Guess Hu Came to Washington

Chinese President Hu Jintao came to Washington DC last April as part of the nuclear non-proliferation initiative and, as expected by most people who know China, he promptly announced that his country would not go along with more sanctions against Iran. The opportunity of Hu’s visit sent pundits on overdrive and some talked about the entire spectrum of US China relations and the unavoidable symbiosis between the emerging superpower and the weakened but still reigning superpower.

The stains in the ties are obvious. In addition to Iran, there has been the climate debacle in Copenhagen, China’s refusal to revalue the yuan, US arms sales to Taiwan and, of course, Tibet. To be sure all those are important issues and there have been instances of incredible naiveté in many US press articles, from climate to Iran, expressing more of the writers’ wishes and biases rather than reality. Some even praised China’s “green” energy activities and claimed that China now leads the US in the environment, a preposterous claim, forgetting that China is likely to manufacture more solar panels and more wind turbines. They do it for all other industrial goods to be exported. In the meantime China is commissioning more than one commercial coal-fired power plant per week. All their wind installations, combined, are less than two months worth of new coal developments. China will not commit economic suicide.

There was one issue, though, that most pundits missed, the one that will most certainly make all the difference in the future, and the one that is no longer below the horizon, is the global competition for oil and gas resources.

While the U.S. under Barack Obama is still consumed by climate change, carbon emissions, and the wishful thinking of wind and solar energies that are unlikely to play any substantial role for several decades, if ever, China has gone on a rampage for global oil and gas resources which dominate and will continue to dominate world energy for the foreseeable future. The reason for the Chinese forays is simple. The country’s energy consumption has been growing at about the same pace as its economy. From 2000 to 2009, China’s crude oil consumption increased from 4.9 to almost 8 million barrels per day and the average yearly increase was about 7 percent. Just this year China started importing more than 50% of its needs. Forecasts put China’s annual demand at 12 million barrels per day by 2020. The US oil consumption has stalled a bit shy of 20 million barrels per day of which about two thirds is imported.

International oil is where the action is. The day of Hu’s visit to Washington DC, Chinese oil giant Sinopec paid ConocoPhillips $4.65 billion to acquire its share in a Canadian tar sands project. This followed in just a matter of weeks, the company’s $2.46 billion acquisition of Angola’s deep water oil reserves and $7.56 billion, the largest ever purchase of an oil trader, for Swiss-based Addax Petroleum. Not to be outdone, CNOOC, the third largest Chinese oil company, two days after Sinopec’s Canadian deal, paid $6 billion to buy the Brazilian offshore Peregrino field. Less than a week later a $20 billion 25-year deal was signed with Venezuela for a “development loan” to be re-paid with oil. PetroChina, the country’s largest oil company, declared that it will spend at least $60 billion over the next 10 years to acquire more oil and gas assets abroad.

Official China and the Chinese press look at all these acquisitions as key to the country’s national security. In 2009, oil production by Chinese companies operating overseas exceeded 800 million barrels (2.2 million barrels per day, about 57% of total imports).

The public personae of the Chinese and US and even other western major oil companies and the way they operate could not have been more different.

First, the Chinese government and its oil companies, far from having an antagonistic relationship as between the US and Big Bad Oil, they have an almost incestuous relationship. Working for an oil company, considered an indispensable national asset on the country’s road to international prominence, is a feather in a Chinese hat. What’s good for PetroChina and Sinopec and CNOOC is good for China and vice versa. There is a very clear plan for China’s oil and gas ventures, one that encompasses already 30 countries, deliberately selected, weighing economic and geopolitical factors. In some countries, Chinese embassies act as virtual headquarters for the oil companies, providing logistical support, connections and protection.

Second, Chinese oil companies, with their government’s backing will not shy away from politically sensitive and even dangerous places in Africa, Asia and the Middle East. Sudan, Myanmar and Iran come to mind despite of their status as rogue nations in the West. There is no way that China will go along with sanctions that would bite the hand that feeds it with energy.

Third, the Chinese have usurped internationally the American “can-do.” What was the landmark of the US oil industry for decades all over the world, has been emasculated by unreasonable environmentalism, stifling regulations and ideologically driven misinformation on both the importance of energy and from where it can reasonably be derived. The Chinese can start producing oil and gas and built thousands of miles of pipelines in the most inhospitable environments in a couple of years. During the same time the US oil companies would be trying to figure out how to apply for permits and testify in myriads of hearings.

It is certain that once reality ensues in America’s energy posture, and after drilling in both of US coasts becomes commonplace, there will be a major competition between China and the US for the same world oil resources and this will evolve into the biggest geopolitical challenge of at least the next two decades. For the last few years the Chinese have acted largely unchallenged from a handicapped George W. Bush administration and a Barack Obama administration, hostage to its alternatives rhetoric. I do not think this will last too long.