Construction is under way on the second part of the 1,000-km (621-mile) Sino-Kazakhstan crude oil pipeline (Atasu, Kazakhstan, to Alataw Shankou, China). The project is under the direction of China National Petroleum Corp. (CNPC) and KazMunaiGas, the Kazakhstan National Petroleum Corp.
The first phase of construction is designed to move 10 million tonnes/year (tpy) and cost $700 million. Work will be completed in 2005.
Phase 2 of the project is planned for completion in 2011 and will increase Kazakhstan's oil exports to China by 20 million tpy. The project is especially important to China because it reduces the country's dependence on the Malacca Straits for its oil supplies.
China's Malacca Straits problem
Currently, China imports about half of its crude oil, and 80% of those imports move through the Malacca Straits (map). Located between Sumatra and the Malay Peninsula, the Malacca Straits is about 600 miles long and connects the Andaman Sea and the South China Sea.
China, already a net oil importer, is increasingly dependent on imported oil. And because of its location, the Malacca Straits is economically and politically significant to China.
Almost 60% of the boats and ships in the Malacca Straits are Chinese, and in the past, China was not concerned with security and the safety of Malacca shipping; today, however, it has become a very sensitive issue for several reasons.
First, the region's pirate activities are rampant, and they are a serious threat to passing ships. More than half of the pirate assaults in the world take place in the Straits. In 2001, according to Guoxue Luo in the June 19, 2004, issue of the Chinese language newspaper Xinmin Weekly, there were about 600 robberies by pirates on shipping in the straits, and the economic loses were more than $10 billion.
Second, in recent years, the Malacca Straits has been threatened not only by pirates, but also by terror groups who could cause serious problems. The straits are narrow and at places very shallow. Suicide attacks against oil tankers—some carrying more than 100,000 tonnes of crude oil—could close the Malacca Straits for a long time.
Finally, the fact that so much commerce depends on the Malacca Straits creates a lot of concern. Even without pirate or terrorist attacks, ship collisions and possible sinkings could be a serious problem. Just a few days of blockage would greatly affect China's petroleum supply.
Also, complicated international relations in the region have caused China much concern. The US military presence in this region worries China. In April 2004, the American commander in charge of the Pacific Asia region published a new antiterror "Maritime Affairs Safety Plan of the District." According to this plan, the US would station Marines and special forces in the Malacca Straits to guard against criminal activities by terrorists and pirates.
Considering increased tensions across the Taiwan Straits, China is worried that America will intervene if it tries to solve the Taiwan problem by force. Stopping Chinese oil tankers passing through the Malacca Straits would be a convenient way for the US to take action against China.
Sino-Myanmar oil pipeline
There are other options open to China to import crude oil. China sees Myanmar as a possibility because of experience during World War II when a highway was constructed across India, Myanmar (then known as Burma), and China to support the war effort. In January 1945, American and Chinese construction units completed the road, and for the next 8 months moved thousands of tons of supplies to the front.
Starting point for a Sino-Myanmar pipeline project would be Sittwe, a Myanmar port city that can handle 200,000-dwt tankers. Crude oil would come from the Middle East and the pipeline would move it to China's Yunnan province.
That route—compared to the usual way through the Malacca Straits to Zhanjiang, a port city in southern China—reduces the distance by at least 1,200 km, and it is much safer. The route also is through a mild climate, and construction of the pipeline would be much easier than the Sino-Kazakhstan oil pipeline project.
The $2 billion estimated cost of the Sino-Myanmar pipeline, however, is a considerably higher cost/mile than the Sino-Kazakstan pipeline.
Because China is an important trading partner, a good relationship with China is in Myanmar's national interest. Currently Myanmar, India, and China share a stable relationship in the region, and between Myanmar and China there are no historic disagreements.
What is important now is that all the ASEAN (Association of Southeast Asian Nations) countries have closer ties to China. Being a member of ASEAN, Myanmar is no exception. That reduces the political risk for the Sino-Myanmar oil pipeline route.
Other possible routes
Another possibility for China to alleviate dependence on the Malacca Straits for petroleum imports—besides a Sino-Myanmar pipeline—is the construction of a pipeline through Pakistan or Bangladesh.
A Sino-Pakistan oil pipeline would pass near the port city of Karachi, Pakistan, to Xinjiang, China, while a Sino-Bangladesh oil pipeline would run from Chittagong, Bangladesh, through Tibet.
There are various arguments for and against these two routes. The Sino-Pakistan oil pipeline route would pass through areas that suffer bad weather, especially in the winter. The Sino-Bengalese oil pipeline would pass through a mountain range, and construction costs could be very expensive. This project also would still need to pass through India, with whom China has some policy differences.
In addition to constructing oil pipelines directly to China, Thailand is looking at the possibility of an oil pipeline passing through it to China instead of possible canals on the Kra Isthmus (map). This would be still another rival to the Sino-Myanmar pipeline project.
Construction of a canal in the Kra Isthmus was the first option to divert Middle East and African oil imports from the Malacca Straits. But the Kra Isthmus canal project has lots of problems. It is still under consideration but would take 10-15 years to dredge and cost at least $28 billion.
As for Thailand, the area south of the Kra Isthmus is still subject to disruption by terrorists and pirates. Therefore, political, economic, and technical issues have basically negated this project.
The oil pipeline project that replaces the canal still brings the Kra Isthmus into use. The pipeline would cost only about $600 million. However, China feels the project is not worthwhile because the pipeline does not go directly to China and oil tankers would still be needed to ship oil to Chinese harbors. Moreover, Chinese experts still worry that US forces stationed in Thailand would be able stop shipments across the Kra Isthmus if there were a conflict.
Central Asia
Besides China's petroleum transportation security problems, there is still the problem of petroleum supply resources. Domestic petroleum deposits are gradually being exhausted, and China controls little foreign petroleum resources. Because of that, Central Asia, especially Kazakhstan, has become an important element in China's solution to the Malacca Straits problem.
China would also like to import oil from Russia because of that country's huge reserves and the fact that the two share a long common border.
Russia, however, does not want to be part of China's raw material base, and that shows with the premature death of the proposed Angarsk-Daqing pipeline project. Russia's OAO Yukos insisted on constructing the pipeline, and it was counting on the pipeline to China to provide an impetus for expanding its production capacity (OGJ Online, Nov. 3, 2003).
Now it is not clear if a branch line of Russia's Far East pipeline can be constructed to Daqing. China's best hopes for petroleum security still lie in Central Asia, especially in Kazakhstan.
KazMunaiGas believes Kazakhstan can increase its annual crude oil production 200% by 2015. Compared to 396 million bbl of production in 2003, the country anticipates it will reach 1.2-1.3 billion bbl in 2015, which is almost the total annual production of China.
According to US Department of Energy statistics, 40-50% of the oil deposits in the Caspian Sea region are concentrated near Kazakhstan's continental shelf. Kazakhstan, therefore, doubtlessly will remain in the center of the Central Asian petroleum picture.
Kazakhstan and China already have completed the Atyrau-Kenkiyak part of the Atyrau-Atasu-Dushanzi pipeline. The second part of the project, Atasu-Dushanzhi, is currently under construction. After the third phase is completed, Kazakhstan's Caspian Sea crude oil can be transported to the Xinjiang refining base through the pipeline. First-stage capacity of the pipeline is 20 million tpy, and the prospective capacity is 50 million tpy.
The Sino-Kazakhstan pipeline intersects a pipeline from Mosk, Russia, to Chardzhou, Turkmenistan, at Atasu, giving it a connection to Russia's West Siberia pipeline network. Russia could also loop the Atasu-Alataw-Shankou pipeline to increase petroleum exports to China.
After completion of the Sino-Kazakhstan pipeline, Caspian Sea petroleum will have an eastern outlet that will be competitive with the western Caspian Sea Baku-Tiblisi-Ceyhan pipeline that was built mainly for the benefit of the US and Great Britain.
The Sino-Kazakhstan pipeline eventually could be extended to the Middle East. The feasible way is to turn south in Kazakhstan, cross Turkmenistan, then enter Iran. That would allow Middle East crude oil to be transported to China through the pipeline directly.
Oil security problems
China is increasingly dependent on imported oil. Last year, its auto sales grew 70% and its oil imports were up 30% from the previous year, making it the world's No. 2 petroleum user after the US. According to economist Robert W. Fogel in a Dec. 4, 2003, Asian Wall Street Journal article, by 2030 China is expected to have more cars than the US and import as much oil as does the US today.
Data from the planning and finance department, China Ministry of Commerce, show that China imported almost 90 million tonnes of oil during the first 9 months of 2004. That is an increase of 40% compared with the same period last year. China's crude oil imports for 2004 could exceed 120 million tonnes.
If oil prices continue rising, it will be because of China's increasing domestic demands and a rapid buildup of strategic oil reserves. Compared with this, China's domestic crude oil production is growing slowly.
July 2003 production grew by 4.4% compared with the same period of 2002 (14.83 million tonnes). China's total output of the first 7 months of 2004 rose by 2.2% compared with the same period of 2003, amounting to 100.55 million tonnes, or 3.5 million b/d.
International Energy Agency data show that one third of the growth in global petroleum demand comes from China and that the foreign dependency rate of Chinese petroleum consumption is more than 40%.
China understands the problem and is addressing it.
Problems in the Malacca Straits are just one aspect of China's oil security problem. Oil is playing a more important role in the development of the Chinese economy, and the security of its petroleum supply will affect China's economic development.
China's efforts to secure its energy supplies will have a wide ranging effect on the global petroleum situation.
The author
Mengdi Gu (mdgu@ sjtu.edu.cn) has been an economics professor in the management school of Shanghai Jiao Tong University, Shanghai, since 2001. He previously served as assistant professor and lecturer. Before joining the university, he was an assistant engineer for Guiyang Hydraulic Power Station Design Institute in China. Gu holds a BS and MS from Hohai University and a PhD from Shanghai Jiao Tong University.