China end game
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Sizing Up the Competition --
Is China The Endgame?
by Dale Allen Pfeiffer, FTW Contributing Editor for Energy
Sept. 25, 2002, 16:00 PDT (FTW) - In the last 50 years of the United States' quest for hegemony, it has viewed its chief antagonists either ideologically (the Soviet Union and Red China), or economically (Germany and Japan). These antagonists were either overcome or co-opted. In the last decade of the 20th century, the U.S. occupied the unparalleled position of being the world's only superpower. Now, as we enter the 21st century, this unopposed superpower -- at the peak of its military supremacy -- may have an Achilles heel. It is running out of energy and so is the planet as a whole.
The 20th century was an era of technological, industrial and economic progress predicated upon the virtually unrestricted consumption of resources. But the rampant consumption of the 20 century cannot last, not on a finite planet where such consumption is dependent upon nonrenewable resources. The coming century will be an era of resource depletion, as the greed of the last century takes its toll upon the planet.
Be this as it may, the world public does not yet recognize this change. Consumer demand is ever increasing. In fact, the capitalist economy is dependent upon ever increasing consumption -- without it, the economic base will stagnate and collapse. And while consumer demand for the key item of energy is expected to increase over the next couple of decades, energy production has reached a plateau and will begin an unalterable decline within the next decade. Very soon there will not be enough.
In the coming years, continued U.S. hegemony will depend upon maintaining control and access to the world's dwindling hydrocarbon reserves, most of which are contained in the Middle East. In achieving this goal, the U.S. will have to find some way to deal with those countries which are expected to take the lead in rising energy demand. Those countries just happen to be the world's most populous countries, and all three are Asian. Ranked by population and projected energy demand, they are China, India and Indonesia.
With a current population of 228.4 million, Indonesia has proven oil reserves of 5 Gb (billion barrels), and in 2001 was producing oil at a rate of 1.49 million bbl/d (million barrels per day). Oil consumption for Indonesia currently stands at 1.022 million bbl/d.1 Oil production has actually declined over the past five years by an average of 2 percent per year. Of an ultimate 30 Gb in oil reserves which this country is expected to contain, 19.4 Gb have already been produced, leaving an estimated 10.6 Gb in independently assessed reserves (1.6 Gb of that yet to be found). There is, however, some discrepancy in the reporting of Indonesian reserves. The Oil & Gas Journal reports 5 Gb, while World Oil reports 9.67 Gb; independent review of industry assessments by C.J. Campbell suggests 9 Gb of reserves. Indonesia reached peak production in 1977 but did not hit the midpoint for depletion of its oil reserves until 1992. It is currently depleting its oil reserves at a rate of 4 percent per year.2 Natural gas reserves stand at 92.5 Tcf (trillion cubic feet). Natural gas production is 2.34 Tcf per year, and consumption is 0.97 Tcf per year. Indonesia currently exports 30 percent of its oil production and 51 percent of its natural gas production.3
Indonesia is a member of the Organization of Petroleum Exporting Countries, though it may have to withdraw in time as production declines from its aging oil fields. U.S. oil companies have been heavily invested in Indonesia's oil resources. Unocal, Conoco and Exxon-Mobil are involved in new projects slated to begin production within the next couple of years. However, even with these major new projects, Indonesia could become a net importer of oil by the end of the decade.4
On the other hand, Indonesia is the world's largest exporter of liquefied natural gas (LNG). Exxon-Mobil, Conoco, BP, Shell and Italy's Agip are all involved in Indonesian Natural Gas production. McDermott International has been awarded a contract for a major gas pipeline to Singapore. Yet despite its natural gas reserves, Indonesia still relies on oil for half of its energy needs. It is attempting to shift to domestic natural gas for power generation, but this attempt has been thwarted by lack of domestic natural gas distribution infrastructure.
Indonesia's energy demands have lessened slightly in response to the Asian financial crisis of the late-1990s, which severely impacted the Indonesian economy. The growth rate of the Indonesian gross domestic product (GDP) in 2001 was 3.1 percent, down more than a third from 4.8 percent in 2000. The GDP growth rate is expected to be 3.5 percent for 2002. Indonesia's economic collapse in 1998 saw 75 percent of Indonesian businesses filing for bankruptcy. The country is now indebted to the International Monetary Fund to the tune of $43 billion.5
As a result of the economic collapse, a number of domestic power generation projects have failed, and several proposed projects were cancelled. The country is expected to run into a domestic power supply deficit within a few years, but up to now foreign investors have shown little interest in new power generation projects.
With a current population of 1 billion, India is the second most populous country in the world.6 The population of India is growing much faster than the population of China, adding 16 million people per year.7 India has proven oil reserves of 4.8 Gb, a production rate of 734,000 bbl/d and a consumption rate of 1.9 million bbl/d. The difference yields a net import of 1.1 million bbl/d. India's natural gas resources are likewise meager, with 22.9 Tcf of proven gas reserves. Domestic natural gas production is just keeping up with current natural gas demand, at 752 Bcf.8 However, natural gas demand has risen faster than any other fuel in recent years, and domestic production cannot keep up with this growing demand. India is currently the world's sixth largest energy consumer.9
In total contrast to its population and the size of its economy, India is an energy poor country. India's ninth Five-Year Plan stated that India would run out of oil reserves by 2012. The plan emphasized the need for new discoveries. However, there have been no new major finds in recent years. In the late 1990s, India advertised the sale of 48 oil and gas blocks, in an effort to boost international investment in exploration. The initial response was extremely disappointing, with no bids received from major international oil companies. The domestic energy picture is further clouded by low recovery rates, averaging only about 30 percent. This is far below the world average.10
Natural gas does not fare much better. The proven gas reserves peaked a decade ago. Bangladesh is considered the most likely source for natural gas imports. However, Bangladesh is very sensitive to the idea of selling off its natural resources. India is also considering importing gas from Myanmar.11 Then there is the more costly idea of importing LNG, most likely from Indonesia and the Middle East. However, before this would be possible major investments in LNG infrastructure would be necessary.
Natural gas and oil pipelines from the Central Asian and Caspian Sea regions have been proposed, but these are complicated by the territorial dispute between India and Pakistan. The Enron-backed Dabhol power plant was to be powered with natural gas piped from Central Asia. This project, India's single largest foreign investment project, has significantly undermined foreign investor confidence in India. Troubled first by payment and contract disputes with the power plant's sole customer, the Maharastra State Energy Board (MSEB), the Dabhol project was also troubled by a lack of cheap fuel. Enron-backed Dabhol Power Corporation notified MSEB in April 2001 that it considered MSEB in breach of contract. Construction activity was suspended in June 2001. Enron is still seeking a buyer for this asset, along with three offshore oil and gas fields.12
Even the coal situation for India is rather bleak. India is the world's third largest coal producer after China and the U.S. Coal satisfies more than half of India's energy demands. Power generation consumes 70 percent of Indian coal, with much of the remainder consumed by heavy industry. Unfortunately, India's coal is of a low quality with a high ash content and a low calorific value. All coking coal must be imported.13 In 1999, India became a net importer of coal.14
While India is energy poor, its energy demands have grown considerably and are expected to continue to do so. By 2020 India's energy demand is expected to increase by more than 2.5 times its present consumption. This will be the result of population growth, urbanization, higher living standards, growth of industry, and growth of transportation demands for both goods and people.15
China is the world's most populous nation, with a current population of 1.3 billion. The GDP, currently $1.27 trillion, is growing at 6.7 percent, down from 7.3 percent last year. Its major trading partners are Japan, the United States, the European Union, South Korea and Taiwan. China has maintained a trade surplus for some time, which is responsible for a significant portion of the bubbling U.S. trade deficit. While China's trade surplus has been falling in recent years, this is largely due to imports of capital goods needed to refurbish outdated industrial facilities.16 This is taken to be an investment which could lead to a resurge in the trade surplus.
After the U.S., China is the second largest energy consumer in the world. The country holds 24 Gb in proven reserves with potential for significant new discoveries both inland and offshore. Oil production amounts to 3.3 million bbl/d. Oil consumption is currently 4.9 million bbl/d and rising. Net oil imports are currently 1.6 million bbl/d, and also rising. China holds 48.3 Tcf of proven natural gas reserves, with production at 0.96 Tcf per year, even with consumption.17 However, natural gas consumption is also expected to rise. China is 10th on the list of countries ranked by conventional oil endowment. For the past five years, oil production has risen by 1 percent per year, which is well below the rise in demand. To date, China has produced 27 Gb of oil, out of 52 Gb so far discovered. Another 5.2 Gb are estimated to still be awaiting discovery, for a total of 57 Gb. They are expected to reach the midpoint to depletion this year, with the production peak following next year. The depletion rate is currently 3.9 percent per year.18
China's primary energy consumption is now equivalent to a fifth of the Organization for Economic Cooperation and Development (OECD) total, and one tenth of the world's total primary energy consumption. The International Energy Agency (IEA) expects that China alone will account for 23 percent of world primary energy demand increase between 1995 and 2020. The OECD will account for another 23 percent, leaving a little more than half for the rest of the world (which will include India and Indonesia).19
Currently, China is the world's third largest oil consumer, behind the United States and Japan. It is expected to surpass Japan within the decade and by 2020 reach a consumption level of 10.5 million bbl/d.20 China only recently became a net importer of oil, as consumption exceeded production for the first time in 1993. By 2020, China is expected to import 8 million bbl/d, more than the projected net imports of Japan, Korea, New Zealand and Australia combined.21 Oil production in China was virtually nonexistent 50 years ago. Production rose from 0.5 mb/d (thousand barrels per day) in 1970 to 3.2 million bbl/d in 1997. In 1990, China exported five times more crude oil than it imported, yet by 1997 its imports had grown to twice the size of its exports.22
China has many other unexplored oil prospects, but the country seems to be pinning its domestic production hopes on the far western Tarim Basin. This is actually three separate basins in the Xinjiang Uygur Autonomous Region. This region, a desert the size of Poland, borders Kazakhstan, Kyrgyzstan and Tajikistan to the west.23 Estimates of its potential reserves still vary from a few billion barrels to 80 Gb. Many obstacles impede exploration and development: deep pay zones, high drilling costs, complex geology, high subsurface pressures and temperatures, a harsh climate (temperatures can hit 117 degrees Fahrenheit in summer and -86 degrees in winter24), and lack of infrastructure.25 Xinjiang also suffers from antigovernment violence blamed on its biggest minority group, the Uighurs.26
To get the oil out of the distant Tarim Basin and bring it to markets in the east and southwest, China has committed itself to a 2,604-mile pipeline system. However, with construction costs estimated at $5.2 billion and Tarim's output growing more slowly than expected, Chinese officials are struggling to figure out how to make the pipeline pay for itself. The Chinese National Petroleum Corporation (CNPC) has pushed on with smaller investments to build pieces of the network, hoping that these smaller investments will render the entire project unstoppable.27 The pipeline is so costly that gas will have to be priced at 35 percent above what buyers say they are willing to pay. It is expected that this pipeline will link up with the even larger "Silk Road" pipeline proposed to bring oil and natural gas from Kazakhstan.28 To finance the Xinjiang pipeline, China has formed a partnership with the Royal Dutch/Shell Group, Exxon-Mobil, and Russia's Gazprom.29
THE ENERGY SILK ROAD
In partnership with Exxon and Mitsubishi, CNPC has submitted a preliminary feasibility study for the world's longest gas pipeline. Dubbed the Energy Silk Road, this pipeline would start in Turkmenistan, and stretch across Uzbekistan and Kazakhstan to Xinjiang's Tarim Basin, a distance of some 4,161 miles. In Xinjiang, it would link up with the Tarim pipeline to continue the journey eastward across China. The estimated cost of $10 billion has stifled investor interest in the project.30 Similarly, a proposed oil pipeline from Kazakhstan eastward across China has spurred little investor interest due to the high price and the difficult terrain which the pipeline would have to traverse.31
While 90 percent of Chinese energy production is located inland, it is beginning to invest more money into offshore production, with significant prospects to be found in Chinese waters. The Chinese National Offshore Oil Corporation (CNOOC) is the company which handles offshore oil production and exploration. Proven offshore reserves are currently 10.7 Gb in 20 offshore oil and gas fields. Offshore production quadrupled between 1994 and 1996, and doubled again by 2000. CNOOC has hopes of major increases in production from fields in the South China Sea. Unconfirmed Chinese reports place potential South China Sea reserves at 213 Gb. However, in 1994 the United States Geological Survey estimated resources at 28 Gb.32 Exploratory geologists who have worked in the area or who have reviewed studies of the area, say that the results are very disappointing and estimate the South China Sea area could contain as little as a few billion barrels in isolated fields.33
Furthermore, the area is troubled by numerous territorial disputes involving China, Vietnam, Chinese Taipei, Malaysia, the Philippines and Indonesia. These disputes have prevented systematic exploration of the area. There is little indication that the disputing parties will come to an agreement any time soon.34 There is some likelihood that increased U.S. military involvement in the Philippines is at least partially due to potential or perceived energy resources in the South China Sea.35
IMPORTS AND SHIPPING LANES
Far from relying on inland pipelines for their future natural gas supply, China is planning on building and updating several LNG ports so that it might increase its imports of LNG. In a blow to Indonesia as the top world exporter of LNG, China has recently awarded a coveted natural gas supply contract to Australia.36 Part of the reason for favoring Australia over Indonesia is probably due to the questionable ability to further crowd traffic in the Strait of Malacca shipping lane. Currently 1,142 ships per day ply the waters through this entrance to the South China Sea. Virtually all Middle Eastern oil shipped to Asian customers must pass through the Strait of Malacca. A trans-shipment pipeline across the Malaysian peninsula has been proposed to ease congestion in the strait.37
ENERGY TRADE AND FOREIGN INVESTMENT
China currently imports oil from many countries throughout the world, including Iraq, Iran, Saudi Arabia, Sudan, Indonesia, Angola, Nigeria, Russia, Argentina, Bangladesh, Canada, Colombia, Ecuador, Mexico, Venezuela and the United States.38 China has attempted to diversify its energy imports for security reasons. However, like all other oil importers, it must turn to the Middle East for the bulk of its needs.
Likewise, China has had to open itself to foreign investment. This was one of the conditions for admission to the World Trade Organization. Among companies investing in China's domestic energy industry and infrastructure are Saudi Aramco, several Iranian companies, Enron (until their bankruptcy), Chevron, Shell, and Exxon-Mobil.39
ENERGY INFRASTRUCTURE AND GROWING DEMAND
China's energy problems are exacerbated by inadequate infrastructure. As mentioned above Chinese production is still growing at 1 percent, and production is not expected to peak until next year. However, energy consumption outstripped production in 1993. Even with all the domestic energy projects on the board, China's energy demand will still depend upon imports. Part of the reason for this is that energy reserves are located some distance from industrial centers and urban areas, and the infrastructure between energy sources and centers of demand have not been well developed.
Chinese industrial energy demand will more than double during the next 20 years. China's electricity demand has doubled within the last decade and is likely to quadruple by 2020.40
If energy demand in China, India and Indonesia is allowed to grow as much as analysts say it will, then these three countries may very well crowd the rest of the world out of the energy market. Furthermore, the studies quoted here do not figure in oil production peak and beginning production decline by 2010. These studies are predicated on rising oil production until at least 2020. Even the Oil and Gas Journal is now issuing warnings that oil production will not be able to meet demand by the end of the decade. The IEA forecasts that world demand for oil will be at 119 mb/d by 2022. Yet even they offer no word about how this demand will be met.41
It is plain that growing energy demands will bring China, India and Indonesia into conflict with the developed world. The United States in particular, as the top world consumer of oil, will likely either have to curb consumption to make room for other countries or will have to find some way to curb the demands of the emerging energy consumers. Moreover, competition for diminishing oil resources could threaten the U.S. dollar hegemony over world oil transactions.
As competitors for diminishing oil exports, Indonesia and India might not present major problems. Being so energy poor, India may have no choice but to take what they can get. In August Pakistani President Gen. Pervez Musharaf broke from his nation's recent political course of exchanging nuclear threats with neighboring India. Musharaf said he did not object to India accessing a proposed Central Asian natural gas pipeline originating in Turkmenistan and running through Pakistan. If the proposal is materialised, Pakistan could get [a] $400 to $500 million annual royalty, according to the Pakistan's DAWN English language newspaper. It is likely that the U.S. will have no serious problems in managing India's energy demands.
As for Indonesia, they are currently in the hands of the IMF and the World Bank. If these institutions stay true to their usual scam, Indonesia should soon be completely impoverished. However, Indonesia does control important shipping routes and valuable energy reserves. Therefore, it is likely that Indonesia will see continuing U.S. intervention for the foreseeable future. U.S. approved political leaders and foreign control of energy resources will keep Indonesia under control for at least a little longer.
As a starving world struggles for the remaining energy scraps, it is foreseeable that India and Indonesia may be left to starve, with much of the Third World. Or it is possible that a nuclear exchange and/or bloody war could be spurred on between India and Pakistan strictly for the purpose of population reduction. Such designs are despicable, but not out of the range of possibility for starving nations.
China, on the other hand, will be our major competition.
China is unlikely to become involved in an open war with the U.S. The annual Chinese military budget was $32 billion in 1997, or roughly an eighth of the $260 billion U.S. military budget for the same year.42 The U.S. has military bases throughout Asia, including the Philippines and Japan, and now in Central Asia. In the event of a war, the U.S. could easily cut off Chinese energy imports through the Strait of Malacca and from Central Asia. A direct war between China and the U.S. would be a disaster for both countries, and possibly for the entire world.
Though China will avoid open warfare with the U.S., they might become sucked into a war in the Middle East. Should the U.S. become involved in a protracted war in the Middle East, it is likely that the opponents would be supplied by China. In a U.S. military conquest of the Middle East, China would have to respond by aligning itself with the Muslim resistance. They would likely do anything short of sending Chinese troops to the Middle East to fight against the U.S.
This being said, China will have to deal with the U.S. empire, and it will need to force the U.S. into recognizing China as an equal power. This will most likely be achieved through economic means, and possibly through a series of minor wars in third-party countries. Economically, China is in a very strong position with regard to the U.S. The Chinese control the U.S. trade deficit, while the U.S. has very little economic control over China. Should the Chinese step up the production and export of consumer goods, the U.S. would have no choice but to swell its trade deficit even farther. And should China supply more goods than the U.S. can consume, the economy will suffer. Likewise, should China move away from the U.S. dollar as the international currency of trade, the results for the United States would be disastrous. Ethnic Chinese control 50 percent of the private capital in the Philippines, 70 percent in Indonesia, 80 percent in Thailand and Malaysia. The countries of the Pacific produce 60 percent of the world GDP. In recent sessions of the Asia-Pacific Economic Cooperation Summit there has been a lot of discussion about a Pacific alternative to the U.S. dollar. The golden Yuan has been the leading contender.43
THE FAILURE OF COMPETITION
In the competition for declining oil reserves, ultimately everyone will lose. In the process of struggling for world domination and energy domination, both militarily and economically, we will drain the world's remaining energy supplies without preparing for the coming transition. The net result will be a tremendous increase in suffering throughout the world, the further impoverishment of the world's population, and a semi-secure, semi-comfortable position of limited power for the elite few who manage to stay on top. Yet it does not have to be this way.
If the United States would cut its energy consumption back to sane levels, there would be enough to build a better world for everyone. Instead of maximizing profits and trying to corner the market, we need to undertake a program to restructure our society. We need to increase energy efficiency and conservation. We need a massive program to provide more energy-efficient housing, transportation and industry. And we need to move from energy-intensive, export-oriented, and hydrocarbon-based agriculture to more sustainable, locally oriented, organic agriculture. Along the way, we can build a more socially responsible, and more democratic society, where everyone will benefit -- or at least not as many will perish.
First we have to deal with our own greed and indifference. And we need to realize that competition will only result in misery. To get anywhere, we must act from a foundation of cooperation and mutual aid. There is very little time left to avoid a catastrophic future.
1 Indonesia; January 2002. http://www.eia.doe.gov/emeu/cabs/indonesia.html
2 Conventional Oil Endowment table, compiled by C.J. Campbell, 2001, revised January 25, 2002. ASPO-ODAC Newsletter #14, February 2002.
6 India, January 2002. http://www.eia.doe.gov/emeu/cabs/india.html
7 Developing Indicators of Energy Use in India, Feasibility Study Report-Draft. Workshop on Energy Indicators for India: Policies, Technical Issues and Data. 18-19 April, 2002; Neemrana Fort Palace, India. IEA document.
8 India, January 2002. http://www.eia.doe.gov/emeu/cabs/india.html
10 India-A Growing International Oil and Gas Player. March, 2000. IEA document.
12 Op. Cit. (note 8)
14 Op. Cit. (note 7)
16 China, June 2002. http://www.eia.doe.gov/cabs/china.html
18 Op. Cit. (note 2)
19 China's Worldwide Quest for Energy Security, 2000. IEA publication. http://www.iea.org/public/studies/china.htm
20 Op. Cit. (note 16)
21 Op. Cit. (note 19)
24 Politics, security worries drive 2,500-mile pipeline in China, Joe McDonald, Associated Press. August 14, 2002. http://www.bakersfield.com/oil/story/1594068p-1711407c.html
25 Op. Cit. (note 19)
26 Op. Cit. (note 24)
27 Op. Cit. (note 19)
29 Op. Cit. (note 24)
30 The Caspian Region, 2002. http://www.eia.doe.gov/cabs/caspian.html
31 Op. Cit. (note 19)
33 personal communication with the author
34 Op. Cit. (note 19)
35 The United States in the Philippines: Post 9-11 Imperatives; Oil and Gas in the South China Sea (part 2 of 6), Larry Chin; Online Journal; July 25, 2002. http://onlinejournal.com/Special_Reports/Chin072502/chin072502.html
36 Australia: Biggest Export Contract Ever; 2002-08-08. Pravda.RU
37 Op Cit. (note 19)
41 World Oil Supplies Running Out Faster than Expected, by OGJ editors, August 12, 2002. Oil and Gas Journal.
42 Military Dictatorship USA?, Dr. Norman D. Livergood. http://www.hermes-press.com/militarismindex.htm
43 It is not Euro to make the Dollar Crash, but Yuan, 2001-11-09. http://english.pravda.ru/economics/2001/11/09/20503.html