China's risky gambit to diversify energy supply options

SINGAPORE - China strategy to diversify supply routes for its rapidly rising energy imports took a major step forward last week.

Natural gas started to flow along a recently completed pipeline that stretches for 1,100 km from Myanmar's coast, through jungle and mountains, to Kunming in south-west China.

There it will feed into other gas lines supplying homes, industries and power plants generating electricity in the world's biggest energy user.

The gas from Myanmar, pumped from an offshore field in the Bay of Bengal, is not expected to reach China via the new pipeline until next month or September.

But at full capacity, it will deliver 12 billion cubic metres (bcm) each year. This is nearly 30 per cent of current annual imports and one-twelfth of the country's 2012 gas consumption.

A parallel oil pipeline, due to open by the end of the year, will be able to carry 22 million tonnes of crude oil from Africa and the Middle East. This amounts to about one-twelfth of China's oil use last year.

The official Xinhua news agency has described the pipelines as "China's new strategic energy channels". This is because they offer an alternative supply route for vital oil and gas imports in case the congested and relatively narrow Malacca and Singapore straits are blocked by piracy, terrorism, a shipping accident or conflict.

Since 2010, over 80 per cent of China's growing crude oil imports have come in tankers through these straits. This is the shortest sea route between the Middle East/Africa and China's east coast ports.

China's ruling Communist Party, as well as its armed forces, fear that this energy artery, which includes increasing quantities of gas from the Persian Gulf, could be cut in a confrontation between the United States and China over Taiwan.

It could also be interrupted in a clash with US mutual defence treaty ally Japan over the disputed Senkaku islands in the East China Sea. An altercation with the Philippines, another US ally, over conflicting territorial claims in the South China Sea could also produce a similar outcome.

Chinese leaders call this vulnerability their "Malacca Dilemma". In recent years, Beijing has negotiated a series of alternative energy supply sources and routes. First, it built an oil pipeline from Kazakhstan in Central Asia, which has the world's 12th largest oil reserves. The line to China opened in 2006 and its capacity is being doubled. In 2011, Russia started exporting oil to China by pipeline.

Last month, Russia, one of the world's biggest energy producers, announced that it would double its annual supply of pipeline oil to China to 30 million tonnes a year by 2018 and to just over 46 million tonnes later.

Russian officials said the deal was worth US$270 billion (S$342 billion), and would run for at least 25 years.

China has yet to clinch a major pipeline gas supply deal with Russia. Despite years of negotiations, the two sides have not agreed on the price.

But talks are continuing with Moscow for two pipelines that could provide China with nearly 70 bcm of gas a year.

Meanwhile, another pipeline designed to deliver up to 40 bcm of gas annually from Turkmenistan to China started operation in 2009. The Central Asian state has the world's fourth biggest gas reserves, after Russia, Iran and Saudi Arabia.

As a result of these agreed or completed projects, China can count on getting 35 per cent of its current gas needs, and 25 per cent of its oil, by overland pipelines. This means it will be less reliant on shipments through South-east Asia's straits.

That is, of course, provided there are no shortfalls in contracted pipeline supplies. These could arise from production problems, contract disputes or serious damage to pipelines from accidents, attacks or natural disasters.

China needs fuels derived from oil to run its modern land, air and water transport system. It needs gas to replace polluting coal.

Indeed, China's demand for oil and gas has been growing so fast in recent years that these new pipelines will not be enough to ease its dependence on maritime supply, particularly through the Malacca and Singapore straits, for long.

That may be why China is interested in what could be the riskiest overland energy supply route of all.

This route would run from China's restive western territory of Xinjiang, across some of the world's highest and most landslide-prone mountains. It would also traverse rebellious areas of Pakistan to reach Gwadar, a deep-water port overlooking the Indian Ocean and Arabian Gulf.

China and Pakistan agreed earlier this month to develop a long-term plan for an "economic corridor" connecting Kashgar, in Xingiang, and Gwadar, more than 2,000km away.

At present, there is only a tenuous road connection. However, hopes for upgraded and expanded road links, as well as a railway and pipelines, from Kashgar to the currently little-used port at Gwadar received a major boost in February.

Control of Gwadar was transferred from Singapore's PSA International to China's state- owned port holding company.

Gwadar is not far from the entrance to the energy-rich Persian Gulf. If oil from there and Africa could be offloaded at the port and transferred cost-effectively to China, it would further diversify Beijing's supply options.

However, it is uncertain whether the benefits to China would outweigh the costs and risks involved in building - and securing - such a long corridor over such forbidding terrain.

- Michael Richardson

The writer is a visiting senior research fellow at the Institute of Southeast Asian Studies.

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