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China edges towards oil multilateralism amid fight between Sudan and South Sudan

Reuters May 3, 2012, 05.11AM IST

NEW YORK: Amid the border fighting between Sudan and South Sudan that has paralysed most oil production in the two countries, there are signs of a subtle shift in Chinese overseas energy policy to embrace a tentative multilateral approach.

Sudan has long been a symbol of Beijing's determination to cement control over oil supplies with investment and diplomatic support, even in the face of Western criticism. State-run China National Petroleum Corp invested more than $10 billion to develop the Sudanese oil industry into the most important producer in East Africa despite Sudan's status in the West as a reviled pariah state.

However, last year's partition of Sudan that was supposed to end decades of civil war has triggered a worsening disruption to the two countries' 5,00,000-barrels-per-day oil industry amid disputes over how to split oil revenues. The two countries together supplied 5% of China's oil imports last year.

The loss of most Sudanese oil production has come amid worsening tensions between Iran and the West and has underscored China's exposure to the vagaries of the oil market. So, it is important that China is talking of working with the US to find a solution to the conflict.

Certainly, Beijing has not abandoned its reluctance to endorse economic sanctions and other coercive diplomacy. Beijing can also be expected to defend its significant investments in the two countries. Already China's Sudan policy has been slowly shifting, starting in 2008 with an easing away from an uncompromising defense of Khartoum's sovereignty to push for curbs on violence in the Darfur region ahead of the Beijing Olympic games.

But cooperation with the US would require a greater understanding between Washington and China over energy policy than is often assumed. China, for one, would have to feel comfortable that the US was not looking to squeeze it out of its position as the main player in the Sudanese oil industry.

China's aggressive search for oil resources was a cause for alarm in some Western circles in recent years as its state firms gobbled up stakes in oil fields in a bid to secure supplies. The drive triggered suspicion and a backlash, particularly in the US Congress, where opposition to China's energy policy helped scupper a 2005 takeover approach for the American oil firm Unocal by China's CNOOC.

The criticism offended Chinese sensibilities, as it carried with it the whiff of hypocrisy and protectionism given Western nations' history of foreign investment to secure resources.

However, China may be coming to see the limitations of dollar diplomacy in the energy sphere, much as the West has learned that national sovereignty can almost always trump capital investment. Philip Andrews-Speed and Roland Dannreuther argued in last year's 'China, Oil and Global Politics' that China's government is slowly abandoning its "strategic" approach to overseas oil policy in favour of a more multilateral approach as the limitations of the "strategic" approach become clearer.  

The two researchers argue that China's leadership is increasingly aware that long-term supply deals, soft loans and even equity stakes in foreign oil fields may offer no guarantees of supply in the event of a crisis.

Diplomatic entanglements with unsavory regimes also have the potential to damage China's broader interests, particularly as it pushes for a bigger role on the world stage. There may even be a growing realisation, Andrews-Speed and Dannreuther argue, that the vested interests of the bureaucracies of China's powerful state oil companies are not necessarily always in alignment with the overall interests of the state.

This is not to say China is about to rush to join the International Energy Agency or is even prepared to side with the West in publicly pushing the OPEC to boost output and lower prices. Nor is it to say that China is ready to adopt a more Westernstyle policy with respect to Iran.

But it does suggest a growing awareness of shared interests between the West and China on oil policy, particularly as China may soon become the world's largest oil importer given rising production in the US and falling demand there. Already, China is a supplier of capital to the US shale oil and gas sector, which ought to show both sides that investment does not have to be a zero sum game that squeezes one party out.

Beijing's capital resources will be needed if the world is to make the huge investments in new energy infrastructure and supplies the world needs to sustain economic growth. A growing realisation by the earth's two biggest energy consumers that they can work together for a mutual benefit can only be a good thing.