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China's growing appetite for oil

BEIJING -- Several times a year, Liu Shangqi dutifully leaves his comfortable life at home for trips to far-off countries on behalf of his employer, China National Petroleum Corp., China's largest oil company. A mild-mannered chief engineer, he does not go out of a sense of adventure.

"I always feel nervous on these kinds of trips, because the local employees tell us the place isn't safe," said Liu, who recently spent a few weeks in Venezuela with Chinese workers who are there year-round to develop an oil field in service of China's worldwide quest for petroleum. "Most of the time we are stuck in three places -- the place to eat, the place to work and the place to sleep."

Laboring far from families and friends, the oil workers have "no real life," said Liu. "The only thing that keeps them going in such hard places is to find oil there for China."

If Liu's description makes China's oil workers sound like old-fashioned worker-heroes in a national propaganda campaign, that's not far off the mark. China's state-run oil giants, which until a decade ago focused almost exclusively on domestic production, are engaged in a highly competitive worldwide search for oil that symbolizes the nation's growing appetite for natural resources.

The country's oil consumption has doubled in the past decade, and China last year surpassed Japan as the world's second-largest user of petroleum -- consuming about 6 million barrels a day.

The super-heated Chinese economy has been responsible for recent worldwide price increases for commodities ranging from coal to copper to iron ore. But the country's most significant effect on world markets is from China's shift in the past decade from oil exporter to major oil importer.

Chinese oil consumption has accounted for nearly 40 percent of the growth in global oil consumption since 2000. That rise in demand has come not from the growing number of cars on China's roads but from energy-hungry power plants and industrial boilers. Even if the country's economic growth slows, as many experts expect, the rapid pace of urbanization will continue increasing China's oil consumption, possibly doubling it within a decade.

Meanwhile, production growth at China's own fields is leveling off, magnifying the country's dependency on imports. China now imports a third of its oil -- about 2 million barrels a day -- and some analysts estimate that by 2020, imports may account for up to 75 percent of China's oil.

"Chinese oil consumers are the driving force" in today's oil prices, said Scott Roberts, director in Beijing for Cambridge Energy Research Associates. Partly because of Chinese demand, tanker rates for delivering petroleum from the Persian Gulf have doubled, raising the barrel price for everybody.

Cutting back

China's oil imports feed an economy that is starving for energy. This year, most Chinese provinces have had at least temporary power cutoffs, and the problem is most pronounced in the places where the economy needs electricity the most. For lack of power, factories routinely shut production in the thriving coastal provinces of Guangdong in the south and Zhejiang and Jiangsu in the east, and in China's largest city and de facto economic hub, Shanghai.

The State Council, China's Cabinet, recently asked all cities to reduce energy consumption, as China's top planners come to grips with the notion that the country cannot sustain its own growth. Major cities have launched less sweeping campaigns to hold down electricity use, including prohibitions on neon lights and limits on the use of air conditioning.

In the hot southern city of Guangzhou, shopping malls, hotels and factories are urged to set their air conditioners a couple of degrees higher. Businesses that set their air conditioners lower than 77 degrees are subject to criticism in the state news media, according to the Guangzhou Daily
The energy crunch is of vital concern to China's Communist Party leaders. Beijing considers economic growth a key to social stability, which in turn preserves their power. To maintain growth, the government must create tens of millions of jobs a year, and to create those jobs, the government needs ample supplies of petroleum.

Provinces are fast-tracking the construction of new electrical generating plants, but their power is not yet available. That has led to even higher demand for oil, as the government keeps operating old oil-fired plants, and factories rely on generators powered by diesel fuel and oil.
The one part of demand that has not exceeded supply has been gasoline for cars, despite an astounding 75 percent increase in car sales last year in China. Because of the way oil is refined here, China produces more gasoline than it needs and still exports it.

But with rising incomes and relentless migration to the cities, China's car boom has only just begun. That inevitably means the construction of yet more suburbs and roads, and higher consumption of gasoline.

To ensure stable supplies, China may soon begin buying even more oil than it needs, and create its own strategic oil reserve, modeled on that of the United States.

Some oil industry experts suggest that the current rise in prices is a product of a fundamental misreading of China's needs.
"China's oil demand caught the world by surprise," said Mark Qiu, chief financial officer of CNOOC Limited, the third-largest China oil company. "That shock happened to be pretty severe."

Investors for a time didn't direct enough money into oil production, he said, but that trend has been reversed and could drive prices down.
But anxious about the country's future growth, China has pushed oil companies to search aggressively for new oil supplies overseas.
'Oil is always political'

In addition to projects in Venezuela, Chinese companies are investigating or participating in oil and natural gas ventures in more than a dozen countries. Chinese companies have also recently expanded oil ventures in Saudi Arabia, and China National Petroleum Corp. hopes to revive an oil deal that it signed in 1997 with Iraq.

China has done business with other countries where American and European companies can't or won't go, such as Sudan. China National Petroleum Corp. bought a controlling stake in an oil field there in 1997.

Sudan's regime is accused of encouraging a genocidal campaign against its non-Muslim populations, but Sudan is also China's fourth-largest source of oil imports. This month, a Chinese firm began building a quarter-mile-long bridge over the Nile in northern Sudan with $10 million in funding from China National Petroleum Corp.

"Maybe in such areas, a bigger company -- for example, the U.S. or European companies, from the developed countries -- maybe they don't want to go there. But China will go there, because there are no other places," said Liu, the engineer. "The places we go, either the conditions to drill for oil are pretty hard, or they have serious security problems that developed countries would not dare step their foot in."

Qiu, of CNOOC, said business comes before politics for his firm. But, he cautioned, "Oil is always political."

It's still unclear whether China's decision to pay a premium to diversify its oil and gas resources will prove worthwhile. There is, for example, a decision made this month by CNPC to build an 800-mile segment of a $3 billion, 1,800-mile pipeline from Kazakstan to China.
Supporters say it gives China an important foothold in the oil-rich Caspian Sea region. But one oil industry expert in Beijing called it a "white elephant" deal, noting that China will still have to rely on the world market to meet its oil needs.

Liu now spends up to a few months each year applying his expertise at heavy crude oil fields abroad. It is not the life Liu expected when he chose to go into petroleum science in 1980, when China was producing all of its oil at home and exporting around the world.

"There aren't a lot of good oil fields left, and it's not easy to get into those good ones," Liu said. "The competition from American and European companies is fierce. And second there is competition from the other Chinese oil companies. They all want to go overseas to develop oil."

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