China Warns Japan Over Drilling In East China Sea

Monday, July 18, 2005

On the geopolitical stage a new Sino-Japanese row has to be closely watched. Chinadaily reported on the weekend that test drills by Japan's Teikoku Oil for gas and oil in a part of the East China Sea disputed by the two countries could lead to a confrontation with China. Chinadaily reports in an unusually aggressive tone:
Our government's sincere calls to solve the dispute through negotiation have fallen on deaf ears in Japan.
Giving Teikoku the go-ahead to test drill is a move which makes conflict between the two nations inevitable, though what form this clash will take is hard to tell.
Japan's unilateral action to start drilling, which flies in the face of international maritime laws, is not simply about new sources of energy. It reveals plainly the country's intention to take our Diaoyu islets for good.
China and Japan have long been divided over the demarcation of the continental shelf of the East China Sea. China has insisted on negotiation and appealed for joint exploration but Japan drew a "median line" without consulting China.
Lodging a protest over the issue with the Japanese side, Chinese Foreign Ministry spokesman Qin Gang said China would "retain the right to further react."
Given the important role energy issues play in the two countries, communication on the subject is bound to have a huge bearing on state-to-state relations.
Keeping a cool head and flexibility may be the way to shoot down disputes like this.
But Japan has strayed from the path of dialogue. If a confrontation were to result, the blame would sit firmly with Japan.
The Prudent Investor hopes the Iraq war will remain the sole bloody conflict about the globe's dwindling oil resources.
Apart from China's efforts to buy Unocal the Far Eastern giant is improving ties with other oil suppliers. Already a week ago China and Nigeria signed an oil supply pact with a volume of 30,000 barrels per day. This minuscule deal can be seen as first inroad towards more business with the oil-rich African country where China until now was successfully shut out by the western oil firms operating there. There are many more deals to follow, the following excerpts from a Los Angeles Times report show:
China dispatches legions of diplomats, surveyors and engineers across the globe to help quench its insatiable thirst for energy.
During the last two years, President Hu Jintao and Premier Wen Jiabao have taken oil executives on trips to oil-rich countries from Algeria to Uzbekistan to seal major deals. The government in Beijing has welcomed top officials from all 11 members of the Organization of the Petroleum Exporting Countries. A major point of a trip Hu made to Moscow this month was to secure access to Russia's vast reserves.
Chinese crews are building roads in Africa in exchange for the right to extract oil from remote regions. Viewers in Saudi Arabia, a nation that U.S. oil firms once had to themselves, now watch Chinese programs on satellite TV as China drills into Saudi sands. China is also taking advantage of tensions between the Bush administration and Venezuelan President Hugo Chavez to wrest oil from one of the largest U.S. suppliers.
To secure deals worth tens of billions of dollars, Beijing is cozying up to regimes in nations, including Iran and Sudan, that Washington labels pariahs.
Beijing Courts Washington's Pariahs
To secure energy for current and long-term needs, CNOOC and other Chinese firms have pursued a bold strategy: Court oil-rich nations Washington considers pariahs. China moves in when U.S. policy keeps ExxonMobil, Chevron-Texaco and other American companies from drilling in Iran, Sudan and elsewhere.
"They have to go where Western oil companies aren't," said Michael Lelyveld, senior analyst for PFC Energy, a Washington-based consulting firm.
China trades on an asset these countries value: its veto power as a permanent member of the United Nations Security Council.
70 Billion Dollar Investment In Iran
Beijing has reportedly threatened to veto any U.S. attempt to impose sanctions on Iran for pursuing uranium enrichment technology in what Washington alleges is a nuclear arms program. China has also sold Iran weapons, including long-range missile technology, that could threaten shipping in the Strait of Hormuz, through which 40% of the world's oil exports flow.
In October, Beijing used its friendship with Tehran to seal a $70-billion agreement giving Chinese companies a 51% stake in the huge Yadavaran oil field, Iran's largest onshore field, along with a promise to help develop the largely untapped area.
"With the current U.S. threat to refer Iran's nuclear case to the U.N., Iran needs friends in high places," said Reza Zandi, an energy expert and journalist for Iran's Sharq newspaper. "We want to be friends with 'big China,' and they want to be friends with us."
China and Iran Embrace Each Other
Deputy Iranian Oil Minister Seyed Mohammed Hadi Nejad Hosseinian said U.S. pressure had driven Iran into China's arms.
The U.S. Energy Department recently opened an office in Beijing, partly to discuss conservation and China's oil quest. U.S. officials also hope high-level dialogue will address Beijing's dealings with Tehran.
A Stake In Sudan
Friction between Washington and Beijing has also surfaced in Sudan, where state-held China National Petroleum Corp. has a 41% stake in Petrodar, a major Sudanese oil consortium. Sudan's relatively small production is expected to reach 500,000 barrels a day this year.
In September, Beijing frustrated a U.S.-led bid to impose tough U.N. sanctions against Sudan after government-backed militias committed atrocities against the non-Arab population in the Darfur region.
Sudanese Information Minister Abdel Basit Sabdarat said the U.S. had pushed Khartoum to limit its ties with Chinese oil companies. "But we refuse such pressures," he said. "Our partnership with China is strategic. We can't just disband them because the Americans asked us to do so."
Joint Venture In Uzbekistan
When Uzbek President Islam Karimov arrived in Beijing nearly two months ago, Chinese greeters handed him a lavish bouquet and guided him across a bright red carpet as Chinese oil executives waited in the wings to sign a $600-million joint venture.
"This is an important step for energy cooperation," Karimov told the People's Daily, the Communist Party's newspaper.
Weeks before Karimov's visit, Uzbek troops fired on protesters in Uzbekistan's Andijon area, resulting in 700 deaths, according to human rights groups. The government disputed that figure, saying only 187 people died, most of whom were "lawbreakers."
After the clashes, Beijing promptly said it would oppose any U.S. or European calls for a U.N. inquiry, describing the Uzbek crackdown as a justifiable move against "terrorism, separatism and extremism."
Business, Not Finger-Wagging Bigotry
In many parts of the developing world, China has made friends by avoiding the sort of finger-wagging of which Washington is sometimes accused.
"The Chinese don't get involved with religion, they don't get involved with political democracy arguments," said Hassan Husseini, a longtime oil consultant in Saudi Arabia.
"On the subject of women, they accept, and we accept, that we're different," he said. "They're very technically competent and they stay out of politics."
Han Wenke, deputy director-general of the Chinese government-supported Energy Research Institute, said Beijing did not need to apologize for striking deals with governments out of favor with Washington.
"This is just an economic relationship, not political or military cooperation," he said. "Another thing, I don't think China needs to follow the U.S. policy."
Other observers note that the U.S. does business with nations such as Saudi Arabia, which is often cited for torture and other human rights abuses. Human rights groups have criticized some U.S. oil companies for dealing with leaders who repress their people and siphon oil revenue into foreign bank accounts.
Whose Dictatorships?
Drew Thompson, a China analyst at the Center for Strategic and International Studies in Washington, said that "in some ways China is being held to a different standard than other countries."
"If there's a military dictatorship in Nigeria or less than free and fair elections, does that mean that ExxonMobil or Shell do not do business with them?" Thompson asked.
Besides diplomatic clout, China offers low-interest loans and promises of better roads and other aid that Western oil companies typically don't.
Beijing has won friends in Africa with big gestures, including a $1.2-billion, continentwide debt-forgiveness program.
It has also addressed the needs of individual countries.
In the slums of Luanda, the capital of oil-rich Angola, residents living amid garbage and open sewers have witnessed the march of modern electricity pylons through their neighborhood, thanks to the Chinese. A few miles away, on the city's outskirts, a modern village is set off from the surrounding shacks by a security fence, built to house government officials. It too was a gift from the Chinese.
Chinese-built roads, bridges and railroad installations are on the drawing board, part of a $2-billion infrastructure loan program Beijing signed with the country last year in return for oil.
From A(ngola) To Z(imbabwe)
Angola, which is China's second-largest supplier after Saudi Arabia and accounts for about 300,000 barrels a day, may be one of the biggest African recipients of China's largesse, but it's hardly alone. China's African footprint is growing - from the blue Chinese tiles adorning autocratic Zimbabwean President Robert Mugabe's palace roof and the smooth blacktop roads snaking across Rwanda to the new railways in Nigeria and a high-profile port project in Gabon.
The Chinese do what it takes to "lubricate their way into foreign oil deals," said Luft of the Washington-based think tank.
Exploration Deal In Gabon
President Hu's visit to Gabon in February 2004 helped Chinese companies secure an onshore oil exploration deal and a promise to be sold a significant amount of crude.
Even as America has become increasingly critical of Saudi Arabia's government on democracy and terrorism issues, China has courted the kingdom with everything from soccer matches to tourism.
In recent years, the Saudis have opened an office of the state oil company, Aramco, in Beijing and a consulate in Hong Kong and this month invested in a refinery in southern China. Beijing has also hinted at a deal to grant Aramco access to its huge retail gasoline market in return for guaranteed supply.
Saudi Robes Made In China
Today, dishdashas, the traditional white robes worn by Saudis, are mostly made in China, and cable channels in the kingdom broadcast Chinese programs. "I love to watch Chinese humor subtitled in English," said Husseini, the oil consultant. "It's so funny."
China's oil needs also mean it must venture off beaten paths. Sometimes, that means moving into the United States' backyard. Chinese firms have been able to capitalize on discontent with Washington in Ottawa and Caracas.
U.S.-Canadian relations have been strained in recent years by disagreements over the Iraq war, missile defense and U.S. restrictions on Canadian lumber and beef. In granting China access to its oil sands, Canada sends a message that the U.S. isn't the only game in town. The move also helps diversify the nation's customer base.
China's investments in Canada began slowly, with a $124-million stake by CNOOC in MEG Energy, a small, privately held company with a proprietary oil sand technology. PetroChina International signed a deal to participate in the billion-dollar pipeline project that would help bring the oil sand output to West Coast tankers.
Canada: US Not The Only Game In Town
The bitumen found in oil sand is a sticky deposit that must be converted into crude before it can be refined into gasoline or other fuels. Extracting the bitumen is expensive, but experts say it can be profitable, especially with oil prices in the neighborhood of $60 a barrel. Production is expected to jump from the current 1 million to 3 million barrels a day within a decade.
China has also benefited from dissatisfaction with the U.S. to the south. Analysts say Venezuelan President Hugo Chavez has used his growing partnership with Beijing as a way to poke Washington in the eye - Caracas says China will help Venezuela diversify its customer base.
Venezuela Intensifies Ties
During a visit to Beijing last year, Chavez pledged energy assistance to China. And in a reciprocal visit in January by Chinese Vice President Zeng Qinghong, Venezuela promised 100,000 barrels of oil a day and 3 million metric tons of fuel oil a year. No investment figures were given, but a competing bid valued a similar deal at $6 billion.
It's unclear, however, when the shipments will begin or if they will affect delivery obligations to U.S. refineries. The U.S. imports 1.3 million barrels a day from Venezuela, about two-thirds of that nation's output.
This month, China said it would boost Chavez's social programs by using Venezuelan workers to build 10,000 houses on state-owned land in Venezuela in the next two years.
And So Does Brazil
Disillusionment with the United States has also provided China with openings in Brazil, where Beijing and Brasilia are collaborating on projects to develop hydroelectric power and natural gas.
"The U.S. is attention to the strategic partnership with Brazil," said Luiz Fernando Furlan, Brazil's minister of development, industry and foreign trade. "We cannot stay free waiting for what Washington decides."
U.S. officials stress that they have no intention of blocking China's search for oil.
"We're not going to go across the globe trying to head off China every time we see them going after natural resources," said the State Department official.
Karen Harbert, assistant secretary of Energy for policy and international affairs, says Beijing's quest does not pose a "threat to U.S. interests or a threat to U.S. companies."
But it is expected to figure prominently in a U.S.-China dialogue scheduled for this month, led on the U.S. side by Deputy Secretary of State Robert B. Zoellick.
US Officials Worry About More Oil Wars
U.S. officials say China's reliance on energy from far-flung sources has led it to seek political stability in some regions and safety on the high seas - goals that dovetail with Washington's.
Harbert said the administration was stepping up efforts to work with China, other major energy consumers and oil-producing nations to ease supply problems. Some critics, however, say the administration should better safeguard U.S. national interests and manage tensions.
"In order to sustain this economic growth, emerging economies such as China and India will need more and more supplies of energy and minerals," Rep. Jim Gibbons (R-Nev.) told a congressional panel in March. "The United States must take a serious look at its energy and mineral supply strategy for the long term."
But although officials in both countries emphasize coordination, some analysts say China's hunt for oil could lead to a clash with the United States.
"The competition for oil could lead to armed conflict, particularly with China," Milton Copulos, president of the conservative National Defense Council Foundation, told a House hearing on global energy in March. "Lest this statement seem alarmist or farfetched, I would note that the Chinese are, for the first time, developing a blue-water navy capable of operating beyond their shores."
Some critics fear that, as its global clout grows, China will begin challenging the U.S. for military influence in Asia, a scenario Beijing rejects. Beijing says it has neither the will nor the ability to challenge the U.S. militarily and only wants to develop peacefully.
But the U.S. and China's neighbors worry that Beijing, if faced with shortages, could use its military to grab oil-rich marine fields. Tensions have flared with Japan over mineral rights in disputed islands in the East China Sea. China has used gunboats to force Japanese seismic ships out of the area. And analysts say a Chinese submarine caught on the Japanese side last year was testing Tokyo's vigilance in the resource-rich area.
Frictions With Taiwan and Others In Asia
China is also seeing growing friction over resources with some of its neighbors as its regional power expands. Taiwan has repeatedly chased off Chinese research vessels doing resource surveys in disputed waters off islands variously claimed by Taiwan, Vietnam and China.
Farther south, China said it had rights to the disputed gas- and oil-rich Spratly Islands in Southeast Asia, also claimed variously by Malaysia, the Philippines, Taiwan and Vietnam. In a bid to break the logjam, China early this month called for joint exploration to exploit some of the Spratly resources.
Turning To Russia And Its Neighbors
China increasingly has turned to Russia and its Central Asian neighbors. Russia and China are discussing a 1,500-mile, $2.5-billion pipeline that would supply 700 million tons of Russian crude over 25 years. And Beijing and Kazakhstan recently agreed to work on a $2.5-billion pipeline able to transport 20 million tons of oil a year to western China.
Since it began importing oil in 1993, China has intensified energy exploration abroad, especially in the last few years. It now boasts investments in dozens of oil and gas projects in 30 nations. CNOOC is the most Western of the Chinese oil giants, with USC- and MIT-educated, English-speaking senior managers. The firm has recruited former Secretary of State Henry A. Kissinger and international business leaders to sit on its advisory board.
Analysts say Chinese oil executives, who are beholden to the Communist Party, are not bound to follow the rules of the market. Beijing disputes that.
"Why are other countries' oil imports justified, but it is called 'a threat' when it comes to China?" Zhang Guobao, deputy minister of the National Development Reform Commission, asked at a Beijing forum in May.
Paying Top Dollar For Supply Security
The fact that China has paid top dollar for projects rejected by Western oil companies has left some analysts shaking their heads about what they see as Beijing's willingness to shell out too much for too little.
Harbert, the U.S. Energy undersecretary, said China's large state-owned energy firms had a "different risk profile" than U.S. companies that must answer to shareholders.
"Just by that difference in purpose, [Chinese firms] have the ability to go into areas where private-sector companies cannot bear that risk," she said.
Some of China's more far-flung deals, such as in Venezuela, reflect a "politically driven panic" to secure any source of crude oil without much regard to practical issues such as transportation and refinery capabilities, said Mikkal Herberg, an oil expert at the National Bureau for Asian Research in Seattle.
"The Chinese are in the mode to pay for supply security … and the economics come secondarily," he said.
Until now market forces are determining the race for oil. It is to be hoped the hot commodity will be dealt with by cool heads.


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