to seriously undermine the others’ vital energy interests, and energy risks becom-

ing an even greater source of bilateral friction and tension. Alternatively, the mutual energy

security interests of China, the U.S., and other major energy importers in stable markets and

an environmentally sustainable outcome will be served to the extent that China and the U.S.

can forge a more confident and cooperative energy relationship.

Much of the tension between China and the U.S. over energy issues is based on

distrust over each other’s long-term energy intentions. Beijing’s belief that Washington is

out to use energy to weaken China mirrors Washington’s belief

that China’s untamed energy demand, aggressive energy security

diplomacy, and rising emissions are undermining U.S. energy and

climate security. Under the Obama administration, it is vital to re-

double efforts to create a direct, leadership level strategic energy

relationship to build confidence, reduce distrust, and promote

energy cooperation with China, not just on climate and clean energy, as many advocate, but

Much of the tension between China and the U.S. over energy issues

is based on distrust over each other’s long-term energy intentions.

29


across the entire range of global energy security issues.18

But a “dialogue” will not be enough to overcome entrenched domestic resistance

and forge a common approach to energy. Something much more ambitious in the form

of a true energy “partnership” is needed. This must be built on the two countries’ core

shared interests in stable and reliable global energy markets to fuel economic prosperity

and environmentally sustainable global energy architecture. Existing channels of regular

bilateral energy consultation have helped build confidence but these are far too limited to

reduce deep suspicions that exist over each others’ long-term energy intentions. An ac-

tive energy dialogue took place within the Treasury Department-led Strategic Economic

Dialogue (SED) but the SED was fundamentally an economic, not a strategic dialogue.

The separate parallel bilateral energy dialogue that continues, while promoting a wide

range of technical cooperation efforts, has also done little to reduce suspicion at the lead-

ership level over energy intentions.

Overcoming this distrust and moving toward a real energy partnership will

require national leadership level political support on both sides. Energy needs to be an

agenda item at the heads of state level to build confidence in each other’s long-term

intentions and to convey a sense of mutual, common energy security interests, which

can only be achieved through direct cooperation and policy coordination across a global

energy agenda from oil market stability to climate change efforts. The new Strategic and

Economic Dialogue (SAED) was established in order to address a broad range of US-

China issues, including energy. But the U.S. and China also need to carve out energy

security and climate as the basis for a separate and equal partnership. It is also vital that

the Obama administration work with China to create an effective Asian regional energy

forum or continuing dialogue. As a region, Asia, particularly the large economies and

oil importers, faces a common set of challenges of energy security and toxic competi-

tive energy diplomacy, energy efficiency, and climate change. Asia is home to four of the

five largest carbon emitters. None of Asia’s existing regional institutions is well situated

30

to address these common energy challenges. China demonstrated a tangible interest in a

regional approach by convening a regional ministerial energy dialogue in late 2007 in Bei-

jing. A regional approach can provide another dimension through which the U.S. can seek

to draw China into taking a regional and global, rather than unilateral, view of its energy

security challenges. Multilaterally, the U.S. needs to push harder to draw China into the IEA

as soon as possible and create a more effective G-20 process to pursue energy issues. This

will take time since Beijing remains reluctant to take on broader responsibilities for global

oil market stability.

U.S. policymakers also need to prepare more systematically for China’s growing

diplomatic and energy influence in key oil and gas exporting regions. Although the pace

and scope of China’s emergence as a major power in these regions will be uneven, Beijing

will become a major player in virtually all these regions: the only question is to what effect.

Until now, the shapeless discomfort over China’s growing involvement in these regions has

resulted in an ad hoc, reactive, and defensive posture on both sides that promotes distrust

rather than collaboration. Rather than simply criticizing

China, seeking to exclude it, or pressuring Beijing to support

policies unilaterally decided in Washington, the U.S. needs

to find ways to forge a constructive partnership to coordinate

policies better to ensure stability in critical energy produc-

ing and exporting regions. Nevertheless, even under the best

of circumstances, a number of bilateral tensions over energy

competition, policies towards pariah states, lingering distrust over strategies toward Africa

and Latin America, along with growing maritime competition are likely to continue. The

U.S. must prepare to carefully manage these tensions and prevent them from spilling over

and undermining the overall energy partnership.

Finally, in order to strengthen cooperation with China on climate change and clean

energy the U.S. must be a more credible partner. This means the U.S. must vastly strengthen

The U.S. needs to find ways to forge a constructive partnership to coordinate policies better to ensure

stability in critical energy producing and exporting

regions.

31


and accelerate its own domestic efforts to promote energy efficiency and cut future

greenhouse gas emissions. While the Obama administration appears willing, it is far

from clear that it can forge the necessary domestic consensus to bring along the Con-

gress, U.S. industry, powerful regional interests, and the American public. Unless it does,

it is unrealistic to expect Beijing to take tough and politically sensitive measures in the

face of its own domestic “growth coalition” of entrenched domestic energy companies,

large state energy-intensive industries, a mushrooming vehicle industry, and obstreperous

provincial leaders to curb its own greenhouse gas emissions. The U.S. absence from the

process in the past has given China a pass on its responsibilities on climate change and

put the focus on the U.S. as the key obstacle to an effective climate regime. Greater U.S.

action is essential to putting the focus back onto China to do more.19 The reality is that

China is a potential Saudi Arabia of energy efficiency. Relatively simple energy effi-

ciency measures can produce enormous reductions in the path of future energy consump-

tion and carbon emissions. The U.S. needs to find ways to work directly with China on

cleaner coal technology, carbon capture and storage, transportation efficiency, and hybrid

and battery technology.

It is also vital that leaders in Washington and Beijing begin to envision energy

cooperation as one comprehensive and integrated set of issues centered on our common

energy challenges. These challenges are highly interactive and potentially mutually rein-

forcing. Joint efforts to reduce the pace of China’s transportation and oil demand growth

and to reduce profligate U.S. oil consumption for transportation will yield strong energy

security benefits in the form of more stable global oil markets, but will also accelerate

carbon emission reductions. Facilitating China’s engagement in global oil management

institutions like the IEA and G-20 will sensitize Beijing’s leadership to the global, rather

than national nature of its energy security dilemma. A growing appreciation in Beijing of

the global market nature of its energy security dilemma can reinforce a perception that

the U.S. and China have fundamentally common core interests in working together to

32

promote stability in key energy exporting regions and to promote increased investment in

energy production and energy infrastructure wherever possible and by whichever company.

Cooperation on climate change can promote cooperation on cleaner coal use and carbon

storage technology but also feedback into joint transportation technology development for

cleaner vehicles, the electrification of both countries’ transportation systems, and reduced oil

consumption.

More broadly, a strong and comprehensive energy partnership can be a valuable

tool in promoting confidence-building and reduced distrust, thereby strengthening prospects

for long-term U.S.-China strategic relations, arguably the world’s most important bilateral

relationship. Until now, energy has been largely a source of friction in an already complex

bilateral relationship. A concerted effort by Washington and Beijing to move together in a

coordinated fashion across an integrated range of mutual global energy challenges can turn a

source of bilateral tensions into a source of confidence and improved strategic cooperation.

33


Endnotes1 Steven Mufson, “As China, US Vie for More Oil, Diplomatic Friction May Follow”, Washington Post (April 14, 2006).2 Kenneth Lieberthal, Testimony, House Foreign Affairs Commmittee, July 23, 2008. 3 All historical energy statistics for this paper, BP Statistical Review of World Energy 2008, London. 4 International Energy Agency, Oil Market Report (September 2009) OECD, Paris5 All energy forecast data for this paper, International Energy Agency, World Energy Outlook 2008, OECD, Paris (2008).6 On a monthly basis, China actually surpassed the U.S. in sales in January of 2009 due to the collapse in U.S. auto sales and continued increases in China’s auto sales, John Reed, “U.S. Car Sales Fall Below China for First Time”, Financial Times (February 4 2009). 7 Trevor Houser and Roy Levy, “Energy Security and China’s UN Diplomacy”, China Security, Vol. 4, No. 3 (Summer 2008) pp. 70.8 See for example, “China’s New Dictatorship Diplomacy: Is Beijing Parting with Pariahs?” Stephanie Kliene- Ahlbrandt and Andrew Small, Foreign Affairs (Jan-Feb 2008).9 China’s Thirst for Oil, International Crisis Group, Asia Report #153 (June 9, 2008).10 Mufson, Washington Post (April 14 2006).11 Jon B. Alterman and John W. Garver, The Vital Triangle: China, the United States and the Middle East, CSIS, Washington, D.C., 2008.12 Flynt Leverett, “The New Axis of Oil”, The National Interest (July 2006).13 See Monica Enfield, “Africa in the Context of Oil Supply Geopolitics”, in Energy and the Transformation of International Relations, Chapter 7, Oxford University Press (2009).14 For example, CNPC’s recent deal to buy Verenex, a company with interests in Libya, was pre-empted by Libya’s state oil company, while a CNOOC/Sinopec bid to buy Marathon’s stake in a large Angolan offshore oilfield, Jubilee, was pre-empted by Sonangol, Angola’s national oil company. See Benoit Faucon and Spencer Swartz, “Africa Pressures China’s Oil Deals”, Wall Street Journal (September 30, 2009). 15 Tom Burgis, “Chinese Seek Huge Stake in Nigeria Oil”, Financial Times (September 29, 2009), p. 1.16 Pang Zhongying, “Playing by the Rules? China’s Growing Global Role”, The Asia-Pacific Journal (October 18, 2008).17 Joanna I. Lewis, “China’s Strategic Priorities in International Climate Negotiations”, The Washington Quarterly (Winter 2007-08).18 For a fuller discussion see Kenneth Lieberthal and Mikkal Herberg, China’s Search for Energy Security: Implications for U.S. Policy, The National Bureau of Asian Research, NBR Analysis, Vol. 17 No. 1 (April 2006). 19 For two strong programs of recommendations for cooperation on Climate Change, see Kenneth Lieberthal and David Sandalow, Overcoming Obstacles to U.S.-China Cooperation on Climate Change, Thornton China Center, Brookings Institution (February 2009); and Common Challenge, Collaborative Response: A Roadmap for U.S.-China Cooperation on Energy and Climate Change, Pew Center on Global Climate Change and Asia Society Taskforce Report, (January 2009)

34

“Resource Diplomacy” Under Hegemony:Foreign Policy ‘Triangularism’ and Sino-American

Energy Competition in the 21st Century

David Zweig Chair Professor, Division of Social Science

Director, Center on China’s Transnational Relations, The Hong Kong University of Science and Technology

Introduction

While many observers of East Asia see the 21st century as the century of China’s

rise, a more insightful response, based on the global structure of power, suggests that for

at least the next 20 years, if not longer, China will continue to rise within an international

system dominated by a declining United States (U.S.) “hegemon.” Thus, although U.S.

hegemonic power is waning due to the Iraqi quagmire and the financial crisis of 2008–09,

in military, economic, cultural, political, moral, and “soft” power, the U.S. will remain the

globe’s dominant power for the next 30–40 years. To understand China’s rise – and its ef-

fort to gain resources to maintain that rise – we must recognize that China’s relations with

the U.S. will determine much about China’s foreign policy and international politics for the

coming decades. If China continues to grow, the U.S. must make room for a stronger China,

and work with it or try to contain its rise. Should the U.S. choose the latter option by chal-

lenging China’s access to resources, particularly energy – a natural stratagem for a declining

hegemon facing a rising challenger – the world will find itself moving towards significantly

more global tension.

35

“Resource Diplomacy” Under Hegemony

International Relations Theory and Sino-U.S. ties

As the current structure of the international system is characterized as a he-

gemonic system with a rising power challenging a (potentially) declining hegemon, a

“power transition” from the U.S. to China may be underway. If so, numerous implica-

tions may be derived from this structure. “Realism” would predict that under a power

transition, the rising power should seek allies that can strengthen its own deterrent

capabilities or it may choose to attack the hegemon first as it nears parity. Or, the hege-

mon could seek to contain the rising power, in part by relying on its alliances. However,

if it finds the challenger hard to contain, it may use threats or even go to war before the

opponent is strong enough to attack it. Then again, the challenger may lie low, until it

surpasses the hegemon and then go to war. Peaceful power transitions are rare in history,

and given the divergent domestic systems in the U.S. and China, the next 20 years are

likely to be rocky.

Alternatively, a “constructivist” perspective on the international system suggests

that the rising power and the challenger, through enhanced interaction, can manage their

inherent conflict and avoid war. Such cooperation is even more likely if the rising power

is satisfied with the international system. The hope that

China could learn to conform to the international sys-

tem was at the heart of then U.S. Deputy Secretary of

State, Robert Zoellick’s call on China to become a “re-

sponsible stake holder” as it rises. This position was

put forward in his speech, entitled, “Whither China:

From Membership to Responsibility?” presented to the

National Committee on U.S.-China Relations in New York on September 21, 2005. But

with enhanced power, will China undergo “positive learning?” Or will it become dissatis-

fied with the international system and push for significant revisions? While the prognosis is

A “constructivist” perspective on the international system

suggests that the rising power and the challenger, through enhanced interaction, can

manage their inherent conflict and avoid war.

36

optimistic, the world is waiting with baited breath to see whether China, as a challenger, will

disrupt the extant international order or work within it.

Finally, the rising power may never accumulate enough power to challenge the

hegemon, yielding to a long period of coexistence. Hopefully, the hegemon will not feel

challenged. Thus, as Ikkenberry argued in a 2008 Foreign Affairs article, if China is not

disaffected with “Pax Americana” and is unlikely to replace the U.S. as the dominant power,

American security, in a period of transition, may be enhanced by strengthening global norms

and institutions, and pulling China more deeply into these institutions, rather than jettisoning

the house it built and constructing an international coalition to contain China’s rise. Fortu-

nately, the Obama administration seems intent on the former strategy.

Energy Diplomacy and China’s Rise

Economic growth is the lifeline of the legitimacy of the Communist Party of China

(CCP) and critical to China’s economic rise. But much of that growth today depends on

access to, and a steady flow of, overseas energy and resources. As more and more cars spill

onto China’s streets, energy consumption increases. As peoples’ standards of living im-

prove, the demand for air conditioners, materials for new housing construction, and a host of

other urban amenities, must be met, as they underpin the new alliance struck with the urban

middle classes by the CCP during the late 1990s. Also, as the Inter-

national Crisis Group estimates, over 70 percent of China’s imported

energy is consumed in its role as an export juggernaut and the “fac-

tory for the world.”

China, today, cannot challenge the U.S. for what Jack Levy

calls “primacy in the global system.”1 China’s influence remains

largely regional and will be so for a long time. But in its search for

1 Jack S. Levy, “Power Transition Theory and the Rise of China,” in Robert S. Ross and Zhu Feng, eds., China’s Ascent: Power, Security, and the Future of International Politics (Ithaca, NY: Cornell University Press, 2008). Professor Levy is Board of Governors’ Professor of Political Science at Rutgers University, and Senior Associate at the Saltzman Institute of War and Peace Studies at Columbia University.

Over 70 percent of China’s imported

energy is consumed in its role as an

export juggernaut and the “factory for the world.”

37


resources, China has begun seriously to challenge America’s perceived interests in Latin

America, Central Asia, the Middle East, and Africa. Moreover, enhanced bilateral ties

with much of the world’s energy and resource producers have implications for American

foreign policy. Thus, while an impoverished and isolated China under Mao was rather

independent, growing dependence on global resources makes energy a chokepoint, in-

creasing China’s vulnerability to external efforts, particularly by the U.S., to slow its rise.

Should the U.S. confront China in these regions around the world as it searches the globe

for resources, what I like to call regional “nodes of competition” could become “building

blocks of systemic global conflict,” putting this critical bilateral relationship at greater risk.

China’s Resource Diplomacy and Energy Strategy

China’s rapid growth and increased global status should generate a confident

foreign policy. But dependence on external resources increases, rather than lessens

China’s insecurity. Thus, resource security is a core component of China’s foreign policy,

as continued economic growth stabilizes Chinese society, insures CCP rule, and expands

national power. As Chu Shulong of Tsinghua University argues, since 1996, China’s

“New Security Concept” has recognized that energy, food, technology, public health,

anti-crime, and anti-terrorism were key parts of national security under globalization.

Quoting Roland Dannreuther,

China clearly feels highly vulnerable with its emerging energy de-pendencies and its energy security policy will be influenced by the degree to which it perceives more general Western policy as seeking to engage, constrain or contain…. China’s energy security policy is there-fore inevitably affected by the broader strategic context and health of Sino-U.S. and Sino-Western relations.2

2 Philip Andrews-Speed, Xuanli Liao and Roland Dannreuther, (2002) The Strategic Impact of China’s Energy Needs, London, International Institute for Strategic Studies, Adelphi Paper No. 346 (2002): 73.

38

Under Mao, China was truly “self-reliant,” avoiding many international constraints.

But today, Chinese fear U.S. efforts to “contain” their country’s economic growth and its

rise to great power status. Liu Xuecheng, Senior Research Fellow, China Institute of Interna-

tional Studies under the Ministry of Foreign Affairs in Beijing, believes that.

When a country the size of China imports more than 50 million tons of oil, fluctuations in the international oil market have considerable impact on the national economic operations of that country. China’s oil imports began to exceed 50 million tons as early as 2000. And since then, China has been exposed to potential risks of oil supply disruptions.3

To enhance energy security, China must limit reliance on external sources of energy

through conservation and the use of domestic supplies, in particular coal, as well as alterna-

tive energy supplies, such as nuclear, solar, and wind. China has enormous room for conser-

vation on the energy demand side due to the country’s gross energy

inefficiency. China’s leaders know the risks of energy dependency. In

November 2004, Hu Jintao called on officials to “give equal weight

to economizing and resource exploitation . . . and actively develop-

ing oil substitutes.” In spring 2005, Premier Wen Jiabao focused on

China’s international vulnerability when he called on China’s interna-

tional dependency in energy not to exceed 5 percent of its total needs

by 2020. Conservancy is a key component of the current Eleventh Five Year Plan outlined in

2006. Ironically, China’s energy dependence is relatively low – the U.S. depends on foreign

energy for 40 percent of its consumption, while Japan depends on foreign sources for over

80 percent of its consumption. Nevertheless, China’s energy dependence is growing quickly

To solve its energy security, China has also moved out into the world, fundamentally

changing foreign policy. “Resource diplomacy,” which reflects policies designed to enhance

a state’s resource security, has three components: (1) a stable supply; (2) at affordable prices;

and (3) the ability to transfer resources to the desired location (many countries or companies

3 Liu Xuecheng, China’s Energy Security and Its Grand Strategy (Muscatine, IA: The Stanley Founda-tion, Policy Analysis Brief, September 2006).

“Give equal weight to economizing and resource

exploitation... and actively developing oil

substitutes.”

39


buy oil that they sell to third parties). But how does it see the world? What views are

propounded?

Government advisors sought to understand whether global conditions threatened

China’s energy security. Their findings, enunciated at a meeting in March 2003 run by

the Chinese Institute of International Studies (CIIS), were that: (1) China’s energy secu-

rity faced an unfavorable shift; (2) the West, particularly the U.S. could contain China’s

efforts to exploit overseas oil and gas resources; and, (3) violent fluctuations of oil prices

and energy supply could affect China’s energy security. These concerns strike at the heart

of the three components of energy security: supply, delivery, and price, and reflect the

strategies adopted under what I call China’s “resource diplomacy.”

The Chinese government encourages its national oil companies (NOCs) to “go

out” (zou chu qu) and sign long-term contracts for equity oil

and gas, a process it enhances with diplomacy and govern-

ment policies. The State Council posted a list of countries

and resources in each country that it wants, offering state-

owned enterprises (SOEs) subsidies if they purchase these

resources. In February, 2008, Li Lianzhong, head of the

Economic Bureau of the Policy Research Center of the

CPC Central Committee, speaking at an economic forum

in Beijing, gave voice to Chinese worries about the U.S.,

and advocated a resource accumulation strategy to maintain the value of China’s foreign

currency reserves. “You can maintain the value of the reserves by stockpiling natural

resources, such as energy and iron ore, through purchasing mineral sources overseas

or acquiring stakes in major oilfields.” He suggested that this was a good way to coun-

ter American efforts to undermine the value of mainland foreign exchange reserves by

devaluing the dollar and raising crude oil prices. While overseas purchases of resources

“You can maintain the value of the reserves by

stockpiling natural resources, such as energy

and iron ore, through purchasing mineral sources overseas or acquiring stakes in

major oilfields.”

40

increase China’s interdependence, and perhaps its leverage with resource rich countries, it

complicates ties with the U.S. and the West.

Van Guens, of the Clingendael Institute in The Hague, speaking in 2008, worried

that the concentration of productive capacity in the oil industry will intensify competition,

while the advent of peak oil sometime in the next 15 years increases the possibility of con-

flict. To diversify energy sources, China strengthens bilateral ties with major supplier nations

around the globe. But as a latecomer to the oil import system – China was a net exporter

until 1993 – it links with many players at the margin of the global system, so-called “pariah

states,” such as Sudan, Venezuela, and Iran.

The Chinese government worries about the “Sea Lanes of Communication”

(SLOCs) through which oil and resources travels to China. Reportedly, China’s President,

Hu Jintao in 2005, referring to a “Malacca dilemma,” commented that, “certain powers have

all along encroached on and tried to control the navigation through the Straits.” This aspect

of resource diplomacy necessitates a stronger navy, perhaps an aircraft carrier, to protect

China’s oil supply lines. In 2002, military leaders called on China to solve its energy secu-

rity through “strategic measures,” i.e., advanced naval vessels. In the summer 2006 issue of

China Security, Zhang Wenmu, of the University of Aeronautics and Astronautics, painted a

dark portrait of China’s energy vulnerability.

China’s dependence on international energy imports is rapidly chang-ing from a relationship of relative dependence to one of absolute dependence (emphasis added) … China is almost helpless to protect its overseas oil import routes. This is an Achilles heel to contemporary China, as it has forced China to entrust its fate (stable markets and ac-cess to resources) to others. Therefore, it is imperative that China, as a nation, pay attention to its maritime security and the means to defend its interests, through sea power, a critical capability in which China cur-rently lags behind . . . The most crucial conduit connecting China with the region and the rest of the world is the sea lanes, and therefore China must have a powerful navy.

41


A US military report, published in November 2008, quotes a Chinese naval strate-

gist saying that, “The straits of Malacca are akin to breathing itself. . . to life itself.” Thus,

after years of speculation, in 2008, China announced that it would build an aircraft carrier.

Engaging regional suppliers, such as Russia, Kazakhstan, and Uzbekistan, allows

China to establish a network of oil and gas pipelines in Asia that circumvent the high

seas. In 2006, China’s first pipeline from Central Asia opened for business, and although

China’s Russian oil comes by train, the two sides completed negotiations on a pipeline

from Siberia to the Chinese city of Daqing, a major refinery center in northeast China.

Another strategy is to avoid the Malacca Straits entirely. For several years, oil tankers

have been traversing the Lombok and Sunda Straits, both in Indonesia, bypassing the

Straits of Malacca.

However, America’s strategic threat to China’s energy security is less than some

might assert. The U.S. Defense Department believes that it would be quite a challenge for

America to block shipments of oil to China. How would the U.S.

military know which tankers were going to Taiwan, Korea, and

Japan, rather than China? In wartime, China would use its enormous

coal reserves to supply energy throughout the country. In addition,

the countries of N.E. Asia are seeking a solution to their common

energy dilemma. In comments at a workshop at Hong Kong University of Science and

Technology in 2007, Christofferson argued that the Western press ignores ongoing negotia-

tions among South Korea, Japan, and China aimed at insuring energy flows to N.E. Asia.

Chinese Student Views on Energy Competition

Do Chinese see conflict on the horizon? Nine hundred students, interviewed in

2006 on five campuses across Guangzhou, Beijing, Nanjing, and Shanghai, reflected a

“constructivist” approach to international relations. They felt the threat of China’s energy

crisis, and 20 percent believed that crisis will very likely lead to military conflict (Figure

America’s strategic threat to China’s energy security is

less than some might assert.

42

1). Fifty-seven percent of them saw the U.S. as China’s most significant energy competitor,

with 30 percent granting that honorific position to Japan.

Figure 1. Will disagreements over energy lead to military conflict among countries?

Yet over 80 percent support “cooperative” or at worst neutral ties to the U.S. on

energy. Thus, when asked generally what position China should take vis a’ vis the U.S. on

energy issues (1= completely cooperative, 5= completely hawkish), the students favored

a neutral position (mean score = 2.99). Interestingly, on the same question on Japan, the

mean score was 3.91 (Figure 2), suggesting that conflict with Japan over energy in the East

China Sea is even more likely – there is, after all a specific locus of conflict in Sino-Japanese

relations, while the energy conflict between the U.S. and China is much more diffuse and

therefore hypothetical.

43


Figure 2. How China should deal with the U.S. and Japan on energy issues? (U.S. in

blue, Japan in red)

Overall, the students were conciliatory on ways to solve China’s energy crisis,

showing no support for expansionist policies. From a list of seven strategies to solve

China’s energy crisis, students favored domestic policies – particularly conservation – as

well as diversifying suppliers, all the while eschewing more nationalistic approaches,

such as expanding the navy. Among the students, 41 percent chose “improving energy

technology and applications” as their first choice, while 18 percent chose “exploiting

domestic energy more efficiently.” Another 18 percent selected “diversifying oil import

countries,” which could involve competition with the U.S. and other countries (Table 1).

Yet few see a strategic problem: only 4.6 percent favored “enhancing military power” as

their primary solution, and 2.7 percent said that improving oil transit by sea should be

the government’s number one priority.

44

Table 1. Ways the Chinese government should improve energy security

Suggestions First Choice (%)

Second Choice(%)

Third Choice(%)

1. Improve technology and its application 41.4 24.4 13.2 2. Exploit domestic energy more efficiently 18.2 17.0 14.1 3. Diversify oil imports 18 18.5 27.0 4. Rapidly improve national energy reserves 10.2 24.4 13.2 5. Cooperate with other countries smoothly 5.1 12.5 16.5 6. Enhance China’s military power 4.6 13.1 8.1 7. Enhance the safety of oil shipping by sea 2.7 8.2 7.3

As for importing energy from the “pariah states” and ignoring their violations of

international norms, mainland students demonstrate greater sensitivity than the Chinese

government does. When asked whether they were concerned about the political system of

the states from which China imports its energy, 19 percent were “completely concerned,” 32

percent were “concerned,” and only 8 percent were “not interested at all.” Granted they may

have been worried about the stability of these countries rather than their regimes’ moralities.

But external criticism may affect students and opinion leaders because they care about Chi-

na’s global image; in turn, they may transfer that pressure onto Chinese government officials.

Does the U.S. Behave like a Threatened Hegemon?

U.S. concerns about China’s resource diplomacy reflect the mindset of a hegemon

under threat. After President Chavez of Venezuela offered his country’s oil to the “Chinese

fatherland” in 2004, the U.S. Congress held hearings on the issue. Blumenthal and Lin of

the American Enterprise Institute, writing in the Armed Forces Journal of June 2006, saw

a growing risk that “China and the U.S. will clash over sources of fossil fuels in the Middle

East and other oil-patch states that are not models of stability or representative governance.”

When asked why he wanted to stop the sale of the Unocal Oil Company to China’s National

Offshore Oil Company (CNOOC), one congressman said that he thought this would slow

China’s rise. In a private conversation, the first head of the U.S. Africa Command (AFRI-

45


COM) expressed deep concerns about China’s assertive Africa policy. Finally, a report

by the U.S. Joint Forces Command, published in November 2008, said that the CCP gave

the People’s Liberation Army (PLA) “considerable autonomy” to build up its military

presence near its oil shipping lines.

Chinese plans to build a “Blue Water Navy” and enhanced submarine capabili-

ties strengthened voices in the U.S. military and neo-conservatives who are calling for a

“hedging” strategy against China. A study by the consulting firm, Booz Allen, adopted

by the Defense Department almost 10 years ago argued that

China was building a “string of pearls” – a series of naval

bases from Gwadar, at the mouth of Straits of Hormuz,

through Bangladesh and Burma, ending at an upgraded

military airstrip in South China Sea on Woody Island. That

concept has great longevity, though the “pearls” on the

“chain” change. In 2009, after China helped the Sri Lankan

military defeat the Tamil Tigers, an anti-China website in the

U.S. added Hambantota, a harbor in the south of Sri Lanka,

to the string, replacing Dacca in Bangladesh, as well as a second military base in the

South China Sea. 4

Yet less panicked voices can also be heard. In 2005, the U.S. Assistant Secretary

of State for Africa, Dr. Jendayi Fraser said that she did not believe that China’s interest

or engagement in Africa is in direct competition to the U.S. “China has as great a right

to engage in Africa as any other country, [and] there is enough good to be done on the

continent.” One of the navy’s top officers, talking off the record, said that since it took

the U.S. 200 years to become a world naval power, it would still take China 100 years to

match that feat. On April 4, 2008, Adm. Michael Mullen, chief of U.S. naval operations,

invited Beijing’s navy chief, Vice Adm. Wu Shengli, to join a global effort to maintain

4 This is quite a strange idea, as the best harbour in Sri Lanka is the eastern city of Trincomelee.

Chinese plans to build a “Blue Water Navy” and

enhanced submarine capabilities strengthened voices in the U.S. military

and neo-conservatives who are calling for

a “hedging” strategy against China.

46

international maritime security, what the U.S. has called the “1,000-ship Navy.” Since then,

China has sent two cruisers to protect ships in the Gulf of Aden. Finally, in June 2008, then

Assistant Secretary of State for East Asia, Tom Christensen, presented a written testimony to

the U.S. Congress defining U.S. policy towards China’s growing engagement with Africa:

We see China’s growing activity on the continent as a potentially positive force for economic development there, which is a goal we share with China and many others. As President Bush has said, we do not see a “zero-sum” competition with China for influence in Africa. Nor do we see evidence that China’s commercial or diplomatic activities in Africa are aimed at diminishing U.S. influence on the continent.

In fact, Sino-American energy competition should be limited, as the two countries

draw on different regions for their oil. According to Pollack, the U.S. relies on Mexico, Can-

ada, and Latin America for over 50 percent of its oil imports, 18 percent from the Middle

East, and 20 percent on West and North Africa, while China depends on Africa for over 30

percent of its imports, 47 percent on the Middle East and very little on North or South Amer-

ica. Still, the two powers overlap in the Middle East and Africa, and after U.S. oil companies

withdrew from Venezuela after it nationalized some of their equity, China has increased its

share of oil from Venezuela.

Pariahs, Neutral and Allies: Three Types of U.S. Partners

As a hegemon, the U.S. can affect the supply, prices, and delivery of the resources

that China needs, thereby slowing China’s emergence as a great power. American compa-

nies can bid up the price of oil, influencing resource prices and China’s ability to buy those

resources. The U.S. military can threaten China’s oil supplies should conflict with Taiwan

or Japan erupt. American oil companies have worldwide resource partnerships and deep

pockets against which China’s neophyte national oil and resources companies must compete.

(Still, today China’s pockets are also deep). As the moral hegemon, America determines

which countries are violating international norms, such as nuclear non-proliferation or geno-

47


cide, complicating China’s energy relations with “pariah” states, such as Sudan, Venezu-

ela, and Iran. Chinese efforts to expand into Latin America or Africa trigger congressio-

nal hearings, while the U.S. media challenges China to improve its moral behavior. And

even if the U.S. cannot really disrupt China’s energy supplies, China believes it can, and

will, follow such a path to limit China’s rise. The result: as China evaluates its resources

security, it sees Americans everywhere.

To evaluate the potential for Sino-American competition, China’s energy part-

ners can be divided into three types based upon their ties to the U.S.: pariahs, neutrals,

and U.S. allies.

Pariahs: Iran, Sudan, and Venezuela

“Pariahs” are states whose international or domestic behaviour has gone beyond

the pale of what the U.S. deems acceptable by global standards; Iran building a bomb or

Sudan’s rampages in Darfur fall into this realm. These are largely countries from which

the U.S. has withdrawn – such as Sudan – or countries

where U.S domestic laws prohibit U.S. energy compa-

nies from doing business, such as Iran. They may be

targets of United Nations (UN) sanctions, largely at the

bequest of the U.S. or the European Union (EU). In any

case, the conflict with China often focuses on whether

China will support sanctions or use its influence to press

these countries to conform to global norms.

China’s homage to national sovereignty means that it often ignores the domestic

politics of its resources suppliers. While the U.S. is guilty of selective moral outrage un-

der its “Washington Consensus,” China’s apparent agnosticism about some international

norms exacerbates moral disagreements with the U.S. The International Monetary Fund

(IMF) or World Bank would have been able to use the funding spigot to much needed

“Pariahs” are states whose international or domestic

behaviour has gone beyond the pale of what the U.S.

deems acceptable by global standards; Iran building a bomb or Sudan’s rampages

in Darfur fall into this realm.

48

loans to extract economic and political concessions from African countries had China not

been willing to replace these funds. Arieh Neier, head of George Soros’ Open Society In-

stitute, who promotes an “Extractive Industries Transparency Initiative,” targeting African

leaders who enrich themselves, not their people, through non-transparent energy deals and

financial allocations, told the author in 2008 that Chinese loans to resource-rich African

states undermine this effort. According to Roger Robinson, vice-chairman of the U.S.-China

Economic and Security Review Commission, “The executive branch is willing to look the

other way on China on a lot of abuses because they want strategic momentum to be pre-

served; they want the North Korean thing resolved.” But, he commented, China’s strategy of

rushing into “pariah” states largely to cater to its energy needs “shows a stunning indiffer-

ence to human rights.”

China seeks ties with “pariah states” that are resource rich. As latecomers to the

energy game, China’s NOCs compete with Western firms

who have well-established ties in many oil rich countries;

China finds it difficult to say no to pariah states when

they ask for political, economic, and military support.

Pariahs also help China avoid direct competition with

U.S. suppliers, but since the U.S. has multiple agendas

around the world, these ties remain problematic for Sino-

American ties.

History links China with some of these states. Ties with Iran go back to the Shah,

long before the U.S. branded Iran a violator of international norms. Iran abjured from the

widespread international isolation of China that followed the 1989 Tiananmen crackdown,

and has loyally purchased military hardware from China. If the U.S. brands Iran an “axis

of evil” and calls on the world to support sanctions, must China turn against its old friend

because that friend wants to develop nuclear weapons? In American eyes, a “responsible”

China has the moral responsibility to promote non-proliferation. But researchers in the

China seeks ties with “pariah states” that are

resource rich. As latecomers to the energy game, China’s

NOCs compete with Western firms who have

well-established ties in many oil rich countries…

49


China Institute for Contemporary International Relations (CICIR) see no examples where

sanctions stopped a state from developing nuclear weapons once it decided to do so. So,

why should China complicate its relations with Iran in an effort that is very likely to fail?

Also, America’s commitment to these norms is not absolute; it agreed to supply India

with nuclear technology, despite India’s flagrant misuse of Canadian nuclear technology

to build it own bomb. Moreover, despite U.S. pressure, the amount of energy China gets

from pariah states encourages China to maintain these links. Iran is a major supplier of oil

and natural gas to China, and together with Sudan and Venezuela, these three states sup-

plied over 22 percent of China’s oil imports in 2007.

Neutrals – e.g., Angola, Kazakhstan, Russia

Many energy producing states are “neutral” vis a’ vis the U.S. They do not have

an ideological predilection to be anti-American, nor do they treat their citizens with such

contempt as to become a focal point of hegemonic concerns over human rights. Van

Guens of Clingandael noted in 2008 that in the coming decade, just 15 oil-producing

countries in the world will account for 75 percent of the net growth of oil supply capacity.

Neutral countries, such as Angola, Nigeria, Kazakhstan, which sell to the highest bidder,

hold much of this oil.5

One key player in this “neutral” world is Russia. Under the “power transition”

theory, Russia is China’s best ally to protect it from the U.S. Energy rich and militarily

strong, it, unlike the EU or Japan, has no love for the U.S. Military exercises between

Russia and China worry Americans, and long-term energy deals could be troublesome.

However, Sino-Russian energy cooperation runs hot and cold, as Russia plays China

much as it plays the rest of the world. Reluctance to ally with China on energy was

clearly demonstrated in the simultaneous negotiations that Russia carried out with China

and Japan over the Angarsk-Nakhodka pipeline. Also, the U.S. does not draw on Russia

to meet its own energy demands.

5 Speech at the Clingandael Institute, June 2008.

50

Allies – e.g., Canada, Australia, Saudi Arabia.

U.S. allies, such as Australia, Canada, Mexico, and Saudi Arabia, all of whom are

major U.S. energy suppliers, comprise the final category. Despite deep military and eco-

nomic ties with the U.S., these states feel the pull of China as it expands its energy pur-

chases, foreign investment, and economic cooperation. Losing such

dependable allies must worry the U.S., as China’s strengthened ties

with these states are not a “win-win” scenario. Moreover, successful

courting of U.S. allies would clearly indicate a major shift in global

power from the U.S. towards China. China has been particularly

active in Saudi Arabia. Before the recent Xinjiang riots undermined

China’s ties with the Muslim world, Kurtlantzick argued that countries in the Middle East

saw partnership with China as less inflammatory than ties with the U.S.

But in democracies, political leaders and parties can change, affecting China’s ties

with these states. Moreover, its communist system does not enamor China to democratic cit-

izens around the world. Thus, in the case of Canada, when the Liberal Party dominated, ties

were good; China was seen as a very viable partner, particularly as a market for Canadian oil

from the Tar Sands in Alberta. But the current prime minister, Harper, a staunch conserva-

tive and human rights advocate, has let ties languish – well into his second term, he had not

visited China and held acrimonious meetings with Hu Jintao. Moreover, the dramatic slide

in oil prices in 2008–09 made the costly extraction process from the Tar Sands prohibitively

expensive, leading China to seek supplies elsewhere.

Foreign Policy Triangularism and U.S. Hegemony

As a rising China builds ties with these resource rich states, it bumps into America,

who, as the global hegemon, has worldwide interests. So, as China enhances bilateral ties – a

“tete a’ tete” – with other states, it suddenly discovers that it is involved in a triangular rela-

tionship – a “menage a’ trios” – where the third partner in each triangle is the U.S. The U.S.

Successful courting of U.S. allies would clearly indicate a

major shift in global power from the U.S.

towards China.

51


can influence discussions in these bilateral negotiations, by forcing its issue – nuclear pro-

liferation, human rights, U.S. ties, and interests – onto the bilateral agenda. The American

government recognizes the “triangularism” that has emerged with China. Speaking at the

University of Southern California in October 2008, former Assistant Secretary of State for

East Asia, Christensen, remarked that “The U.S.-China relationship is much more about

third areas in the world than it has been in the past.”

Figure 3 shows how China’s bilateral ties have become trilateral for both Ameri-

ca’s enemies and its friends. As China rises and expands ties with each state in the figure,

it finds that the U.S. already has a relationship with each target of China’s foreign policy.

For example, when China decided to strengthen ties with President Hugo Chavez of Ven-

ezuela, those efforts were viewed negatively by the U.S. because Venezuela is the number

four oil supplier to the U.S. and President Chavez is actively building an anti-American

alliance in Latin America. Similarly, when Canada and China discussed shipping oil

from the Alberta Tar Sands to the PRC, the U.S. had an interest, since a 2001 report on

energy security described the Tar Sands as part of America’s “strategic reserve.” Though

the following statement may be apocryphal, then Vice President Cheney reportedly told

colleagues that it was acceptable if Canada sold oil to China, so long as “the Canadian

remember that it is really our oil.”

Sino-American tension over these energy contacts may fluctuate depending on

the level of Chinese government involvement in the deals. Writing in Minerals & Energy

in 2006, Ma and Andrews-Speed saw a spectrum running from countries, such as Sudan,

Iran, and Kazakhstan, where the involvement of China’s government is “strong and stra-

tegic,” through countries, such as Angola and Venezuela, where government involvement

is “significant,” to a large number of other states where China’s government plays only

a supporting role. While the U.S. may see the Chinese government driving these energy

acquisitions, China’s government may often not be so active.

52

Figure 3: Visualizing Sino-American Triangularism

The next section explores the extent to which China’s bilateral energy relationships

are actually triangular by looking at how China’s actions in these countries are affected by

U.S. interests. The three case studies include Venezuela (current pariah, with deep U.S. en-

ergy ties), Australia (U.S. strategic ally in Asia-Pacific region), and Angola (neutral, open to

influence from both the U.S. and China).

Playing in America’s Backyard: China and Venezuela

Projecting economic influence and “soft power” is far easier than projecting military

strength, particularly for China at the start of the 21st century. American military supremacy

remains unquestioned, particularly in the Western Hemisphere where, under the Monroe

Doctrine, the U.S. has dominated Latin America for close to 200 years. But growing trad-

ing and investment power helps China navigate America’s backyard. In 2004, 50 percent of

53


China’s outward foreign direct investment (FDI) went to Latin America. Visits by top

officials have become common. Vice-President Zeng Qinghong visited the Caribbean in

February 2005, as did Vice Premier and trade guru, Wu Yi. Hu Jintao visited four coun-

tries in South America in 2004 and signed many Memoranda of Understanding (MOUs)

with Brazil. And in September 2006, Wu Bangguo, the second highest Communist Party

leader in China, visited Brazil, Chile, and Uruguay. A key target of China’s expanding

influence in Latin America has been Venezuela.

Venezuela ships over 60 percent of its oil to the U.S. where it is refined, allow-

ing U.S. oil companies to dominate Venezuela’s oil industry. Yet

Venezuela’s president, Hugo Chavez, who sees China’s market

as a major force for diversifying sales and enhancing Venezuelan

independence from the U.S., wants to change the terms of trade

with the declining hegemon by expanding ties with the rising

challenger. Addressing a meeting of Chinese businessmen in

Beijing in December 2004, Chavez said that:

“We have been producing and exporting oil for more than 100 years, but these have been 100 years of domination by the United States. Now we are free, and place this oil at the disposal of the great Chinese fatherland.”(emphasis added)

On his weekly radio talk show, “Alo Presidente,” President Chavez in August

2006 announced that “China will help U.S.,” welcoming China’s role in Latin America

and seeing its rise as making the world more multi-polar. In May 2007, Chavez an-

nounced that foreign oil companies could hold only a 40 percent share of Venezuelan

fields, taking a 60 percent share of fields owned by U.S. ConocoPhillips and Exxon

Mobil in Venezuela’s Orinco Belt Project. In response, these American firms pulled out,

allowing Chavez to negotiate with the Chinese on much better terms for Venezuela.

However, apparently in March 2007, even before Chavez nationalized the Orinco oil

fields, the president of Chinese National Petroleum Company (CNPC) told Chavez that

Venezuela ships over 60 percent of its oil to the U.S. where it is refined, allowing

U.S. oil companies to dominate Venezuela’s

oil industry.

54

China would accept the new Venezuelan foreign equity policy, a fact that may have strength-

ened Chavez’ determination to push the Americans out; after all, their leaving would open

the door to bring in China. The result was a five-year deal between China and Venezuela.

China’s relations with Venezuela are deepening. Venezuelan military personnel have

trained in Beijing. China provided Venezuela with military radar systems and helped Ven-

ezuela launch its first satellite. Then, of course, there are the newly strengthened energy ties;

in fact, Chavez has announced plans to ship China one million barrels a day, which would

catapult Venezuela near the top of China’s oil suppliers. Little wonder that during Chavez’

August 2006 visit to China, President Hu Jintao called Venezuela a “strategic partner.”

Despite Chavez’ bluster, in July 2005, Watson of the National Defense University,

told the U.S. Congress that “Chinese involvement in Venezuela. . . . has been much more

circumspect than it is often portrayed.” China worries that Chavez will

pull it into a conflict with the U.S. In addition, Venezuelan oil has a high

sulfur content, making it very difficult for China to refine. In Watson’s

view, China’s real interest in Venezuela relates to orimulsion, a Venezuelan

proprietary process to remove petroleum from the Orinoco region’s coal

seams. Given China’s enormous coal resources, this technology could help decrease China’s

external dependence.

Yet Herberg of the Pacific Council on International Policy sees orimulsion as the

dirtiest form of energy produced on earth, so he doubts China would move down that road.

Moreover, according to Zha of Peking University, CNPC worries about being tied to Ven-

ezuela; they know Chavez is unreliable. In fact, according Kurtlantzick, immediately after

Chavez made a provocative speech in Beijing in 2005, China’s ambassador to Venezuela

told the local press that “China did not want to associate itself with those statements,” and

that “the natural markets for Venezuelan oil are North and South America.”

China worries that Chavez will

pull it into a conflict with the

U.S.

55


U.S. Views of Sino-Venezuelan Relations

After Chavez’ 2004 visit to Beijing, Congress called on the Congressional Re-

search Service to study the impact of a cut off of Venezuelan oil on the U.S.. Since then,

the U.S. has imposed an arms ban on Venezuela, prohibiting the sale of U.S. defense

articles and the licensing of services. On 2 March 2006, the U.S. House of Representa-

tives International Relations Committee Subcommittee on the Western Hemisphere held

a hearing entitled “Energy Security in the Western Hemisphere.” At the hearing, Dan

Burton, chair of the House Subcommittee asserted that the United States must “always

look at Latin America in relation to the Monroe Doctrine, we have concerns: Chavez,

Castro, Ortega, Morales in Bolivia, and their connections with

communist China.” Some at the hearing said China’s efforts

in the region meant that U.S. would face growing competition

from energy hungry nations and could not take Western hemi-

sphere energy for granted.

Today, Venezuela and the Andean nations are seeing

China play a larger role. That role remains largely economic,

but the rise of leftist leaders in the region gives China a con-

stituency for economic, political, and military involvement. China will move cautiously,

wary of angering its American friends. If U.S. distraction with Iraq is what has allowed

China the opportunity to play in America’s backyard, that distraction is waning. (Though

attention has shifted to Afghanistan.)

However, Venezuela differs from other pariah nations. The loss of American

influence in the Western hemisphere is felt more acutely than a loss of influence else-

where. Second, as mentioned above, Venezuela is the number four oil supplier to the

U.S.; the shift of that oil to China will reverberate within the American economy and

polity. Third, leftist leaders in Latin America who nationalize U.S. oil holdings and turn

access to them over to China are highly threatening. Finally, unlike other pariah states,

“Always look at Latin America in relation to the Monroe Doctrine,

we have concerns: Chavez, Castro, Ortega, Morales in Bolivia, and their connections with

communist China.”

56

such as Sudan and Iran, whose oil the U.S. abandoned long ago, the U.S. did not choose to

abandon Venezuela, though some of its largest oil companies have been pushed to make that

decision. Sudan and Iran have worrisome human rights or nuclear policies; but they are not

threatening to cut oil supplies to the U.S. today – they did so long ago. This fact alone makes

Venezuelan sctions more difficult for the Americans to accept and its impact on Sino-U.S.

ties much greater.

Courting America’s Allies

U.S. allies, such as Australia, Canada, and Saudi Arabia have accommodated

themselves to China’s new international status. The economies of the former two countries

have grown quickly in the past decade, and despite the developed nature of their economies,

much of that growth is based on the sales of resources to countries, such as China. But as

long-term American allies, if they adopt pro-China policies or prove reluctant to help the

U.S. contain China, bilateral ties will suffer.

U.S.-Australian relations have long been quite close; Australia is America’s second

most important ally in the Asia-Pacific region after Japan. The mutual defense treaty be-

tween Australia, the U.S., and New Zealand, called ANZUS, has been in effect for over 50

years. And, although Australia is not involved militarily in American plans for any Taiwan

scenario, the U.S. has relied heavily on it to be its deputy sheriff in East Asia, as Japan does

not play any major military role.

The July 1996 declaration, “Relations of Strategic Partners of the 21st Century

between Australia and the United States,” announced that instability in the Taiwan Straits

and the Spratly Islands created the need for “forward deployment of the U.S. military in

Australia.” Then U.S. Defense Secretary William Perry called Australia one of two Ameri-

can “anchors” in the Asia-Pacific Region and key to America’s positioning a missile defense

system in the Asia-Pacific region.

57


China in Australia’s Growth and Development

But Australia’s economy has been buzzing along at a rapid clip, with exports to

China a key driver of that growth. Between 1999 and 2008, exports as a share of Austra-

lia’s GDP (evaluated on purchasing power parity) remained constant, about 20.5 percent,

but both the GDP and volume of exports have increased by 51 and 57 percent, respec-

tively. Much of that growth is due to exports to China (Table 2).

Table 2. China’s share of Australia’s exports, 2003–2007 ($A mil.)

2003 2004 2005 2006 2007

Exports to China 9,779 13,533 19,156 23,708 27,754

Total Exports 147,950 156,430 179,732 207,421 216,376

China’s Share 6.6 8.7 10.7 11.4 12.8

China’s Rank 3rd 3rd 2nd 2nd 2nd

Source: Dept. of Foreign Affairs and Trade, Australia; Australian Bureau of Statistics

Conflicting data from the Australian Bureau of Agricultural and Resource Eco-

nomics (ABARE) shows China’s share of Australian exports in 2007 at 14 percent. Re-

gardless, a jump of 100 percent in five years is quite significant. Many of those exports

are natural resources, particularly nickel, copper, lead, and zinc, giving China enormous

leverage in these sectors. As Table 3 shows, China is a very significant player in copper,

iron, and zinc.

Table 3. China’s share of Australian mineral and energy exports (%)

2005-06 2006-07

Metallurgical coal 2.0 2.0

Copper (c) 74.0 56.0

Iron ore (c) 52.0 53.0

Lead 33.0 26.0

Crude oil 3.0 3.0

Zinc 15.0 32.0

Source: ABARE 2008, Australian Mineral Statistics. Note: (c) Excludes Hong Kong; (p) Preliminary

58

As Hirschman noted in National Power and the Structure of Foreign Trade, en-

hanced trade creates coalitions for better ties with key trading partners. Remarkably, 12 per-

cent of Australian grain production – not simply its grain exports – went to China in 2005,

which should form a pro-China lobby among traditionally conservative farmers. China has

begun importing liquefied natural gas (LNG) and coal from Australia, assisting the mining

industry. China’s purchases of natural resources also greatly affect northwest Australia, so

much so that Hu Jintao, during his 2008 visit for the APEC meeting, spent several days in

Australia’s northwest region, home to many of its resource. So, it is not surprising that a sur-

vey in 2007 showed that more Australians favored a Free Trade Agreement with China than

with U.S., even though the U.S. and Australia already had such an agreement

Trade’s Strategic Implications

Until recently, Australia’s increasing trade with China triggered an adjustment in

U.S.-Australian relations. While ties are strong – the ANZUS Defense Agreement remains

intact – voices from Australia increasingly called on the U.S. to work closer with China and

eschew its containment policy. A survey reported in the South China Morning Post in April

2005 showed that 58 percent of Australians had “positive feelings” towards America; but

69 percent had similar feelings for China. According to a December 2008 report by the Pew

Global Attitudes Project, while 59 percent of Australian’s held a positive view of the U.S.

in 2003, only 46 percent did so in 2008, below the 52 percent that held a positive view of

China in that same year.

While Australia’s opposition constantly accused the Howard government of being

America’s “deputy sheriff” in East Asia, riding along side the U.S. to maintain regional sta-

bility, during the trip to East Asia in April 2006 by Secretary of State Condoleeza Rice, Aus-

tralian Foreign Minister Alexander Downer distanced his country from America’s portrayal

of China as a growing regional threat. Australia similarly rejected Japan’s trilateral efforts to

contain China, involving Australia, the U.S., and Japan.

59


Following the election of the Mandarin speaking Rudd as PM, Australia

continued to distance itself from calls for the containment of China. In response to then

Japanese Prime Minister Abe’s proposal of a Quadrilateral Framework – Japan, Australia,

the U.S., and India – that targeted China’s rise, the new Australian Foreign Minister,

Stephen Smith, at the first Sino-Australian strategic dialogue after Rudd’s election victory,

assured China that Canberra would pull out of the “quad.” Stratfor, an international affairs

forecaster, said that,

Canberra is currently in the midst of plans to cast itself as the middle power, or geopolitical broker, between Washington and Beijing. . . This is not the first time that Canberra has tried to sweeten up relations with Beijing in order to alleviate Chinese concerns about Washington’s plans to expand its influence in the region.6

Yet American policy makers do not worry too much about Australia’s

China policy. Chris Hill, former U.S. Assistant Secretary of State for East Asia under

President Bush, told the author that while Australia did not want to discuss China’s

rise in a trilateral or quadrilateral format, Australians share Americans’ worry about

security. He saw little risk to the close ties between the U.S. and Australia, despite the

apparent shift in the Rudd government. More important, in their visit to Australia in

2008, Defense Secretary Gates and Deputy Secretary of State Negroponte did not see

Australia’s growing economic ties to China as a problem. “I don’t think there’s anything

incompatible with developing an economic relationship with China and also managing

our bilateral relationship and the alliance,” said Negroponte. “We both have important

economic relationships with China.” Gates added that he did not believe that Australia, or

any government, would “put its fundamental security interests at risk over an economic

relationship.”

In fact, several months into the Rudd administration Sino-Australian relations

underwent numerous crises, largely due to resource issues and security. Several efforts by

6 R. Blackburn, “Australia: Sliding into Position Between Beijing and Washington,” @www.STRA-FOR.com, 5 Feb 2008, accessed on 8 January 2010.

60

Chinese state owned enterprises to buy into Australian resource companies met with signifi-

cant opposition from shareholders, the Australian public, and Australia’s foreign investment

board. While Australians are glad to sell resources to China, they do not want Chinese state-

owned firms to own the resources or the companies that extract them. In 2009, Australia

announced the largest post-WWII injection of military hard-

ware, which the Australian Defense White Paper justified as a

hedging strategy against rising security concerns in the region.

While there was no reference to China per se, China expressed

concerns that it was a target of this increased investment. At

the time of writing, Sino-Australian ties suffered another blow;

Stern Hu, a mainland born Australian citizen was under deten-

tion for stealing state secrets related to China’s negotiations with Australia’s largest iron ore

developer, Rio Tinto.

Ironically, China is having problems with Australia precisely because it is open and

democratic. Political opposition sees China’s aggressive move into Australian resource sec-

tor as good grist for the political mill. The suddenness of China’s rise and its intensive ties to

Australia has aroused popular concerns.

A U.S. Neutral: Angola

Angola reflects the “neutral” oil producing states in terms of their ties to the U.S.

and China. Angola is not beholden to either the U.S. or China. Both backed the losing side in

the decade’s long, Angolan civil war, so both have been working to establish good political

ties since the mid-2000s. But America’s economic hegemony gave it a dominant position in

the oil industry through Chevron, the top player in the oil sector. Even when Cuban and Rus-

sian troops and advisors guided the MPLA in the civil war, Chevron pumped large amounts

of oil from its concessions in Cabinda in the north of the country. Yet interest in Angola in

both countries has grown significantly. In 2007, Angola was expected to be the fastest grow-

While Australians are glad to sell resources to China, they do not want

Chinese state-owned firms to own the resources or the companies that

extract them.

61


ing economy in the world due to the jump in oil prices and the post-Civil War construc-

tion boom. China has provided numerous development projects and massive loans to

the Angolan governments, receiving excellent oil concessions in return. This financial

largesse has helped Angola evade Western pressures, primarily from the IMF, for greater

transparency in how it allocates its oil revenues. On the U.S. side, the prestigious and

influential Council on Foreign Relations argued that given Angola’s status in Africa and

the global oil economy, the U.S. needed to be more active there.

China, Africa, and Angola

Beginning in 1978, China shifted the focus of its external ties from its Maoist

preoccupation with the Third World to the developed economies. With Deng Xiaoping’s

search for advanced technology, foreign investment, and Western management tech-

niques, Chinese foreign policy virtually ignored the developing world. Resource diplo-

macy, however, has heralded a new era of South-South cooperation and new challenges

by China to American interests in the Third World.

Between 2000 and 2008, China’s imports from Africa increased ten times, mak-

ing China the number three importer of African exports after the U.S. and France. While

overall trade in 2000 was US$10 billion and US$30 billion

in 2004, it topped US$106.8 billion in 2008. Between 2000

and 2008, China’s FDI in Africa surpassed US$5 billion, but

this number still falls well short of Western investment. In

2005, a large Chinese training program for African diplo-

mats let China present its case, relative to the American

case, to African diplomats. Beijing has signed at least 40

oil agreements with various African countries and has been building concrete bridges to

cement “political bridges” throughout Africa, helping Chinese firms compete with U.S.

62

Beijing has signed at least 40 oil agreements with

various African countries and has been building concrete bridges to ce-

ment “political bridges” throughout Africa...

interests there. Medical teams from China train counterparts in numerous African countries

and provide free equipment and drugs to fight AIDS, malaria, and other scourges.

The Africa-China Cooperative Forum, held in November 2006, was a historic event

in China’s African ties, with almost 50 leaders traveling to Beijing. With Africa supplying

over 30 percent of China’s imported oil, China’s top leaders, President Hu Jintao and Prime

Minister Wen Jiabao, visited over 14 countries in the region from 2005 to 2009, including

all major oil suppliers to China. A map of Western Africa, created by National Geographic,

showing the major oil fields in the region, explains why so many Chinese leaders have been

visiting Africa’s Gulf of Guinea (Figure 4).

Angola exemplifies China’s enhanced attention towards sub-Saharan Africa. The

two countries did not establish diplomatic ties until 1983. However, according to Paul Hare,

relations took a monumental leap in March 2004 when China’s Export-Import Bank (Exim-

bank) offered a US$2 billion oil-backed loan to Angola on very favorable terms.7 As a result,

when Shell Oil sold off its oil interests in Angola and arranged for Indian oil companies to

take over its 50 percent equity-stake in deep-water Bloc 18, Sonan-

gol, Angola’s national oil company, exercised its right of first refusal

and instead gave the equity stake to Sinopec, one of China’s NOCs

(The Financial Express, March 8, 2005). China’s increased clout

was further revealed when Sonangol turned France-based Total’s

concession over a part of offshore Bloc 3 to China, as France and An-

gola were involved in a bilateral dispute over monies and corruption. Then, in 2006, Sonangol-

Sinopec International (SSI) broke records, offering US$2.2 billion in signature bonuses to obtain

operating rights in relinquished areas of deep-water Blocs 17 and 18.

On the Chinese side, Angola has become China’s largest oil supplier – 22 percent of

total imports compared to 20 percent for Saudi Arabia and 11 percent for Iran. In 2003, An-

7 Paul Hare, “China in Angola: An Emerging Energy Partnership,” ChinaBrief, Volume VI, Issue 22 (8 November 2006): 4-7.

63

China’s increased clout was further revealed when Sonangol turned France-based Total’s concession over a part of offshore

Bloc 3 to China...


gola became China’s largest oil supplier in Africa, surpassing Sudan and Congo. In 2007,

Angola supplied nearly half (46 percent) of China’s crude oil imports from Africa, well

ahead of Sudan (19 percent) and Congo (13 percent). According to Ian Taylor, China’s

US$2 billion loan was tied to Luanda’s commitment to supply Beijing 10,000 bpd of crude oil,

which was to be extended to 40,000 bpd, as well as to award China substantial construction

contracts.

Figure 4. Where the Oil Is

Along with the country’s lucrative investment in Angola’s oil industry, Chi-

nese state-owned and private enterprises are increasingly involved in the host country’s

infrastructure, such as transportation and telecommunication. Beijing has made Angola

its largest foreign aid destination, but according to Ghazvinian’s Untapped: the Scramble

for Africa’s Oil (2007), 70 percent of the projects Angola contracted under the latest US$3

billion loan must go to Chinese companies. Meanwhile, oil-backed loans from China’s

export-credit agency, Eximbank, have funded a host of projects throughout Angola, rang-

64

Source: National Geographic Publication

ing from basic infrastructure such as rails, roads, and bridges, to community development.

The most ambitious project is the rehabilitation of the Benguela railroad, linking the port of

Lobito on the Atlantic with the Democratic Republic of Congo and Zambia, the old copper

route. A railroad linking Luanda with Malange, a major town in the interior, and the new

airport in Luanda are also under way.

During a visit in 2005, Vice Premier Zeng Peiyang agreed to nine cooperative

projects, including US$369 million in civilian telecommunications by ZTE, US$300 to $500

million in transport infrastructure, US$100 in military transmitters, and agricultural develop-

ment. The Angolan government welcomes Chinese loans and aid as they come without any

insistence that Angola improve its governance and fiscal transparency, as required by the IMF.

Neutral states, however, are not easy to manage. While pariahs need China to al-

leviate their global isolation and relieve pressure from the West, neutral countries, such as

Angola, shift allegiances quickly. In November 2007, despite strengthened relations, Angola

invited the Spanish to take over oil fields that had been promised to China, leading China to

cancel a further US$2 billion loan. Zha Daojiong of Peking University sees some opposi-

tion in China to continued activity in Africa as the Chinese now understand that Africans are

interested only in cash and will break deals even after they are signed.

America’s Views of China in Africa and Angola

The West and the U.S. in particular, has been surprised and troubled by China’s

increased activity in Africa. Eisenman and Kurlantzick see China benefitting due to U.S.

inattention to Africa.

Over the past decade, while the United States has too often ignored sub-Saharan Africa policy, other than counterterrorism cooperation and aid initiatives, Beijing has quietly established relationships with the conti-nent’s political and business elites… building close ties with countries from Sudan to South Africa, becoming a vital aid donor in many African nations, signing trade initiatives with more than 40 African states, and developing military relationships with many of the continent’s powers.8

8 Joshua Eisenman and Joshua Kurlantzick, “China’s Africa Strategy,” Current History (May 2006): 219-224.

65


In response, in 2006, the U.S. military created an Africa Command

(U.S.AFRICOM), whose first director saw China as a major threat to U.S. interests in

Africa. Though it was not clear if the command was targeted at China, the announcement

coincided with President Hu’s 2006 tour of Africa, convincing Chinese policy makers

that the U.S. intends to compete with it for geopolitical influence and resources on the

continent. According to Jiang Wenran, such a move will reinforce Beijing’s awareness

of the limitations of its global reach, and could strengthen voices inside China’s military

and policymaking circles that favor greater power projection capabilities.

Given long-term control and ownership in oil supplies, the U.S. has remained

Angola’s largest oil importer, ahead the EU and China. Since 1982, Angola has been

America’s second largest oil supplier in Africa after Nigeria. American oil companies,

such as Chevron and ExxonMobil, have remained oil giants in Angola’s oil production,

as compared to Chinese NOCs. Thus, in terms of control and ownership, China’s impact

on Angola’s equity oil market remains limited, but through acquisitions of rival stakes

has grown rapidly.

Western attention focuses on Angola’s extensive corruption. According to Ghaz-

vinian, NGOs, such as Global Witness or “Publish What You

Pay,” want Angola’s government to explain a US$4.5 billion dis-

crepancy between government revenues and expenditures. Neier,

who promotes George Soros’ Extractive Industries Transparency

Initiative (EITI), which targets African leaders who enrich them-

selves, not their people, through non-transparent energy deals,

believes that Chinese loans undermine this effort, and therefore, by omission, contribute

to corruption.

Yet not all American government officials see a China-in-Africa threat. As men-

tioned above, Deputy Assistant Secretary of State for East Asia, Christensen, saw room

for China and the U.S. in Africa. In December 2005, U.S. Assistant Secretary of State

NGOs want Angola’s government to explain

a US$4.5 billion discrepancy between government revenues

and expenditures.

66

for African Affairs, Dr. Jendayi Frazer, told China’s Deputy Foreign Minister, Dai Bingguo

and other officials that she did not believe that China’s interest or engagement in Africa is in

direct competition to the U.S. “I think China has as great a right to engage in Africa as any

other country, [and] there is enough good to be done on the continent.” She added, however,

that, “there are various countries [in Africa] where clearly our policies do not cohere.”

U.S. Congressman Ranneberger sought common ground with China: China’s growing presence in Africa is a reality, but it can increase the po-tential for collaboration between the United States and China. . . . China should have many of the same interests in Africa as the United States, based, among other elements, on our shared reliance on a global oil mar-ket, shared desire to diversify sources from the Middle East and shared concern over volatile oil prices.

Nevertheless, Ian Taylor sees growing Sino-Angolan ties and China’s non-inter-

ference in Angolan domestic affairs, in particular its acceptance of little transparency in oil

revenues, violates the “Western-centric” norms of the “Washington Consensus,” favoring

transparency. Taylor even argues that China’s unconditional credits to secure oil deliveries

from Angola have encouraged corruption; certainly the size of pre-

signature bonuses place a lot of money directly in the hands of gov-

ernment and company officials with little accountability. Though

Angola remains engaged with the IMF and World Bank, Sino-An-

golan ties have alerted Washington that transparency requirements

through international agencies might be less viable in Angola, or other non-transparent states

in Africa, when China provides loans on favorable terms.

Yet China’s energy gains in Angola have come at the expense of the French not

Americans. U.S. firms still dominate the oil sector in terms of production and purchases, al-

though China’s role is rising. Still, as a “neutral,” Angola is free to go with whomever pays.

China’s unconditional credits to secure oil

deliveries from Angola have encouraged

corruption...

67


Energy in Sino-American Relations: Nodes of Cooperation or Conflict?

While managing climate change and economic links strengthen Sino-American

relations, should both states follow their current developmental trajectories after the

current crisis subsides, energy competition may be a future bugaboo of U.S.-China ties.

Around, the globe, a cash-rich China shops for resources to concretize its holding in U.S.

dollars. Potential conflicts could emerge, so cooperation must be encouraged at the both

the regional and bilateral level.

NGOs play this role. In 2009, The Asia Society’s Center on U.S.-China Relations

and the Pew Center on Global Climate Change proposed a wide range collaborative pro-

gram, including clean coal technology, energy efficiency and

conservation, advanced electric grids, renewable energies,

emissions data collection and green technology financing, all

of which can decrease China’s environmental footprint. Two

decades of Sino-U.S. cooperation in science and technol-

ogy – over 30,000 projects – improved China’s technologies

in coal production and consumption, energy safety, and a

host of energy, environmental and health problems. Growing

collaborative research between American and Chinese scientists has benefitted China’s

development of clean coal technology and coal desulphurization. Organizations, such as

the World Resources Institute (WRI), headquartered in Washington, DC, help China’s

energy efficiency industries find venture capital, making it profitable for both Americans

and Chinese to cut greenhouse gases.

Government links expanded dramatically. A Sino-American Energy Policy Dia-

logue (EPD) was established between China’s National Development and Reform Com-

mission (NDRC) and the U.S. Department of Energy (DoE), in May 2004, to facilitate

policy-level bilateral exchanges on energy security, economic issues, and energy tech-

Two decades of Sino-U.S. cooperation in science and

technology... improved China’s technologies in coal production and

consumption, energy safety, and a host of energy,

environmental and health problems.

68

nology options. In July 2005, the Assistant Secretary of State for Economic and Business

Affairs, reporting to the Senate Foreign Relations Committee, called on the U.S. to engage

China on energy efficiency issues to decrease China’s fear of energy dependence. In De-

cember 2006, the EPD became part of the China-U.S. Strategic Economic Dialogue (SED),

calling for a vision of sustainable economic development while enhancing energy security

and environmental quality on both sides. In his inaugural speech to the SED in Beijing in

December 2006, then U.S. Treasury Secretary Paulson stated that energy was one of the

three pillars of the SED, together with “maintaining sustainable growth without large trade

surpluses” and “continuing to open markets to trade, competition, and investment.” In his

view, both countries “have shared responsibilities to develop alternative energy sources and

technologies, as well as to increase industrial energy efficiency.” These talks also prompted

Sino-U.S. “cooperation on strategic oil reserves in response to global energy and environ-

mental challenges.” More recently, in July 2009, during his first visit to China as Secretary

of Energy, Dr. Steven Chu signed an accord to establish a joint center on clean energy that

may propel the clean coal industry.

Internationally, both countries interact in multilateral fora on energy cooperation,

such as the Asia-Pacific Economic Cooperation (APEC) Working Group, the Asia-Pacific

Partnership on Clean Development and Climate (APP), and the International Energy Fo-

rum’s Joint Oil Data Initiative (JODI). China will soon to join the International Energy

Agency (IEA), which, given the size of China’s future demands, will facilitate global energy

management. The Obama administration is making global warming and energy key foci of

Sino-U.S. ties. All of this is good news.

But more could be done, particularly trilateral discussions. The “triangularization”

of Sino-American relations will increase, not decrease, as China continues to extend its ac-

tivities into more regions of the world. Both Herberg of PCIP and Richard Hu of Hong Kong

University see deep mutual anxiety at the core of the energy insecurity and the resource co-

nundrum felt by both China and the U.S. This tension will grow if China successfully woos

69


U.S. allies, such as Australia and Saudi Arabia, with its import power and capital exports.

Still, the U.S. must temper its response towards its democratic allies – a declining hege-

mon needs to hold onto its friends, while Australia’s cautious approach to China suggests

that in countries where public opinion influences government policy, China will have to

alter its behavior significantly before it can build a new and stable coterie of supporters.

Conclusion

The world is passing into a critical period. A new power is rising, China, while

the old hegemon, the U.S., remains quite strong. Whether the rising power has designs

to challenge the hegemon for global dominance will only unfold well into the future. But

simply by rising, China automatically challenges American interests around the globe,

for, as it strengthens its bilateral trade, its diplomatic ties and its resource extractive

capacity, it appears to take something away from the U.S. That is the essence of Sino-

American triangularization.

This global structure necessitates greater sensitivity by the two actors – sensitiv-

ity about how they are perceived by the other in these multiplicities of triangular ties. In

particular, China must be more sensitive to the fact that acts through which is enhances it

national interest and bilateral ties are often zero-sum, as such acts undermine America’s

national interest. China desperately touts it rise as a “win-win” scenario, but in many

cases, it cannot be so, and when it is not, feathers get ruffled in America.

Similarly, the U.S. must be more sensitive to the fact that China’s leaders must

feed the national economy and energy and resources are critical to keeping that fire

burning. Possessing a more mercantilist economy and mentality, China supports its

state owned enterprises in the energy and resource sector in their efforts to accumulate

resource; yet the government is also pulled along by these firms as they seek profits and

expand around the globe. No doubt, business is business, and inter-firm competition

70

drives the world economy. But making China’s search for energy an issue of U.S. national secu-

rity can push economic competition into the realm of interstate conflict.

Such complicated bilateral ties need better policy coordination and management by the

two governments. Domestic laws curtail American firms overseas, regulating their actions and

pointing them towards more ethical and more transparent behavior. China must do the same. If

China wants America’s green technology, it must strengthen its IPR regime. Given the tight ties

between the Chinese state and Chinese firms “going overseas,” such coordination and regulation

should be easy. Yet recent voices in China express the risks created when uncoordinated efforts

by SOEs overseas undermine China’s foreign policy and its international image. Still, it is not

surprising that Americans find little credibility in Chinese pronouncements that the “tail” (the

companies) is “waging the dog” (the Chinese state).

America’s bilateral policy may be better coordinated. The Strategic Dialogues will give

America a clearer voice when it speaks to the Chinese. But the target of this dialogue must not

be only to promote U.S. interests, but to find ways to help China adapt to the world and help

China’s energy and environmental sector. But there are numerous voices in the U.S. that wish to

inflate the China threat. For them, China’s global energy dependence is a godsend, an excellent

mechanism for limiting China’s rise and challenge to the U.S. But there are also ears in China

that thrive on expressions of American concerns about China’s rise. Mistrust of America runs

surprisingly deep within the Chinese bureaucracy; since most Chinese are Realists and believ-

ers of conspiracy theories, they expect the U.S. to try to stop their rise and see it doing so, even

when it is not. And while American concerns about China cannot, nor should not be silenced,

they must not drive America’s China policy. The message must be clear: the U.S. welcomes a

rising China that brings solutions to the bilateral, triangular and global problems.

Finally, if the hypothesis is correct, that America is a silent and often invisible player

triangularizing China’s bilateral ties, then many issues could be best discussed within a triangu-

lar format, such as a Sino-American-African dialogue or a Sino-American-Latin America one.

While the U.S. may hesitate to join such discussions, as they give credence and legitimacy to

71


China’s engagement in regions from which the U.S. would have preferred to exclude them,

such dialogue with a rising China is necessary. Many of the meetings could be “track-two,”

bringing influential academics and middle level policy makers together to discuss how China’s

rise in a particular region can be best managed to insure a “win-win” scenario. Conferences in

the West on these issues tend to be run by the U.S. congressional committees and reflect the

concerns of a declining hegemon. No doubt, both sides will hesitate to put their cards on the

table. But the first step is to get people to recognize that U.S.-China interdependence occurs at

the global level, and that regional competition poses a serious threat to the bilateral relation-

ship. Only then can the potentially negative implications of Sino-American triangularization

be better managed.

------------------------------------------------------------------------------------------------

David Zweig is the Director of the Center on China’s Transnational Relations and a Chair

Professor in the Division of Social Science, Hong Kong University of Science and Technology.

72

Appendix 1. China’s crude oil imports by country and region, 2001–2007 (%)

Country/Region 2001(a)

2002(a)

2003(b)

2004(b)

2005(c)

2006 (d)

2007 (d)

Saudi Arabia 14.6 16.4 16.7 14.0 17.5 16.4 16.1

Oman 13.5 11.6 10.2 13.3 8.5 9.1 8.4

Iran 18.0 15.3 13.6 10.8 11.3 11.6 12.6

Yemen – – 7.7 4.0 5.4 3.1 2.0

UAE – – – – 2.0 2.1 2.2

Qatar 2.2 0.7 0.7 0.1 0.3 – 0.2

Iraq 0.6 0.8 -- 1.1 0.9 0.7 0.9

Kuwait 2.4 1.5 1.0 1.0 1.3 1.9 2.2

Others – – – 3.3 2.5 – –

Middle East 50.9 47.6 47.2 44.9 44.6

Angola 6.3 8.2 11.1 13.2 13.8 16.2 15.3

Sudan 8.3 9.3 6.9 4.7 5.2 3.3 6.3

Congo 1.1 1.5 3.7 3.9 4.4 3.7 2.9

Equatorial Guinea 3.6 2.6 1.6 2.8 2.9 3.6 2.0

Libya – – – – 1.8 2.3 1.8

Nigeria 1.3 0.7 0.1 1.2 1.0 – 0.5

Algeria – – – – 0.6 – 1.0

Gabon – – 0.3 0.4 0.0 – 0.5

South Africa – – – – – 0.2 1.4

Mauritania – – – – – 0.6 0.4

Others – – – – 0.5 – 0.3

Africa 24.3 28.7 30.2 29.9 32.4

Russia 2.9 4.4 5.8 8.8 10.1 11.0 8.9

Norway 1.5 3.0 1.0 1.6 0.4 0.2 0.1

United Kingdom 0.8 1.8 0.2 0.1 – – 0.1

Kazakhstan – – 1.3 1.0 1.0 1.8 3.7

Others – – – – – – –

Europe 8.3 11.5 11.5 13.0 12.8

Brazil – – 0.1 1.3 1.1 1.5 1.4

Venezuela – – 0.5 0.3 1.5 -- 2.5

Argentina – – 0.1 0.6 0.7 1.2 1.0

Ecuador – – – – – 0.1 0.1

73


Peru – – – – – – 0.7

Colombia – – – – – – 0.5

Canada – – – – – – 0.3

United States – – – – 0.2 0.2 –

Others – – – 0.4 0.8 – –

Western Hemisphere 0.7 2.6 4.3 3.0 6.5

Vietnam – -- 3.8 4.4 2.5 – 0.3

Indonesia 4.4 4.7 3.7 2.8 3.2 1.5 1.4

Malaysia 1.5 2.4 2.2 1.4 0.3 – 0.3

Australia 1.2 1.7 2.0 1.2 0.2 0.3 0.3

Thailand – – 1.8 0.7 0.9 0.8 0.7

Brunei – – 1.5 0.7 0.4 – 0.2

Japan – – – – 2.0 1.7 –

Singapore – – – – – 2.9 –

Others – – – – 0.1 – 0.3

Asia-Pacific 15.2 11.5 7.6 7.2 3.5

Total 100.0

Source: (a) China Foreign Economic Statistical Yearbook, 2003, China Statistics Press.(b) Chen Wenxian and Mo Lin, “CNPC’s 2004: a fruitful year,” China Oil, Gas and Petrochemicals (1 Feb. 2005) at www.chinaaogp-online.com; China Foreign Economic Statistical Yearbook, 2004-2005, China Statistics Press.(c) Ministry of Commerce of China, http://www.mofcom.gov.cn; China Trade and External Economic Sta-tistical Yearbook, 2006, China Statistics Press; The Yearbook of World Economy, 2006/2007, China Social Sciences Press.(d) General Administration of Customs of China; The Yearbook of World Economy, 2007/2008, China Social Sciences Press.– Not Available.

74

Mikkal E. Herberg

Mikkal Herberg is the BP Foundation Senior Research Fellow for International Energy at the Pacific Council on International Policy. He also serves as Research Director on Asian energy security at The National Bureau of Asian Research and is a Senior Lecturer on international and energy at the Graduate School of International Relations and Pacific Studies, University of California, San Diego.

Previously, Mike spent 20 years in the oil industry in senior planning roles for ARCO, where from 1997-2000 he was Director for Global Energy and Economics, responsible for worldwide energy, economic, and political analysis. He also headed country risk management and held previous positions including Director of Portfolio Risk Management and Director for Emerging Markets. Mike writes and speaks extensively on Asian and global energy issues to the energy industry, governments, research institutions, and the media in the U.S., Asia, and Europe. He has testified before the U.S. Senate Foreign Relations Committee, the U.S.-China Economic and Security Review Commission, and the California Energy Commission. He is cited frequently in the news media, including The Wall Street Journal, Washington Post, South China Morning Post, Asahi Shimbun, National Public Radio, NIKKEI News, and Caijing. Recent publications include “Fueling the Dragon: China’s Energy Prospects and International Implications” in Energy and the Transformation of International Relations, Oxford Institute for Energy Studies; The Rise of Asia’s National Oil Companies, The National Bureau of Asian Research; “Energy Security in the Asia-Pacific Region and Policy of the New U.S. Administration”, in America’s Role in Asia: Recommendations for U.S. Policy from Both Sides of the Pacific, Asia Foundation; and China’s Search for Energy Security: Implications for the United States, co-authored with Kenneth Lieberthal, The National Bureau of Asia Research.

About the Authors

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David Zweig

David is Chair Professor, Division of Social Science, Hong Kong University of Science and Technology, and Director of the Center on China’s Transnational Relations. His Ph.D. is from The University of Michigan (1983) and in 1984-85 he was a Postdoctoral Fellow at the Fairbank Center, Harvard University. He taught for ten years at the Fletcher School of Law and Diplomacy, Tufts University (1986-1996). David studied in Beijing in 1974-76, and was a Visiting Scholar at Nanjing University in 1980-81, 1986 and 1991-92. He and his family have lived in Hong Kong since 1996.

David has written four books, including Internationalizing China: domestic interests and global linkages (Cornell Univ. Press, 2002), has edited four books, including Globalization and China’s Reforms (Routledge, 2007). He edited Special Issues of the scholarly journals, Pacific Affairs and Journal of International Migration and Integration, which focused on Chinese migration in the Asia Pacific Region. He writes on Chinese who have studied abroad since 1978, Hong Kong-Mainland ties, and China’s “Resource Diplomacy.” He is currently leading a research team analyzing how living on the Chinese Mainland affects the identity and political values of Hong Kong people.

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Documents

China's Rise and the Geopolitics of Energy - Pacific Council on