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Chinese Demand Taps OBOR to Redraw Global Oil Map

Summary

Oil is critical to ensuring China’s growth over the next few decades, and securing it has become a top priority for the nation. By financing multiple OBOR development projects to circumvent key oil supply chains through the Strait of Hormuz and Strait of Malacca shipping lanes, China has chipped away at competing oversight in these regions, allowing it to secure access to resources while strengthening relationships with OBOR partner countries.

Decades of rapid economic expansion have fueled China’s demand for oil. Since 2017, the country has outpaced the US to become the world’s largest crude oil importer. Undisturbed access to oil is vital to maintaining the country’s economic growth, and therefore viewed as a matter of national security. The One Belt One Road Initiative (OBOR) plays a key role in opening up new pathways for China’s oil importation as it strives to build transport and energy corridors with partner countries to break the bottleneck of Asian connectivity. By promoting more secure infrastructure linkages via OBOR, China seeks to de-risk shipping oil through political instability and contested waterways. To bypass various bottlenecks in the supply lines, new routes through Iran, Pakistan, Thailand, and Myanmar are being constructed.

China’s Oil Reliance

China is the world’s second-largest oil consumer, with demand for gasoline and diesel products driving its consumption. The country relies on oil to power its fleet of more than 258 million cars, as well as sustain its colossal manufacturing industries, ranging from apparel to aircraft. China’s main oil fields have aged over time, leading to constricted drilling – it costs US$41 a barrel to drill in China compared to US$13 in Saudi Arabia and US$11 in Iraq. Currently, domestic production only fulfills approximately 35% of total oil demand, which increases pressure on Beijing to source oil from overseas.

Just in 2019, China imported a record 10.1 million barrels per day, clocking in an increase of 9.5% from a year earlier, with the majority of oil coming from Gulf and African countries. Oil tankers from these regions are dependent on two arterial waterways: the Strait of Hormuz and the Strait of Malacca. Without access to the region’s shipping lanes, China would be completely cut off to the vital resource it needs.

Strait of Hormuz 

One of the most contested chokepoints amongst China’s oil shipping lanes is the Strait of Hormuz; this narrow waterway separates the Arab states from Iran. Oil exports from Saudi Arabia, Iraq, UAE, Kuwait, Qatar, and Iran flow through the Strait, amounting to one-third of total global seaborne traded oil.

China receives 38% of its total daily imports of oil through this Strait. Given the Strait’s importance to global trade, the passage is patrolled by American-led forces, which may pose a challenge to China as Sino-American relations continue to deteriorate. To circumvent this chokepoint, China has designed two solutions financed through OBOR: one involving Iran and the other Pakistan.

The first solution is infrastructure development in Iran for oil transportation. Iran holds approximately 9.3% of the world’s total proven oil reserves, and China is its largest customer – purchasing 6% of its total oil requirements prior to the implementation of American sanctions. 

According to leaked documents, a proposed US$400 billion agreement between Iran and China will commit US$280 billion to Iran’s oil and gas industry and US$120 billion to production and transportation infrastructure. The terms of the agreement also give Beijing access to supplies of crude oil and gas from Iran at discounted prices for the next 25 years. Once the construction in Iran is completed, oil from the Middle East would be transported over land through Central Asian countries through pre-existing routes connected to western China. These routes were also funded via OBOR.

Source: Mercator Institute for China Studies

The second method China is working to ensure land-based oil supply is through developing the Gwadar Port in Pakistan. The port is near to the oil-rich nations of the Middle East, but lies East of American influence in the Strait of Hormuz. While China has access points to the Indian Ocean already via its port investments in the islands of Sri Lanka and Malaysia, the Gwadar Port offers China unique land-based connectivity. The Gwadar Port is the last stop along the China-Pakistan Economic Corridor (CPEC), linking China’s landlocked province of Xinjiang to the Arabian Sea. China currently has US$62 billion worth of investments planned for the CPEC, from wind farms to highway renovation, pointing to the long-term value of the region.

Plans driven by OBOR called for a seaport, roads, railways, pipelines, dozens of factories, and the largest airport in Pakistan. However, while many plans have been made for OBOR projects across Pakistan, less than one-third of announced projects have been completed. Challenges such as difficult terrain, limited capacity to handle vessels, and corruption have slowed China’s plans for CPEC. More recently, Pakistan has approached the PRC to relieve some of its debt burden after the country experienced the impact of the COVID-19 pandemic on its economy. Together, these challenges have rendered the status of certain current and future projects uncertain.

Given Beijing’s oil dependency, the proposed infrastructure construction in Iran coupled with development of Pakistan’s Gwadar port could secure China’s future energy imports by removing the dependency on American controlled waterways. By leveraging trillions of dollars in investment through OBOR, the dragon has redrawn the trade map by constructing ports on the Indian Ocean while extending its reach to the Strait of Hormuz.

Strait of Malacca

The second choke point in the oil supply line to China is the Strait of Malacca. Across the Indian Ocean and through the strait is the shortest shipping route between the oil exporting nations of the Middle East and the oil importing nations of Japan, South Korea, and China. The narrow waterway straddles Malaysia to the north, Singapore to the east, and Indonesia to the west. With over 80% of China’s oil imports flowing through the strait, closely tied to it are Beijing’s economic and national security concerns.

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Source: Bloomberg

The need to find an alternative energy route from the Strait is two-fold. The first is a capacity problem: it is estimated that by 2024 more than 140,000 vessels will pass through the narrow waterway, which can only accommodate 122,640 vessels per year. As a result, the vessels will have to traverse longer alternate routes thus increasing transportation costs. Given that oil demand is predicted to rise mirroring China’s growth, finding other viable energy route options is essential.

The second problem is the region’s proximity to an Indian military base located to the west of the Malacca Strait and Singapore’s military presence in the waters to the south. Both footholds are closely assisted by American and Japanese forces.

To secure the supply chain, China has put forward two proposals. The first is to construct a 150km canal across the Kra Isthmus in southern Thailand. The Thai canal would link the Andaman Sea to the South China Sea, shaving days off the total journey from the Middle East and bypassing the Strait of Malacca. As per the Memorandum of Understanding linked in 2015 between China and Thailand, the canal would take 10 years to complete and US$28 billion in funding through OBOR. The canal would be supplemented by a deep seaport and special economic zone to attract companies to set up bases in Thailand. Once the canal is constructed, China would not only have developed a new route but also fortified its position in one of global shipping’s most important regions.

China’s second proposal is to construct the Myanmar-Yunnan Pipeline. The pipeline is the most ambitious construction project that the global energy sector has ever seen and would run 770km from Myanmar’s western coastal port of Kyaukphyu, spanning the entire length of the country, to the Chinese city of Kunming. The long-delayed pipeline will be built at a cost of US$1.5 billion funded through OBOR and can meet 6% of China’s total oil demand. The land-based route provides additional capacity for China’s oil demands. Furthermore, access to Myanmar’s west coast opens the Indian Ocean route to China and challenges other countries’ hegemony in the region. Control over the pipeline reduces dependency on the strait while gaining an upper hand on neighbouring rivals in case the Strait of Malacca was compromised.

Looking Forward

The key to understanding Beijing’s long-term oil plans in Asia can be pieced together through its OBOR investments. The projects implemented in Iran, Pakistan, Thailand, and Myanmar range from ideas on paper to successfully completed projects. All together, they weave a narrative that showcases China’s desire to establish land-based oil supply routes and underscores its economic might to bring them to fruition.

Still, these projects have not not unfolded as smoothly as hoped. In pursuing these development projects, these countries have largely assumed heavier debt burdens. The projects are mired in controversy, both on domestic and international levels.

Despite the setbacks, these alternative energy routes that China has planned to bypass the Strait of Hormuz and Malacca have raised Beijing’s status in the global energy market. With OBOR driving Beijing’s vision, the Middle Kingdom is bringing Chinese characteristics to the world of energy, and redrawing global supply chains in the process.

Aditi Taswala is a guest contributor to The China Guys and authors the newsletter: Filtered Kapi.

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