China’s growth will bring change

The government maintains price ceilings on petrol and other refined products. In recent years these have been adjusted upwards, but not fast enough to keep up with the rise in
international prices.

The government provides subsidies to refiners to compensate them for losses resulting from the regulated domestic pricing structure. While the long-term aim is to eliminate the subsidies, this process is expected to take a number of years.

In August analysts were suggesting that the government would be in no hurry to pass on the latest increases in international oil prices to the domestic market, because of concerns over domestic inflationary pressures, political sensitivity over the upcoming Communist Party Congress, and next year's Olympic Games.

The IEA described a ‘familiar sequence' of events starting with a surge in international oil prices, a move by PetroChina and Sinopec refineries to try and export more to take advantage of higher margins, a government exhortation to both companies to meet their domestic market obligations, and their reluctant response, under protest because of mounting downstream losses, with the government finally reacting with a slight adjustment to pump prices and a compensation package. ‘So far this year, the cycle has reached the fourth step; the fifth one will likely take place over the next few months' the IEA said in August.

Transport issues

China's arrival on the global scene as a heavy-weight importer is changing the logistics of the oil industry. As the economy sucks in record volumes of imported oil, much of it is brought in through risk-prone areas of the Middle East, or West Africa, as well as through potential ‘choke points' such as the Straits of Malacca. Beijing's security strategists are looking at ways they can reduce these risks.

One project under investigation is a proposed US $7 billion pipeline, that would involve crude being off loaded by tankers entering the northern Straits of Malacca, piped to the east coast of peninsular Malaysia, and then being re-loaded for onward carriage to China. It is not clear that this project will go forward, given its complexity and the likelihood, that a premium pipeline transit rate might be charged. Negotiations are continuing over a possible oil and gas pipeline linking Myanamar's western port of Sittwe with Kunming, the capital of Yunnan province in China, which would similarly by-pass the Straits.

The emphasis is clearly on opening new transport routes. China has for example funded most of the US $300 million cost of building a deep sea port in Gwadar, Pakistan, only 120 kms from the Pakistan-Iran border, with an eye on bringing in crude oil supplies overland from there.

A new 80000 bpd overland oil pipeline from Kazakhstan was opened last year. Russia delivers significant volumes of crude to China by rail tankers. President Vladimir Putin recently renewed his pledge to boost Russian oil exports to new markets over the next decade. Putin said he planned for 30% of Russian oil and gas to be exported to Asia within the next 15 years, compared to 3% at present. Beijing and Moscow have been in long-running talks to build a pipeline from eastern Siberia to the Chinese oil hub at Daqing. In August Russian oil minister Viktor Khristenko said that planning was well under way for first-phase throughput of 300000 bpd.

Oil and foreign policy

China's new dependence on oil imports and its concerns over transport and security of supply are, according to many analysts, likely to play an increasingly important part in shaping the country's foreign policy.

In the first half of last year, China's most important oil suppliers, in order of importance, were Angola, Saudi Arabia, Iran, Russia, Oman, Equatorial Guinea, and Yemen. Middle Eastern countries supplied 46% of China's import needs, followed by African countries with 32%. One obvious conclusion is that those two regions of the world are likely to loom large in Beijing's foreign policy thinking over the next decade.

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