China sails troubled waters over oil
The nation's huge dependence on imports makes supply a security issue, writes Mark O'Neill in Shanghai
On June 23, a small boat packed with explosives launched a suicide attack on a Chinese tanker with 300,000 tonnes of oil in the South China Sea - but swift intervention by naval vessels saved it from harm.
It was, in fact, just an anti-terrorist exercise - the first conducted by the nation's military against an attack on an oil tanker - reflecting the growing anxiety of China's leadership over the country's vulnerability as an oil importer.
This year, crude oil imports will exceed 100 million tonnes for the first time, up from a record 91.12 million last year and 60.26 million in 2001.
Of the imports, more than 90 per cent come by sea, and more than 90 per cent of imported supplies are transported in non-Chinese tankers.
A war, a trade conflict, a boycott, or any event that stopped the foreign ships from sailing would be disastrous for China. With its negligible oil reserves, the country would soon face critical shortages.
One strategic alternative would be the construction of pipelines from oil-rich neighbours Russia and Kazakhstan, but negotiations have been slow and problematic.
In May, China and Kazakhstan agreed to build a 1,200km pipeline to bring 10 million tonnes of Kazakh oil annually from the Caspian Sea to Xinjiang by 2006, but China is reportedly unhappy with the price premiums it will have to pay.
Pipeline talks with Russia have been largely fruitless, as the giant oil exporter is undecided between a direct-to-China pipeline and one directed towards Japan.
Some Chinese scholars have floated the idea of building a pipeline from Myanmar's deepwater port of Sittwe to Kunming in Yunnan province, which would eliminate the need for tankers to travel through the Straits of Malacca, but the government has yet to comment on the plan.
With the pipeline alternatives confined to the theoretical, the government plans to follow the example of the United States and Japan, the world's two biggest oil importers, and build a fleet of very large crude carriers (VLCC) so that China can transport its own oil - even if it must still depend on the US navy to police the shipping lanes in the Middle East and Southeast Asia for the foreseeable future.
One of the key proponents of the plan is Sun Zhitang, vice-general manager of China Shipping Group.
'Our ocean-going firms have an acute shortage of VLCCs, so we have to rely on overseas shipping firms,' he told a seminar on ship-building last week in Shanghai, to mark the fifth anniversary of the state-owned China Shipbuilding Group. 'By 2009, we should be capable of shipping 30 per cent of China's oil imports, triple the current level.'
Mr Sun's company and China Ocean Shipping Group (Cosco), the country's biggest shipping firm, have both ordered VLCCs with a capacity of 300,000 deadweight tonnes (dwt).
Last month, Cosco announced that it would double its crude oil fleet to nearly four million dwt from the current 19 tankers and 1.94 million dwt.
On June 18, Cosco signed a framework agreement with Sinopec, one of China's big three oil companies. Cosco will provide crude oil shipping services in exchange for guaranteed business from Sinopec.
Last December Sinopec signed a similar agreement with China Merchants Group, a Hong Kong-based conglomerate owned by the Beijing government. The group controls Ming Wah, whose fleet includes eight VLCCs, with a ninth 300,000 dwt tanker expected from Japan soon and a tenth of similar size due for delivery in April next year.
The new policy will not be cheap. A VLCC costs US$65 million to $80 million to build and is expensive to maintain.
Some economists argue a more sensible option would be not to spend money building a new fleet, but rather to exploit the existing surplus of VLCCs by leasing them and buying second-hand vessels.
But this is a minority opinion. Most believe that China's economic growth and future status leave it with no option but to follow the example of the United States and Japan.
Japanese vessels carry more than 200 million of the 250 million tonnes of crude which their country imports each year.
This plan is good news for shipyards in Japan and South Korea, especially because China Shipbuilding Group - which built six million dwt of new capacity last year, or about 10 per cent of the global total - is overstretched and can meet only a limited portion of the demand for VLCCs in the near term.
China's quest for oil security is casting a giant shadow over its future.
'All the indications are that the centre of China's diplomacy is shifting from political issues like the fight against terrorism to co-operation in energy and especially oil,' said Fang Changping, a professor at the International Energy Strategy Research Centre at People's University.
'The oil problem is not just an economic issue but is a matter of national security.'