China Embarks On New Petroleum Diplomacy With The Greater Middle East & Africa.

*** In An Era Of Rising Oil Prices And Burgeoning Demand For Fuel, The Issues Of Energy And National Security Begin To Be Linked *** The Withdrawal Of CNOOC's Bid For Unocal Will Have Major Geo-Strategic Implications On Both China And The Americans

*** There Are No Rules For Competition To Secure Energy Supplies Out Of The GME And Africa Other Than The Law Of The Jungle

*** Tokyo's Thirst For Oil Was A Catalyst For Its War With USA In 1940; The Kamikaze Were A Necessity, In View Of A Shortage Of Aviation Fuel In Japan

NICOSIA - Having become the second largest energy market in the world, China has embarked on a new diplomatic approach aimed as securing stable petroleum supplies from the Greater Middle East and Africa. Dedicated "petroleum diplomats" are being sent to Chinese embassies in the two regions. One of the prospective geo-political projects Beijing is considering is a crude oil pipeline proposed to be built from Libya to Port Sudan, on the Red Sea, for long-term supply to China.

The Greater Middle East, including the CIS, accounts for the bulk of the world's proven reserves of petroleum (oil and natural gas). The African continent contains potentially huge reservoirs of high quality oil, which is low in sulphur and much in demand in China, India and other fast-growing Asian economies.

In Nigeria, state-owned Chinese oil companies are bidding for oil E&P blocks and have responded favourably to Abuja's proposal that they invest in the country's refining sector in return for upstream advantages. These companies are trying to secure long-term supply of light/sweet crude oils from Nigeria and other West African countries (see survey of Nigeria in this week's APS Review).

Unlike the old Japanese model of creating oil E&P companies out of "golden parachutes" for MITI bureaucrats, Beijing has adopted a three-pronged strategy for the Chinese to secure long-term energy supplies: (1) establishing durable state-to-state partnerships with petroleum-rich countries, such as the one being developed between China and Venezuela; (2) buying major petroleum producing companies like Unocal, although the state-owned Chinese National Offshore Oil Corp. (CNOOC Ltd) recently had to withdraw its $18.5 bn bid for the US major (see overleaf); and (3) making use of its being one of the five permanent members of the UN Security Council to back projects of geo-political importance, such as the proposed pipeline from Libya to Port Sudan.

The pipeline was first proposed to the Japanese government in April this year during a visit to Tokyo by a Libyan delegation under Saif ul-Islam al-Qadhafi, the favourite son of the Libyan ruler. The idea was to make Libyan crude oil available to Asia through the Red Sea. Its geo-political significance was to have the pipeline pass through the huge but impoverished and war-torn western Sudanese province of Darfur and to project Sudan as a potential corridor for African energy supplies to the Red Sea.

Asked to help finance the project, however, Tokyo's response was one of surprise combined with disbelief. Chinese diplomats have since taken up the matter for study, this being one of many new energy projects likely to become of geo-political importance.

At the same time, Beijing is pinning its hopes on potentially huge petroleum prospects in Sudan, where China's largest overseas oil production is located. Sudan's light/sweet crude, the Nile Blend, is particularly popular in China. The crude is 33[degrees] API with 0.04% sulphur. It has low metals content.

Beijing's top state-owned energy group, China National Petroleum Corp (CNPC), is the biggest oil producer in Sudan. CNPC leads Sudan's three main oil E&P consortia.

Implications Of Competition For Energy Supplies: A provision in the recent energy legislation which the US Congress passed recently and which would have delayed a takeover of Unocal by CNOOC was behind the latter's Aug. 2 withdrawal of its $18.5 bn offer. That episode will have major geo-strategic implications for both China and the US.

In withdrawing its offer, CNOOC cited political opposition in the US. While many observers say the American fears were overblown, the anxiety on Capitol Hill highlighted the question whether energy markets should be marked by international competition or co-operation. The contest between China and the US is as much about strategy as resources.

While China has a strategy to secure energy resources which should guarantee its future economic growth, the US has relied on markets. America's focus has been on promotion of an expanding and increasingly free global energy trade, rather than on a strategy to secure its energy needs.

David Phillips, of the Council on Foreign Relations, has a widely shared US view: Washington needs "a comprehensive energy strategy which is part of our national security strategy". Oil is the key fuel for transportation. India and China, the world's most populous nations, are scrambling to ensure the foundation of their expanding middle class - an economic growth suggesting that in the near future oil demand could outstrip supply. There are no rules governing competition for secure supplies, nor is there a system conducive to international co-operation in energy security. The law which exists is that of the jungle. In an era of high oil prices and burgeoning demand for fuel, the issues of energy and national security are being linked.

Phillips says: "When we isolate other countries, it becomes harder to secure their constructive participation in addressing America's needs". Nations are negotiating bilaterally for pledges of long-term petroleum supplies, rather than buying them on the open market. State-run NOCs control about three-fourths of the world's oil resources. Energy rivalries could accelerate, if those supplies result from diplomacy rather free trade.

In arguing against CNOOC's bid for Unocal, Frank Gaffney, president of the US Centre for Security Policy, last month noted in testimony to Congress that Japan's thirst for oil was a catalyst for its war with America 65 years ago. Although China did not take a military approach in its quest for oil, Gaffney warned: "We ignore at our peril...the fact that Beijing is engaged in an even more ambitious effort to acquire legal title to energy resources".