China's Growing Petroleum Demand Will Be Big News in 2004

The international oil and gas industry is witnessing an attention shift from the promise of Russian oil supply to the realities of Chinese oil demand.

While an infatuation with potential Western multinational access to Russian crude oil supplies dominated oil and gas business headlines in 2003, the headlines in 2004 will likely focus on China.

China has a problem. It is a net oil importer--the globe's second largest after the United States. And its demand for crude oil is growing rapidly as domestic production flattens and a booming economy requires ever-greater amounts of energy. Chinese petroleum imports grew 27 percent last year and continued to surge as the year came to a close.

Indeed, the nation witnessed a 10 percent rise in imports between November and December.

China accounted for 35 percent of the increase in global oil demand in 2003, according to the International Energy Agency. It is expected to account for 30 percent of the increase in 2004, even with a recovering global economy.

And it won't stop there. Over the next half-decade, Chinese imports could double to 4 million barrels per day, the IEA suggests.

The reasons are easy to identify. There is growing fascination with the automobile. China is now the world's fastest expanding market on a percentage basis for four-wheeled transportation. The nation added two million automobiles to its fleet of 20 million vehicles last year, and new car sales could hit 10 million annually over the next half-decade as automobile ownership increases five times to more than 100 million vehicles.

But it is not just gasoline. China's enormous factory output of goods for global export requires petrochemicals to manufacture the plastics used in toys, technology, and trade. At the same time, the Chinese rely heavily on oil derivatives such as diesel for power generation and construction.

Diesel apparently was in short supply as 2003 came to an end. In many areas of the country, electricity shortages are a fact of life, thanks primarily to rapid growth in industrial demand. Power rationing means factories operate only at night, or shut down one day a week in many provinces. Two-thirds of China's 32 provinces are under some form of power rationing, according to London's Financial Times.

The short supply situation has attracted the attention of the federal government, which is encouraging construction of additional power generating capacity. Despite these efforts, some observers expect the problem to worsen in 2004 and take between two to five years to balance out.

In the meantime, power shortages may cap Chinese current GDP growth of eight percent per year--or even reduce it.

Power shortages are the leading reason Chinese crude oil imports are expected to rise six percent in 2004 according to a variety of estimates, though it is generally conceded that the volume could be much higher yet because of factors such as the newly established program to develop a Chinese strategic petroleum reserve.

China is now experiencing the same concerns as the West: namely, energy security. Half of its oil imports originate in the Middle East, hardly a paragon of stability these days. It is one reason the international diplomatic community is witnessing closer arrangements between the Chinese and Saudi Arabia, which now sends students to Chinese universities. Meanwhile, Saudi Arabia and ExxonMobil are in the late stages of negotiation with the Chinese to construct a major refinery for the nation.

The complexities of growing energy demand are prompting the globe's most populous nation to look at alternatives to Middle Eastern supplies, however. China National Petroleum Corp. (CNPC) is rumored to be in the hunt for a $200 million investment that will provide controlling interest in the Stimul joint venture, which controls licenses to 200 million barrels in reserves near Kazakhstan's western border.

The Caspian region is especially attractive to the Chinese. There are ongoing talks with Iran to develop oil or gas reserves, while a wide array of projects in other Caspian states such as Azerbaijan occasionally surface in trade publications. The Chinese also revived talks this summer to construct a 3,720-mile pipeline linking the region with mainland China. It involves a potential investment of $4.3 billion over 20 years.

Nor are the Chinese limiting themselves regionally. The nation has been active in Latin America since 1993. Talks are underway to develop 200 million barrels in potential reserves in Ecuador. On the other hand, Chinese investment in Venezuela has been hampered by the political turmoil surrounding the Hugo Chavez presidency.

Similarly, the Chinese are looking intently at Russian supplies. It has not been easy. CNPC lost out on a bid to purchase the Russian government's share of Slavneft in 2002 after an unusual bidding procedure awarded the government's share to Tyumen Oil Co. under questionable circumstances.

Additionally, the Chinese have aggressively pursued a pipeline connecting northeastern China to the eastern Siberian oil fields. However the Russian government appears to favor an alternative and more expensive route to the Pacific Coast, which would be partially financed by the Japanese. Right now, China imports Russian oil via train. It hasn't helped that last summer's agreement to purchase Russian oil via pipeline was made with Yukos, which has fallen out of favor in Russia.

Meanwhile, the Chinese are trying to build their own strategic petroleum reserve, which will add further demand to the global spot market in 2004. The country has earmarked $725 million to create four strategic stockpiles. The initial stockpile would cover 55 days of forward demand, eventually expanding to 70 days by 2008. That should bring a sigh of relief to global oil purchasers. With oil markets experiencing continuing volatility, the last thing the world needs is for the Chinese to be forced into a panic-buying situation because of global supply disruptions.

There are strategic implications for the future. China will become a major competitor in global markets. The need could encourage the Chinese to endorse greater cooperation on international diplomacy or it could force the regime to pursue its own interests.

Either way, China has been a latecomer to the global oil banquet. And it is hungry. Assuaging that hunger will have significant implications for global oil demand over the next few years, but it also creates an expanding market for Western multinationals and state-sponsored oil companies who are pursuing increased global production.

It will be easy to gauge the progress. Watch the business headlines in 2004.