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Mainland oil security lies in diversity of suppliers

Tom Miller

PetroChina's discovery of a giant new oil reserve in Bohai Bay may ease the mainland's dependence on expensive imports but the country still will need to diversify its foreign suppliers to ensure stable imports for its growing needs.

This year, for the first time, the mainland looks set to import more oil than it produces at home.

Crafting a successful oil import strategy is now not just a matter of economic management but one of national security.

China imported 14.4 per cent more oil last year to 145.2 million tonnes, according to the customs ministry.

That was 4.1 percentage points higher than in 2005, and a similar rise is expected this year.

Analysts forecast oil imports to reach 250 million tonnes by 2010.

Just 15 years ago, the country was a net oil exporter but its rapid economic growth and industrial production has since transformed it into the world's second-largest consumer and third-largest importer of oil, behind the United States and Japan.

Beijing's energy strategists said strengthening oil security would require diversification of both supply and import routes. In particular, China's dependence on oil from the Middle East makes it vulnerable to supply shocks caused by war or trade sanctions.

More than 40 per cent of China's oil imports originate in the region, a proportion that has remained constant over the past 10 years.

The Middle East's huge reserves mean that it will remain a major supplier, although China has been sourcing more from Africa, making Angola, Congo, Equatorial Guinea and Sudan four of its top 10 foreign suppliers.

Last year, Angola nearly overtook Saudi Arabia as China's top supplier, exporting 23.5 million tonnes of crude, up 34 per cent on the year before. Angola accounted for 16 per cent of China's total imports, despite producing only around 2 per cent of world oil.

Shifting to African suppliers does not, however, solve what President Hu Jintao has referred to as the 'Malacca dilemma' - imports from Africa must follow the same precarious sea route through the Strait of Malacca as those taken by shipments from the Persian Gulf.

More than 60,000 vessels, carrying up to one-third of the world's trade, pass through the narrow sea lane separating Malaysia, Indonesia and Singapore every year. These include tankers carrying 85 per cent of China's oil imports.

'The real concern for China in the Malacca Strait is the US. It is a choke point where the US can cut off oil supply,' said Erica Downs, a China energy specialist at the Brookings Institution in Washington DC.

Despite attempts to build up its navy, China still does not have the military muscle to defend shipments through foreign sea lanes.

It could finance alternative transit routes overland, allowing oil tankers to dump their load before entering the strait.

However, that would be a more expensive option.

Pakistan's President Pervez Musharraf has pushed the idea of an 'energy corridor' for China via the port of Gwadar, already heavily financed by the mainland government, for several years.

Beijing has also considered building a pipeline from Sitwe in Burma to Kunming in southwest China.

Still, a more realistic option would simply be to increase oil imports overland from Kazakhstan and especially Russia.

Although currently the world's biggest oil producer and second-largest exporter, Russia accounted for only 11 per cent of China's oil imports last year.

'As China's closest neighbour with a rich supply of oil and gas, the Chinese government would love to have better neighbourly support,' said Rachael Tsang, head of oil and gas research at Japanese brokerage Nomura.

Russia sent a mere 7 per cent of its total oil exports to its neighbour last year, despite sharing a 4,200km border. Saudi Arabia, Angola and Iran all exported more.

'There is a huge sense of mistrust between Russia and China, especially from the Russian side which has real fears about China. They worry about selling arms and oil to a country that one day might constrain Russian interests,' said Dr Downes.

That mistrust has delayed ambitious plans to build a pipeline that would carry 600,000 barrels of oil per day from Taishet in eastern Siberia to China, nearly doubling the current total of daily imports.

Nevertheless, the first phase of the planned pipeline is due to reach the town of Skovorodino, just 70km from the Chinese border, next year.

With the Kremlin now committed to exporting one-third of its oil to Asia by 2020 under its national energy strategy, the mainland government can almost sniff the sweet scent of crude wafting over the border.

However, Russian crude alone will not solve China's oil supply dilemma. Dr Downes warned: 'China doesn't want to be too dependent on Russia. Diversity is key.'

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