06-10-04

China's huge appetite for oil to power industry and its electricity generation is a commodity-market tectonic shift whose outcome and strategic implications are unclear. What is clear is that China is in a great hurry to close deals on long-term supply, including that of gas.

There is also the trickier consequence to consider: Pipeline construction across international borders to reduce dependence on ocean supply routes that Beijing calculates can only get less secure.

China is the second largest oil consumer after the United States, accounting for 40 % of the global increase in consumption since 2000. For a random supply comparison, its Three Gorges Dam will add 10 % to its electricity output. An energy return that modest for an infrastructural investment that will run to $ 25 bn (S$ 42 bn) when the dam becomes operational in 2009 shows the enormous supply margin that China will have to make up for, if its economic expansion is not to falter.

The oil industry -- from OPEC producers to modern variations of the Seven Sisters and hedge-makers in oil trading hubs such as Singapore and Rotterdam -- are crunching permutations to see how they could be affected. The truth is that nobody can be certain how Beijing's frenetic deal-making will shape out.

Chinese Prime Minister Wen Jiabao received no clear word on his recent Moscow trip on whether Russia will favour a Japanese pipeline plan or China's decade-old offer to draw on the Siberian oil reserves by using Daqing in the north-east as the terminal. It is not a simple matter of Russia settling on the China pipeline, which is shorter and cheaper to build. Acceding to China's entreaties would restrict Russia to one customer. It would not seem an astute commercial move.

The rival Japanese line, using the Russian Pacific port of Nakhodka as the terminal, is much longer but Japan has offered $ 7 bn in lolly to pay for the construction and Siberian oil-field development. Russia could then sell oil not only to Japan, the main beneficiary, but also to China and South Korea.

Here, politics intrudes. If Japanese Prime Minister Junichiro Koizumi attaches as a condition the settlement of its claim to the Kuril islands, which Russia considers its territory, the deal could be as good as dead. The Kurils is an issue that tests notions of nationhood and honour in both countries.
Industry analysts think that, strategically, Russian President Vladimir Putin will call for China, especially since he has gained the upper hand in his power-play with the founder of the oil company Yukos, which had been a major China supplier. If Japan wants the deal, can Mr Koizumi survive not bringing up the Kurils issue? The dispute has been the one factor that has kept the two countries technically in a state of war since 1945.

China also has designs on Myanmar and Thailand in its oil supply search. This will have ramifications in the region, not to mention Singapore's position as an oil centre. A China-Myanmar pipeline that will load supplies at the Myanmar port of Sittwe in the Bay of Bengal to Yunnan province will remove some of the uncertainty of carrying supplies through the Malacca Straits.

The same thinking is behind persistent talk of Thailand opening oil terminals on the Isthmus of Kra -- with Chinese collaboration -- so that East Asian customers can avoid making the straits loop. At present, 60 % of China's oil imports come through the straits. What are the implications of a Myanmar that gravitates to the China orbit? How might these developments and hard-headed Thai calculations affect Singapore?

Source: The Straits Times