University of Amsterdam
Graduate School of Social Sciences
Chinese Multilateralism in Energy Security
The Case of Iran
MSc Political Science (International Relations) Thesis Project: The Geopolitical Economy of Energy
23 June 2017
Amsterdam, the Netherlands
Author:
Thijs Jansen
11094966
Supervisor:
Dr. M.P. (Mehdi) Amineh
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Table of Contents
Abstract ... 5 Acknowledgements ... 6 Map 1 – China... 7 Map 2 – Iran ... 8List of Tables and Figures ... 9
List of abbreviations ... 10
Chapter 1: Research Design ... 13
1.1 Introduction ... 13
1.2 Literature Review ... 16
1.3 Theoretical and conceptual framework ... 22
1.4 Brief argumentation and hypotheses ... 25
1.5 Research method ... 26
1.6 Structure of the thesis ... 27
Chapter 2: Background ... 29
2.1 Introduction ... 29
2.2 Background of Chinese state-energy relations ... 29
2.3 The current Chinese energy situation ... 32
2.3.1 Oil ... 33
2.3.2 Gas ... 34
2.4 Conclusion ... 35
Chapter 3: The Sino-Iranian Energy Relations ... 37
3.1 Introduction ... 37
3.2 State, energy security and NOC’s in China ... 37
3.2.1 The Chinese state and energy supply security ... 38
3.2.2 The going out strategy and Chinese NOC’s ... 40
3.3 State, the hydrocarbon Industry, and the political economy of energy in Iran ... 44
3.3.1 The political economy of energy in Iran ... 44
3.3.2 The Iranian hydrocarbon industry ... 46
3.4 The Sino-Iranian energy relations ... 52
3.4.1 Sino-Iranian diplomacy and trade... 52
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3.5 Conclusion ... 62
Chapter 4: Geopolitical and geo-economic challenges for the Chinese energy supply security from Iran ... 65
4.1 Introduction ... 65
4.2 Domestic challenges in Iran ... 65
4.2.1 Political (power) challenges ... 65
4.2.2 Socio-economic challenges ... 68
4.2.3 Technical challenges ... 69
4.3 International Challenges ... 70
4.3.1 The Middle East ... 71
4.3.2 China, Iran and the West ... 74
4.4 Conclusion ... 79
Chapter 5: Conclusions ... 83
Bibliography ... 89
Primary sources ... 89
Internet Sources ... 89
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Abstract
This thesis will provide a comprehensive analysis of the involvement of China in Iran between 2001 and 2017. This will be done by using a critical geopolitical perspective, which enables to analyze the crucial factors that have contributed to China’s activities beyond its borders. In addition, it is able to explain geopolitical and geo-economic means that gain importance in the international sphere. Analysis is in this thesis relies on several claims. First, the Chinese development of the last decades has depended on increasing energy imports, based on the current Chinese energy situation this will continue in the foreseeable future. China’s national oil companies (NOC’s) have a crucial role in this regard. The companies are important tools for Chinese geo-political economic power projection. To determine the strength and sustainability of energy relations, this thesis will look into diplomatic-, trade-, and investment relations. Furthermore, it outlines the increasing military cooperation on the Eurasian continent. Iran’s domestic ruling elite is analyzed within the critical geopolitical perspective and from an rentier state perspective. The country’s ruling elite is highly dependent on incomes from oil. It will be argued that the elite’s stability in Iran is maintained through high expenses on defense and military. Domestic as well as international geopolitical and geo-economic challenges have the potential to influence the Chinese energy supply security from Iran.
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Acknowledgements
This thesis has been the result of six months of extensive research into the Sino-Iranian energy relations. When I started studying I couldn’t have guessed that this would be the subject that I would eventually write my final thesis on. After studying economics and business administration in my Bachelor, I wanted to change the direction of my studies during my Master. This has resulted in two years of studying International Relations at the University of Amsterdam. In the first semester of my Master I followed the course Energy and Geopolitical Economy in Eurasia, taught by Mr. M.P. (Mehdi) Amineh. During the first lectures and while reading articles, the subject started fascinating me more and more. At the end of the course I was determined to write my thesis on the subject and with Mr. Amineh. Luckily, this became reality as I got into his research project.
In this thesis I’ve tried to capture the most important factors of relations between China and Iran, when it comes to energy supply security. Although there will always be room for more analysis, I’ve tried to be as comprehensive and inclusive as possible. The framework set out within critical geopolitics possesses important tools to accurately describe, analyze, and understand the specifics of energy relations. The process of working on a project that has the size and requirements of this thesis, obligates you to be a critical student.
In fulfilling that process I want to extend my gratitude to several persons that have helped me during these last six months. First, I want to thank Mehdi. His continuous efforts to stay engaged with my research, his passion for the subject, and his extensive knowledge have helped me tremendously in completing this thesis. Furthermore, I would like to thank my parents and sister. Not only for the six months of this thesis, but also for earlier support in completing my studies. Special gratitude goes out to my father Jaap Jansen for his ongoing critical notes, that have enhanced this thesis. Finally, all friends, relatives, roommates, sport-buddies, and all others that have supported me, and missed out on me as I was working on this project the past half year. In this regard, I want to thank Jonas Kolenberg and Louise Kirby Petruccio for their final editing. It makes me feel proud that I’ve bundled my research and findings, on such a complex matter as the Sino-Iranian relations, in this thesis.
Thijs Jansen
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Map 1 – China
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Map 2 – Iran
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List of Tables and Figures
Tables
Table 3.1
Overview of China’s three major national oil companies
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Table 3.2
Iran’s government budget dependent on oil (2000 - 2009)
50
Table 3.3
FDI by Chinese companies in Iran
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Table 3.4
Iran’s new upstream oil projects
61
Table 4.1
Economic bases of the political factions in Iran
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Table 4.2
Iran’s historical level of democracy since the Shah
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Table 4.3
Qualified IOC’s for Iranian upstream energy projects
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Table 4.4
State Fragility Indexes
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Table 4.5
Military spending US, SCO members, and Iran
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Figures
Figure 2.1
The reformed Chinese energy sector
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Figure 2.2
Total primary energy consumption in China per fuel-type (2012)
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Figure 2.3
China’s oil production and consumption from (1993 – 2016)
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Figure 2.4
China’s natural gas production and consumption (2000 – 2013)
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Figure 3.1
Primary energy consumption OECD and China
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Figure 3.2
China’s major oil suppliers in 2014
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Figure 3.3
Chinese M&A’s and FDI in energy in the 2000s
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Figure 3.4
Oil production and consumption in Iran
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Figure 3.5
Iran’s government budget dependent on oil (1955 – 2008)
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Figure 3.6
Iran’s governing bodies and connection to the energy sector
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Figure 3.7
Iran’s GDP dependent on oil (2001 – 2014)
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Figure 3.8
Iranian exports and the petroleum industry
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Figure 3.9
Official contacts between Chinese and Iranian high-level officials
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Figure 3.10
Value of Sino-Iranian trade (2003 – 2015)
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Figure 3.11
Chinese FDI in Iran (2005 – 2017)
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List of abbreviations
ASCM
Anti-Ship Cruise Missiles
BP
British Petroleum
B/d
Barrels a day
CCP
Chinese Communist Party
CEO
Chief Executive Officer
CGIT
China Global Investment Tracker
CIA
Central Intelligence Agency
CNOOC
Chinese National Overseas Oil Company
CNPC
Chinese National Petroleum Company
COD
Central Organizational Department (China)
EIA
Energy Information Administration
EU
European Union
EOR
Enhanced Oil Recovery
FDI
Foreign Direct Investment
FYP
Five Year Plan
GDP
Gross Domestic Product
HRS
Household Responsibility System (China)
IDP
Internally Displaced Person
IEA
International Energy Agency
IMF
International Monetary Fund
IOC
International Oil Company
IPC
Iran Petroleum Contract
IPO
Initial Public Offering
IRGC
Islamic Revolutionary Guard Corps
IRI
Islamic Republic of Iran
JCPOA
Joint Comprehensive Plan of Action (Nuclear Deal)
LNG
Liquified Natural Gas
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MOU
Memorandum of Understanding
M&A
Mergers and Acquisitions
NIOC
National Iranian Oil Company
NOC
National Oil Company
NPC
National Petrochemical Company (Iran)
OBOR
One Belt One Road
OECD
Organization for Economic Co-operation and Development
OMV
Austrian Mineral Oil Administration (German: Österreichische
Mineralölverwaltung)
OPEC
Organization for the Petroleum Exporting Countries
PGNiG
Polish Petroleum and Gas Mining (Polish: Polskie Górnictwo Naftowe i
Gazownictwo)
PLA
People’s Liberation Army
PRC
People’s Republic of China
PSA
Production Sharing Agreement
PTTEP
PTT Exploration and Production (Public Company Limited)
R&D
Research & Development
SASAC
State Assets Supervision and Administration Commission (China)
SCO
Shanghai Cooperation Organization
SETC
State Economic and Trade Commission (China)
SFI
State-owned Financial Institutions (China)
Sinopec
China Petroleum & Chemical Corporation (or Sinopec Limited)
SIPRI
Stockholm International Peace Research Institute
SOE
State-Owned Enterprise
SPC
State Planning Commission (China)
Tcf
Trillion cubic feet
TGE
TGE Marine Gas Engineering
TVE
Township and Village Enterprises (China)
UAE
United Arab Emirates
UK
United Kingdom
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(UN) SC
(United Nations) Security Council
U.S.
United States (of America)
USD
United States Dollar
WTO
World Trade Organization
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Chapter 1: Research Design
1.1 Introduction
The Chinese industrial development since the 1970’s has resulted in remarkable economic growth. Naturally, the economic growth is accompanied by an increasing need to fuel the domestic industry. From the 1990’s onwards, the Chinese government, historically largely influenced by the Communist Party, started to implement policies to secure its energy supply. One of these policies was the
increasing involvement with countries cross its borders.
Conventional bilateral approaches, such as energy import and economic cooperation, have gradually changed into a multilateral approach. The BRICS, the Asian Investment Infrastructure Bank and several other initiatives with Chinese involvement have gained global attention. In addition, China is increasingly capable of projecting its power outside its borders. The central purpose within this capability is to guarantee its energy supply security.
Iran, is one of the most resource-rich countries in the world. With the second largest reserves of natural gas and fourth largest reserves of crude oil it has enormous potential for energy trade. It is for this reason that China, by means of its national oil companies started to develop activities in the country. The downside, however, of doing business with – and in – Iran has for long been its difficult position in the international landscape (e.g.: sanctions, position in the Middle East, etc.). In recent years this has somewhat changed with the agreement on the Nuclear Deal in 2015 and the election – and re-election – of current President Hassan Rouhani.
1.1.1 Objectives
The situation stated above has resulted in the formulation of several objectives that are assessed and constitute the central research elements presented in the thesis presented below.
- Identify agencies and actors in energy policy-making in China and Iran that have a direct influence on energy relations.
- Understand the Chinese strategy regarding its energy supply security.
- Explain how the identified agencies and actors influence the Iranian hydrocarbon industry. - Outline Iran’s and China’s relations vis-à-vis the United States.
- Outline diplomatic and economic relations between Iran and China in the period from 2001-2017 by state and national oil companies (NOC’s).
- Assess the geopolitical challenges to China’s energy supply security form Iran.
- Outline the geopolitical challenges to China’s energy supply security form the Middle East under the condition of maintaining current relations with Iran.
- Assess the influence of Western actors (i.e.: the EU, US, international oil companies (IOC’s), and multilateral institutions) on non-state actors that contribute to the Sino-Iranian energy relations (i.e.: NOC’s, multilateral institutions)
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1.1.2 Research questions
Following from the objectives, the purpose of this thesis has been bundled in the formulation of a central question:
“What are the challenges and opportunities of energy supply from Iran for the Chinese energy security?”
To give an answer to this question, research is divided into sub-questions that all in part explain the challenges and opportunities for the Sino-Iranian energy relations.
1. Which actors are primarily involved in the Sino-Iranian energy relations?
2. What efforts have been made in China and Iran in order to render the energy relations between both countries?
3. What are the geopolitical and geo-economic challenges for the Sino-Iranian energy relations? 4. How have recent events, such as the Joint Comprehensive Plan Of Action (JCPOA), the
introduction of the Iran Petroleum Contract (IPC), and the (re-)election of Rouhani affected the Sino-Iranian energy relations?
1.1.3 Social and scientific relevance
Energy supply security has become an essential part of countries strategic objectives in international relations (Remme, Blesl & Fahl, 2008; Amineh & Guang, 2014). The European Commission issued the Green Paper in 2006 in which energy transition and diversification of energy sources were central concerns. The US, for its part, is currently extracting large quantities of shale gas, primarily to guarantee its own energy supply security (Stevens, 2012). Emerging economies (i.e.; China, India, Brazil) have become new competitors on the energy market. China’s rapid economic growth changed the country in 1993 from an exporter of energy to a net importer. Today it’s the world’s largest energy-consuming state (EIA, 2015).
Growing energy demands put pressure on oil-exporting regions. The Middle East, with its vast natural reserves, is one of the key regions in meeting the worlds current energy needs. Iran has a key position, both geographically as strategically. Ranking second in gas reserves and fourth in oil reserves it is a recognized and reliable – at least, in terms of reserves – energy partner, despite Iran’s large population and little concern for efficiency in the domestic market (Moshiri, 2015). It’s political climate and relations both on the regional and international level are precarious. Until 1979, under rule of Shah Mohammed Reza Pahlavi, Iran was a key-ally of the US. The Islamic Revolution of that same year shifted power to Ayatollah Khomeini. The revolution and the kidnapping of US embassy
personnel caused the deterioration of the US-Iranian partnership. As the authoritarian rule continued in Iran, diplomatic relations with the US never revived. The Iranian nuclear issue has ever since been a key priority for US foreign policy. Through economic sanctions agreed upon in the UN Security Council (SC) the US has tried to exclude Iran largely from international trade (and nuclear weapon
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acquisition). China, as a permanent member of the SC, however, has maintained its diplomatic ties with Iran. Where American and European companies left Iran due to the sanctions, Chinese NOC’s – along with Iranian domestic actors (Jalilvand, 2017) – have increased their presence filling the ‘Western void’. Within this context China has been balancing between maintaining good relations with the US and securing its energy supplies from Iran. This is known as it’s ‘Persian Gulf Dilemma’ (Garver, 2006). The election of Hassan Rouhani in 2013 opened up the possibility for Iranian
rapprochement with the West. The 2015 Joint Comprehensive Plan of Action (JCPOA), or nuclear deal, has started the process of lifting international sanctions on Iran. The deteriorated relations with the US and strengthened ties to China make energy supply security relations with Iran a relavant matter in international relations theory.
The above outlined developments of recent years offer new possibilities for Western-Iranian relations. In the meantime, China gained a foothold in Iran. Many scholars (Dorraj and Currier, 2008; Dong, 2014; Jenkins, 2014) studied the specifics of the Sino-Iranian relations. Others have focused on the triangular relation between China, Iran and the US (Garver, 2006, 2009, 2011, 2013, 2016; Leverett and Bader, 2010). China’s energy relations and its multilateral strategy has also been
researched thoroughly (Jiang & Sinton, 2011; Jiang & Ding, 2014; Szamosszegi & Kyle, 2011; Dong, 2014; Leverett & Bingbing, 2014). Vakhashouri (2015 and 2017) and Jalilvand (2017) have studied recent developments in the Iranian energy sector. However, an integrated and updated study of these research themes – the connection of Chinese multilateralism, NOC’s, the Iranian political economy and the recent political developments within Iran – is still missing. The presented thesis is the outcome of such a study.
1.1.4 Delineation of the research
Timeframe
The start of the 2000s marked the beginning of the Chinese “Going-Out” strategy in order to sustain its economic development. The involvement of Chinese NOC’s in Iran was pioneered by Sinopec (also called China Petroleum & Chemical Corporation or Sinopec Limited). In January 2001, the Chinese national oil company acquired a 50-per cent stake in the Zavareh-Kashan block from the NIOC at the cost of $13 million (Dong, 2014). In 2014, Saudi Arabia, Oman, Iraq and Iran account for 44% of China’s crude oil imports, Iran alone accounted for 9% in 2014 (EIA China Report 2014). I consider Sinopec’s involvement in Iran as a key event, and starting point, for analyzing Sino-Iranian energy relation. Because the agreement on the nuclear deal (JCPOA) with Iran is less than two years ago, recent developments are crucial to take into account as well. Hence, the thesis’ period of time under study, or timeframe, will be from 2001 to 20171.
1 It has to be noted that Chapter 2, on the background of the Chinese energy situation, deviates from this timeframe. In
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Delineation of space
The central theme of this study is the energy relation between China and Iran. These two countries will take a central position in the analysis. Within the Persian Gulf, the Strait of Hormuz is of key interest to China, Iran and the Middle East as a whole. A majority of energy exports from the region pass through this waterway. In addition, the Strait of Malacca is another ‘chokepoint’ that is essential to Chinese energy security as (almost) all of its energy imports pass through it (EIA, 2015). Energy transportation routes over land mostly constitute a network of pipelines through Central Asia.
1.2 Literature Review
Ruling […] elites have an interest of their own to meet these demands to maintain order at home as well as for protecting the state against competitors in the international system. Those with a mandate to act on behalf of the state, therefore, process these demands into a workable strategy
(Amineh & Yang, 2014). The literature review aims to shortly research and present the crucial subjects that need to be studied in order to be able to answer the research- and sub-questions. These are divided into China, Iran and Sino-Iranian relations.
1.2.1 China
State structure in China
China’s current state constitution describes its unicameral legislature, and the National People’s
Congress (NPC) as the highest organ of state power (Lawrence, 2013). The NPC’s role includes
supervising four other political bodies: 1) the State Council, the highest organ of state administration; it oversees the state bureaucracy and manages day-to-day administration of the country; 2) the State
Central Military Commission, which directs the armed forces of the country; 3) the Supreme People’s Court, the highest judicial organ; and 4) the Supreme People’s Procuratorate, China’s top
prosecutor’s office (ibid). Lawrence (2013; 2) states that “the Party commands the overall situation and coordinates the efforts of all quarters, and the Party must play the role as the core of leadership among all other organizations at corresponding levels.” The CCP’s constitution explicitly states that the Communist Party “persists in its leadership over the People’s Liberation Army and other armed forces of the people (ibid).” The Party exercises that leadership through a Party Central Military Commission.
A likewise structure can be found when looking at the CCP’s influence on energy companies. Fundamentally speaking, in addition to state ownership, there are two channels through which the Chinese state aligns its financial system with its energy companies. First, it does so implicitly through the CCP’s human resources department; the Central Organization Department (COD). Basically, the COD appoints the top-tier executives of China’s energy SOEs and large state-owned financial institutions (SFIs). Second, the Chinese state forges the alignment through coordination between its
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energy-germane and finance-germane bureaucracies (Kong & Callagher, 2016). The most prominent actor concerning company-control is the SASAC (State-Owned Assets Administration and
Supervision Commission). The SASAC is overseeing Chinese energy companies’ cross-border expansion as a way to promote the preservation and enhancement of the state-owned assets in the country’s energy sector (Kong & Callagher).
Chinese going-out strategy and NOC’s
Chinese immense economic development of the past decades has dramatically increased its energy needs. Consequently, China has become a net importer of oil in 1993 (EIA, 2015). Moreover, the Chinese ruling elite became aware that it had to guarantee its energy supply security in order to fuel its enormous economic growth, which resulted in an increased search for relations with resource-rich countries. Gradually, this has changed Chinese foreign policy from bilateral relations into a multilateral approach. However, there is a second, more implicit reason for this gradual transition towards multilateralism. The creation of the Shanghai Cooperation Organization (SCO) in 1996 was also the beginning of Chinese attempts, in cooperation with Russia, to limit U.S. influence in Central Eurasia and the Middle East (Amineh & Guang, 2014). President Xi Jinping first presented China’s vision for a “Silk Road Economic Belt” during a 2013 speech in Kazakhstan. The idea was to “forge closer economic ties, deepen cooperation, and expand development in the Euro-Asia region” (ibid). In early 2015, the contours of Beijing’s strategy began to emerge as China’s leadership laid out plans for this “Silk Road Economic Belt” through Central Asia, and a “21st Century Maritime Silk Road” through Southeast and South Asia (Zimmerman, 2015). China refers to these two combined as “One Belt, One Road” (OBOR). The most important tools for the Chinese multilateral approach are the national oil companies (NOC’s). These NOC’s are mostly regarded as ‘extended arm’ of the Chinese leadership (i.e.: the CCP)2. Sinopec pioneered the activities of Chinese NOC’s in Iran by acquiring a share in the Zavareh-Kashan oil-field in 2001.
1.2.2 Iran
Contrasting political factions
2 Mainly, the debate is divided into three ways describing the relation between the state (or CCP) and the NOC’s:
1) state-led, 2) independent or 3) hybrid. Within the presented thesis, the state-led approach is used. Dong (2014; 568) stresses this: “the biggest oil giants, including CNPC, Sinopec and CNOOC, who take the main
responsibility for implementing energy policies on behalf of the Chinese government, set their own targets in terms of crude oil to be acquired overseas.” Cunningham (2016; 3), furthermore, argues that evidence suggests a less monolithic view of state influence and that “it is clear that Chinese energy SOEs are utilizing a degree of state financing”, but the relationship does not confirm that the “causal arrow of influence” points from Beijing to the firms.
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The Islamic Republic of Iran (IRI) is unique in a sense that it combines a semi-theocratic mode of rule based on the velayat-e faqih system3 (the Governance of the Jurist). This system was institutionalized according to the constitution of 1979, with a constitutionally based rule of the people based on the constitution of 1906 (Rakel, 2009). According to Chehabi (2001), the IRI has characteristic features, which are inherent in both totalitarianism and authoritarianism. Apart from these governmental bodies and institutions the political elite consists of three different political fractions; the conservative, the pragmatic and the reformist fraction. These are commonly divided into the conservatives and the
moderates (pragmatic and reformist faction).
Rouhani’s election in 2013 – and his re-election in 2017 – have strengthened the hopes of a more liberal Iran. However, the most serious structural impediment constraining the Iranian
president’s powers is his constitutional subordination to the Supreme Leader (Monshipouri & Dorraj, 2013). In addition, the tensions between the elected and unelected institutions of governance
contribute to the non-functioning of Iranian politics (ibid). Much research is done on Rouhani’s capabilities in relation to regime change (Monshipouri & Dorraj, 2013), the cultural life
(Abdolmohammadi & Cama, 2015), and on issues such as human rights, women rights, and the constraint on media (Singh, 2016). Many have emphasized the ‘stiffness’ in politics and the restricting role of conservatism in that regard (Rakel, 2009; Jalilvand, 2017). The factions are divided in their opinion about the energy sector and – mostly – foreign (western) influence in the industry, which is one of the central themes in this thesis.
The state-energy sector relation in Iran
The implementation of the JCPOA occurs against the backdrop of intensive political struggle inside Iran (Jalivand, 2017) between conservatives and moderates. The conservatives and IRGC-affiliated entities have substantially benefited from the sanctions, because – in the absence of competition – they were able to improve their economic, and subsequently also political, position. The energy sector is one of the key industries that are constrained by conservative power.
Traditionally, NIOC and its subsidiaries were in charge of running the Iranian energy industry. NIOC is controlled by the Ministry of Petroleum and hence by the government. During the
Ahmadinejad presidency, however, the IRGC entered the energy sector. In 2011, President Ahmadinejad (himself a former IRGC member) even appointed Rostam Ghasemi (the head of
Khatam-al Anbiya, the IRGC’s business conglomerate) as petroleum minister. Courted by the
government, the IRGC sought to replace the void left behind by Western IOCs leaving the country. By 2013, when President Rohani assumed office, the IRGC had established a strong foothold in the energy industry. Rohani replaced Ghasemi with the experienced and technocratic Bijan
3 The theocratic part of the system constitutes of the religious supervisory bodies (the Council of the Guardian
[Majles-e Khobregan], the Expediency Council [Majma’-e Tashkhis-e Maslahat-e Nezam], and the Assembly of Experts [Shora-ye Maslahat-e Nezam]). The republican institutions are legitimized by the people (the legislative [the Majlis, or Parliament], the executive, and the judiciary) (Rakel, 2009).
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Zanganeh, who had already served as minister of petroleum (1997–2005) and minister of energy (1988–97). This is where moderates and conservatives clash in their opinion about the energy sector. The Iranian Petroleum Law (IPC), was formed as an consensus between conservatives and moderates, balancing between offering attractive terms to IOC’s (moderates) and the conservatives ‘resistance economy’ (conservatives). Regarding the JCPOA it seems that ‘resistant economic’-sentiments have been less successful. IOC’s are able to enter the country again, making it possible to regain the post-sanctions position that they had before withdrawal from the sector under US-led-post-sanctions (Jalilvand, 2017).
Geopolitical challenges for energy cooperation in Iran
On foreign policy issues, Rouhani’s election presented a window of opportunity (Monshipouri & Dorraj, 2013; Juneau, 2014) compared to his predecessor Ahmadinejad. Events that have taken place during his first presidential term suggest a more liberal direction in Iran, and a more liberal energy sector. The agreement on the Nuclear Deal, or the Joint Comprehensive Plan of Action (JCPOA) in more formal terms, in 2015 and the consequential partial lifting of sanctions on Iran can be regarded was the first major step towards improvement of Iranian foreign relations. As stated above, the IPC constitutes another ‘liberal turn’. Rouhani and the officials surrounding him, especially Foreign Minister Zarif, have proven willing to engage with Washington on a transactional base (Singh, 2016) Despite these openings for cooperation with the West, Iran’s observer status in the Shanghai
Cooperation Organization suggests otherwise. The SCO includes a number of Muslim Central Asian states that share religious and cultural affinity with Iran, as well as Russia and China (ibid). In
December 2014, China and Central Asian countries agreed upon a contract to connect China’s western Xinjiang province to Herat in Afghanistan, from where it will connect to Iran (Zimmerman, 2015). Iran’s interest in the SCO appears to correlate with its anti-American agenda, as the SCO is often proclaimed by observers as a counterweight to the USA (Abkbarzadeh, 2015) or NATO (China Monitor, 2014).
The implementation of the JCPOA has attracted the interest of IOCs from around the world. Throughout 2016, a number of companies moved to Iran, signing several Memoranda of
Understanding4 (MoUs) (Jalilvand, 2017). An OPEC deal signed in November exempted Iran from
production cuts and acknowledged pre-sanctions output levels as Iran’s reference production (ibid). However, to utilize the full potential of its energy riches, Tehran will need to attract international investment and technology. Otherwise, the Iranian energy sector will remain underdeveloped as the
4 These include, American-Dutch Schlumberger, British-Dutch Shell, Chinese CNPC, French Total, German
Wintershall, Italian Saipem, Japanese Inpex, Norwegian DNO, and Russian Gazprom. Up to now, however, no contracts have been inked. The MoUs largely comprise field studies as preparatory steps. Only one consortium, comprising NIOC, Total, and CNPC, has signed a ‘heads of agreement’; this represents a step forward towards contract finalization.
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country holds the world’s largest combined reserves of oil and natural gas (13 per cent of global total) (BP, 2016) but only accounts for some 4.7 per cent (BP, 2016) of worldwide production.
Iran and the Arab Spring
The start of the Arab Spring intensified the instability of the Middle. Filiu (2011) states that there is a clear dichotomy between the Iranian and Western view on the Arab Spring: the Islamic Republic regards it as first step towards toward an Islamist order, as the West sees it as a movement towards greater rights and freedoms. Iranian wishes for the former fly against the reality of developments in North Africa and in the Gulf states, where many protestors have insisted that they are fighting for ‘freedom’ and ‘democracy’ (Parchami, 201). However, the outcome of the war in Iraq and the West’s inability or unwillingness to find a solution to the Israeli–Palestinian conflict played into the hands of Iran and the Islamists, reinforced Iran’s regional role and altered the Middle East balance between ‘resistance’ and moderates in favor of the former (Aliboni, 2011). Several sources (Baer 2009; Sanger, 2011; Tait, 2011; Warrick, 2011) argue that recent events have benefited the Iranian position, or at least compared to the U.S. position in the region. Others have disputed these findings and argued that the Arab Spring-movements view the IRI as ideological failure (Sadeghhi-Boroujerdi, 2011) and aim for similar movements as the Iranian Green Movement, leaving Iran far more isolated in the region than it is willing to acknowledge (Tait, 2011; Tisdall, 2011; Warrick 2011).
1.2.3 Sino-Iranian relations
China, Iran and U.S. policy: the triangular relation
China and Iran are emerging powers with increasingly significant political and economic relations that have both regional and global dimensions (Dorraj and Currier, 2008). Over the past quarter century, China has been challenged to balance a major interest in maintaining comity with the United States against its efforts to develop multi-dimensional cooperative relations with important countries in the Persian Gulf - including countries in policy conflict with Washington (Garver, 2006; Leverett & Leverett, 2009). In 2014 more than half of China’s crude oil imports came from Middle Eastern countries. Iran itself accounted for 9% of these Chinese imports (IEA China Report 2014). The ‘balancing act’ between continuing good relations with the United States and Iran is called the ‘Persian Gulf Dilemma’.
Knowing Chinese intentions is of crucial importance to American foreign policy. Garver (2011) states that it is difficult for outside observers to know whether Beijing is playing a dual game in Iran. China’s political system is not transparent, and foreign and security policy issues are well
guarded. Two ‘opposing’ considerations need to be taken into account in thit respect. First, China is far from comfortable with the reality of American hegemony in the Persian Gulf – or elsewhere in the world, for that matter (Garver, 2009). According to Chinese media and scholars, the United States falsely imagines that it can – and does – impose its values and systems on the people of the Persian
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Gulf (Garver, 2011). For the Islamic Republic of Iran specifically, Chinese analysts believe that the US is largely to blame for the bad state of US-Iranian relations (Garver, 2013). The second
consideration is that China does not want to directly confront the US in the Middle East. China’s economic development significantly depends on export revenues to the US. Also, Chinese foreign direct investment sustains American consumption-levels and partly legitimizes the enormous national debt of the US (Morrison, 2011).
Sino-Iranian bilateral relations and diplomacy
As civilizations with deep historical roots, rich cultural traditions and illustrious imperial pasts, the two countries have a basis for psychological identification (Dorraj & Currier, 2008). The above outlined Persian Gulf dilemma is at the heart of Chinese considerations to further engage in Iran. The vast Iranian resources, globally second ranked gas reserves and fourth ranked oil reserves, are making the country, in terms of reserves, a reliable energy supplier.
During Supreme Leader Khomeini’s regime, his principle of “Neither West, nor East” had been translated into policies of isolationism (Garver, 2006). Rakel (2009) has stated that several developments of change accelerated after his death in 1989. First, the country became primarily preoccupied with the domestic economic difficulties. Second, a ‘new generation’ of reform-supporters that had not actively participated in the process of the revolution got more important. And third, the process of globalization also reached Iran; developments in media, information, and communication connected people over the world with distinctive discourses on world peace, human rights, and democratic issues. Whereas there was a short declaratory policy change in US-Chinese relations, the 1990s meant a built-up for anti-hegemonic sentiments within the Sino-Iranian relations. China supported Iran and disapproved former US president Bush’ statements in which he proclaimed Iran, North Korea, and Iraq in an “axis of evil.” (Garver, 2006). The increasing amount of Sino-Iranian contacts are reported by the Ministry of Foreign Affairs of the People’s Republic of China. Analysis of this record will be performed in chapter 3.
Research on the military cooperation between China and Iran is diverse. Dorsey (2016) has researched the increased involvement of China in Iran during the Iran-Iraq War in the 1980s. This research is supplemented by analysis done by Wuthnow (2015), on the specifics of Chinese military deliveries towards Iran. Furthermore, Garver (2016) has researched increasing military cooperation, which is supplemented by other findings of Dorsey (2016).
Chinese NOC’s and investment in Iran
The China Global Investment Tracker (CGIT) by the American Enterprise Institute (AEI) provides a
comprehensive data set covering China’s global investment and construction activities. The data set reveals that in the period from 2005 up till now Chinese companies have invested in the metal sector (9 transactions), energy sector (7), transport (6), utilities (1) and real estate (1). These purchases are
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examples of FDI in company-assets by a variety of companies. Not all transactions of Chinese companies in the Iranian economy are left aside of public scrutiny. In their study of Iran’s Chinese energy partners, Mark Dubowitz and Laura Grossman (2010) identified 89 instances in which the U.S. government sanctioned Chinese entities (many of which were state-owned enterprises) for transferring restricted items to Iran between 1997 and 2010 (Garver, 2011).
A major role in Chinese foreign relations, especially when it comes to energy, is in the hands of the Chinese national oil companies (CNOC’s), as outlined above. China’s major NOC’s are CNPC,
Sinopec and CNOOC. In its Annual Report 2015 CNOOC reports that, by means of two of its
subsidiaries (COOEC and CNOOC EnerTech), it is active in the Iranian energy sector. The CNPC
Annual Report 2015 states that in Iran, the North Azadegan project began trial production and the MIS
project progressed smoothly to resume production. It also engages in other drilling and ‘well logging’ activities in the country, according to the report. On overseas technological development CNPC stresses that; “to promote the global application of our new technologies, we set up an overseas technical support center for R&D and services, as well as interpretation and evaluation of well logging data” (CNPC, 2015). Sinopec does not have any report on activity in the Iranian energy sector in its
Annual Report 2015. From the dataset provided by the CGIT we can conclude that their last equity
purchase in Iran dates back to December 2007, which was a majority share in National Iranian Oil. More recent reports or articles (Vakharhouri, 2015, 2017; Jalilvand, 2017) show that Sinopec is active in Iran.
1.3 Theoretical and conceptual framework
This section of the research design is aimed to introduce the theory that is used as a framework for the thesis. Subsequently, the theory is concretized in some central concepts that are considered most accurate to explain the dynamics of Sino-Iranian energy relations.
Critical Geopolitics
International Relations (IR) and International Political Economy (IPE) differentiate on the definition of the unit of analysis and the level at which that unit is to be studied (Amineh & Guang, 2014). Classical scholarly debates tend to focus on access to resources, while ignoring the economic aspects of energy security, such as security of demand (Keating et al., 2012). They center on states as the unit of analysis, while ignoring the ever-growing role of transnational actors, such as national energy companies, as well as global externalities and spill-overs. Furthermore, these theories tend to
marginalize the role of international cooperation in energy and developments in international law and treaties, even though these remain important bases of interstate economic interdependency. Neoliberal approaches, in turn, tend to negate the possibilities of political change in energy relations (Keating et al., 2012).
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This thesis aims to take a more analytical stance and loose the state-centric analysis. Therefore a critical theory-approach is chosen. This type of analysis has gained legitimacy at the end of the last century. The core-periphery structure of dominance is maintained not just by external pressures but also with the support of dominant classes or elites in the periphery country who benefit from the relationship (Cox, 1992). Agnew (1994) argued that mainstream IR theories rely on three geographical assumptions: states as fixed units of sovereign space, the domestic/foreign polarity, and states as ‘containers’ of societies. By geopolitics, Agnew and Corbridge (1995) understand the division of global space by institutions (states, firms, social movements, international organizations, armed forces, terrorist groups, etc.) into discrete territories and spheres of political-economic influence through which the international political economy is regulated materially.
One a global level, perspectives on geopolitics are contesting each other. Walter Russel Mead (2014) has rejected Fukuyama’s The End of History and the Last Man5 and stressed the intensified
geopolitical battle on the Eurasian continent. His analysis is mostly based on the intentions of ‘revisionist states’ China, Iran and Russia. He argued that these states challenge the U.S.-led liberal world order. Ikenberry (2014) states that Mead gives a false picture of the “illusion of geopolitics”. He regards Russia and China, and to a lesser extent Iran, as ‘occasional spoilers’ of the world order that is maintained by the West. He states the international process of democratization has started before the end of the Cold War (i.e.: the 1970’s) and that this has strengthened the network of alliance tied to the liberal world order.
Amineh and Houweling (2003; 315) state that “critical geopolitics merges elements borrowed from political realism, from two domestic-society schools and from constructivism and enriches that mixture with spatial variables”. Like Harvey (2003), Amineh and Guang (2014) consider geopolitical orders also to be ‘geo-economic’. The current structure of the post-Cold War international system is a combination of regional and sub-regional, international geo-economic systems. Boundaries between domestic and global issues have become blurred (ibid). Furthermore, Amineh and Guang also
highlight the role of IOC’s as a principal means of advancing national interests and as an instrument of national power projection. After introducing the theory on Rentier States I will elaborate on the central concepts of Critical Geopolitics.
Rentier state theory (RST)
Many countries that possess a large amount of natural resources are considered to suffer from the so-called ‘resource curse’ or are typified as ‘rentier states’. Gray (2011) states that rentier state theory seeks to explain the impacts of external payments – or rents – on state-society relations and
governance. The theory has typically been used for the Gulf states and other resource-rich parts of the
5The end of History? was Francis Fukuyama’s initial essay, published in 1989. In 1992 he wrote the book The End of History
and the Last Man as an elaboration on his essay. The main concept that was developed within the essay and book stated that
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world. Lately, a theory of ‘late rentierism’ has gained ground, that overcomes the shortcomings of the classic rentier state theory. Hussein Mahdavy (1970) laid down the foundations of rentierism for Iran. He defines rentier states as countries that receive on a regular basis substantial amounts of external rent. Mahdavy (1970) highlighted the fact that rentier states do not have the constraint of lacking savings or foreign currencies, that other underdeveloped countries have. It could be argued that the socio-political structure of these countries, combined with disguised colonialism, is not conducive to rapid (economic) growth (ibid). These notions are partly mirrored by the concepts, outlined in the next section
Concepts
Hence, the critical geopolitics approach provides a number of concepts. Energy security can be defined as the availability of energy at all times in various forms, in sufficient quantities and at
reasonable and/or affordable prices, without an unacceptable or irreversible impact on the environment (Yergin, 1988; Amineh and Guang, 2014). Energy security can be analyzed through the energy
scarcity model. Amineh and Guang (2014) have discussed three possible ways in which energy
scarcity can occur: demand-induced, supply-induced and structural scarcity. Demand-induced scarcity refers to a situation in which population growth, a rising per capita income resulting in higher levels of consumption and technological change, which renders fossil fuels more essential for the production of wealth and power, increase domestic demand for fossil fuels. Supply-induced scarcity refers to a situation in which i) a decrease in stock (or market-efficient access to it), ii) inefficient use of supplies, and iii) a lack of adequate productive capacity and pipeline infrastructure, reduce the supply of energy resources. Structural scarcity refers to a situation in which there is a supply-induced scarcity caused by the deliberate action of a major power or non-state actors, such as transnational oil companies and producer cartels such as OPEC. To reduce the instability of energy supply through the scarcity model, states have increasingly engaged in energy relations in order to secure energy supply. The core pillars of such energy relations are diplomacy, trade and investment. Diplomacy is executed by the central government, commonly represented by official state visits. Following the state-relations, trade and investment relations are executed by companies.
Furthermore, critical geopolitics stresses the centrality of concepts as power projection and
state-society complexes. The former is the analysis of powerful states or regions (e.g.: EU also
performs power projection) and their domination across borders in order to secure resources. Regarding the latter, Amineh and Guang (2014) state that there are two ideal types of state-society(-market) relations; the liberal state-society and the authoritarian state-led society. The latter is characterized by the relative differentiation between state and society: the ruling and governing groups, which are, to some extent, separated in the liberal state-society. Lateral pressure refers to the development of socio-economic forces released by market actors. These social forces induce
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incentives in governments under stress to expand beyond borders as the capability to do so improves in absolute and relative terms (ibid).
1.4 Brief argumentation and hypotheses
In order to answer the central question in this research it is needed to connect the actors involved in the topic to the central themes and concepts. That means that the units of analysis need to be defined. These are the following:
1. (The Chinese leadership concentrated in) the CCP;
2. The Iranian political factions and bodies that influence energy policy; 3. Chinese NOC’s active in Iran.
Furthermore, other state- and non-state actors will be discussed that are related to the topic, although they are not considered as actors under study. These actors need to be tied to the central concepts of this thesis. The concepts have been discussed in the previous section. Concepts for this study are both domestic and international. Chapter 3 contains three section, two sections on the domestic dynamics in China and Iran and one section on the relation between the two.
Actors
China’s enormous population and rapid economic growth have legitimized its fast growing position in world politics. In order to facilitate such a position, it’s foreign policy has shifted towards a
multidimensional and multilateral approach (Leverett & Bingbing, 2014). This process has been developed over the past decades. The role of the CCP in that development has been evident
(Lawrence, 2013). Therefore, the CCP is a crucial actor and therefore an important unit of analysis in this thesis. Changing the perspective from the domestic policy to international or multilateral policy, means shifting analysis from the CCP to the NOC’s. China’s diplomatic, economic and military policies have been shaped by energy supply security. For China, the three major NOC’s are CNPC, CNOOC and Sinopec and they have a crucial position in the Chinese Going Out strategy (Jiang & Sinton, 2011
Since the Islamic Revolution of 1979, conservative clerics have ruled Iran (Rakel, 2009).
Moderate presidents have been elected, but so far have been unable to loosen the grip of the
conservatives that are all over the political system of the IRI (ibid). Mayor policies under current moderate president Rouhani, such as the introduction of the IPC and the JCPOA, might constitute change. However, as the literature review has outlined, the power structure within the political elite of Iran is complex and stiff. The Supreme Leader, IRGC, and the religious bodies have large interests and influence in the energy sector (Jalilvand, 2017). Therefore, it is crucial to research the political factions scattered over the complex system of the Iranian political elite and its relations to the energy sector.
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Hypotheses
The research questions in combination with the literature review and argumentation have resulted in the formulation of the three following hypotheses:
Hypothesis 1. The state-society-market relations in Iran and China have facilitated ever-deepening energy relations in the last 17 years.
Hypothesis 2. Chinese efforts in diplomacy, trade and investment have ‘shielded’ Iran from the increased international sanctions on the country.
Hypothesis 3. Sino-Iranian energy relations will continue to enlarge, despite the domestic and international geopolitical and geo-economic challenges.
1.5 Research method
The research in this thesis is based on qualitative data. The qualitative data is partly derived from book chapters, peer-reviewed journals specialized in energy policy, energy relations, and geopolitics. The leading journals on energy-related issues are Energy Policy, Energy and Energy Economics. They provide the base for the argumentation that is elaborated on in this thesis. Furthermore, these journals contain key insights in over-time development of policies regarding energy politics.
For Iran and the Middle East, leading academic journals are Journal of Iranian Studies;
International Journal of the Middle East Studies; The Journal of the Middle East Studies; The Middle East Studies. For China, the Journal of contemporary China; China Quarterly; China Journal are
reliable academic sources. These academic works are supplemented by news articles from mayor journals, mainly Reuters, New York Times, Al Jazeera, CNN, and the Financial Times. These are able to explain more recent developments in the field and provide additional insights.
Chapters 2, 3, and 4 contain the research results of this thesis in sequential order. Chapter 2 will describe the development towards China’s current energy situation. Chapter 3 contains the three ‘buildings blocks’ for the Sino-Iranian relations; China, Iran, and their relations. Following from this, challenges to the Sino-Iranian relations will be discussed in Chapter 4. Variables to conceptualize – and quantify – relations between China and Iran will predominantly be based on primary. These are trade numbers, diplomatic activities, GDP-dependence on oil in Iran, military spending, investment numbers, and other indicators that enhance the Sino-Iranian energy relations. Institutions that have published key reports on essential topics of this thesis are; Energy Information Administration (EIA);
International Energy Agency (IEA); The Global Statistical Energy Yearbook; The Heritage Foundation, China Global Investment Tracker; CIA World Factbook; and the World Trade Organization (WTO) and the International Monetary Fund (IMF). Company reports also provide
useful information. The Annual Reports China’s largest NOC’s entail information about their activities in Iran. Furthermore, NIOC publishes essential information about the Iranian energy sector. BP publishes the Annual Energy Outlook and the Annual Review of World Energy which contain key
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global energy data. Government-data is selectively used as well. The Ministry of Foreign Affairs of the
PRC and the Central Bank of Iran are the most prominent examples.
So, the argumentation outlined by the academic sources is supplemented by the primary data. This results in findings about the direction, change and strength of Sino-Iranian energy relations. Essentially, the data collection method outlined above results in two case studies and an analysis of the relation between the two cases. The two single cases studies on Iran and China are mainly focused at providing a background. The aimed results of research primarily need to explain the relation between the two cases, namely the Sino-Iranian energy relations.
1.6 Structure of the thesis
This chapter has outlined the research design for this thesis. Chapter 2 will analyze how China’s development has pushed its policymakers into formulating energy supply security-policies. In addition it will outline the current Chinese energy situation and the problem of energy scarcity. The aim of this chapter is to understand the forces that have pressured China into securing its natural resources outside its borders and stress the importance of fossil fuels in that regard.
Chapter 3 will constitute of three parts. First, China’s energy situation that was outlined in Chapter 2 will be connected to its foreign policy. It will be argued that the foreign policy is closely connected to its energy supply security. The influence of the CCP in the domestic leadership and policy-making will be analyzed. After that the role of the NOC’s in Chinese multilateralism will be researched. In the second part, Iran’s political system and economy will be outlined. In addition the section will take a closer look at the hydrocarbon industry in combination with the political economy of energy in the country. The last part of the chapter will analyze the relation between the two countries. This chapter will analyze the Sino-Iranian diplomatic, trade, and investment – through the NOC’s – relations. The aim of this section is to research the Sino-Iranian relations, as well as the two countries separately.
In the fourth chapter, analysis will shift from the elements that enhance the Sino-Iranian relations to possible challenges it faces. These challenges are mainly geopolitical and geo-economic. Furthermore, the challenges are both domestically and outside the borders of the two countries. It will be argued that the challenges coming from Iran are (predominantly) political, socio-economic, and technical. Furthermore, the IPC and JCPOA have attracted IOC’s to the country, increasing the competition for upstream projects in the Iranian upstream industry. Internationally, several factors contribute to the geopolitical challenges. The upheaval in the Middle East align countries and
groupings, transcending sovereign state-borders that could potentially influence the Chinese activities in Iran. Within the Chinese-led multilateral framework of institutions, special attention will be given to the Shanghai Cooperation Organization.
Finally, chapter 5 will contain the conclusions to this thesis. It will connect the most prominent findings of chapters two, three and four to the research design set out in chapter one.
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Chapter 2: Background
2.1 Introduction
The purpose of the following chapter is to establish where China’s need to engage in energy relations comes from. It will (briefly) research the background of the Chinese energy scarcity and clarify the development towards – and the state of – the current Chinese energy situation.
In order to provide a structured background, the chapter is divided into several paragraphs. Section 2.2 researches the (historical) foundations of the current energy situation. First, the section aims to provide a historical overview of the market reform period in China, starting in the 1970’s. Despite, being out of the formulated timeframe for analysis, this is considered essential information to stress in this thesis as background for research. Furthermore, this section will have a more descriptive character. The analysis outlines how present relations between the state and energy sector are so close.
In section 2.3 research will focus on the current Chinese energy situation. First, in section 2.2.1, the energy mix and its implications will be outlined. Section 2.3.1 and 2.3.2 will give an overview of the, respectively, oil and gas production and consumption of the Chinese economy.
Finally, in the conclusion, the central questions and findings of the background analysis will be recapped. The questions that are addressed in this section are how the Chinese energy situation has changed over the last decades and what this has meant for energy usage and policy in China.
2.2 Background of Chinese state-energy relations
Chinese domestic development
China, from 1949 onwards also known as the PRC, could for a long period of time be regarded as a ‘closed economy’, or ‘socialist self-reliance approach’ as Li and Clark (2010) label it. An historical transformation started in China at the end of the 1970’s when some mayor changes in economics, politics and development shifted the course of the country (Li & Clark, 2010). The ‘Dengist China’6 took the capitalist mode of economic development based on privatization of ownership and the means of production and distribution, to the marketization and allocation of resources including the total acceptance of economic inequities and political privileges (ibid). Mainly, the period from 1978 until 2008 is regarded as the ‘opening up’-phase (Sullivan, 2012; Walter & Howie, 2012; Li & Clark, 2010), from which 1992-2005 were the years of reform (Walter & Howie, 2012). Two main factors have accelerated this process. First, international developments (i.e.: fall of the Berlin Wall; collapse of the Soviet Union) and, second, American influence – unwanted by the CCP leadership7.
6 Deng Xiaoping was one of the main capitalist challengers of the communist Mao administration.
7 Sullivan (2012) showed that internal CCP documents accused the Bush-administration in 1991 of attempting to
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The basis of this capitalism put emphasis on market-oriented science and technology as the essential productive forces, along with the promotion of the interests of the privileged, professional and
entrepreneur classes, to also include the commercialization of welfare and social security (Li & Clark, 2010). The central government aimed to take advantage of the immense population resources8. Not at least because of its advantage compared to Western populations9. When energy shortages threatened the economic development in the early 1980s, energy conservation and energy efficiency became important elements of China’s government (Nakajima, 1982). Administrative measures were put in place during those years, which resulted in two decades of declining energy intensity (Andrew-Speed, 2009). The Five-Year-Plans (FYP’s), issued by the central government, were important tools to convert the economic potential into policy goals. To fuel the economy, the sixth FYP (1981-1986) focused on the expansion of energy supplies and specified targets for coal, oil, and electricity
production (Li & Clark, 2010). Considering the scale of the national economic development goal, the government forged ahead to promote the development of renewable energy – hydro power in
particular – and called for energy conservation to compensate for restrictions caused by the low level of energy technology (Yao & Chang, 2014). In October 1984, CCP-party congress approved the ‘Decision on the Reform of the Economic Structure’, which aimed ‘to build socialism with Chinese characteristics’, paving the way for further market expansion (Peng and Chen, 2011; Vogel, 2011). It officially gave legitimacy to comprehensive market reform in China and reduced the scope of central planning and at the same time, expanded enterprises’ operational autonomy (Yao & Chang, 2015).
The 1990s gave rise to two major changes in the structure of the Chinese energy industry: it shifted from an exporting to an importing industry, and from state-led to more business-led10. The transformation from net exporter to net importer of energy, in 1993, put energy more central on the Chinese political agenda. In 1998, Premier Zhu forcefully carried out a major streamlining of central government agencies that reduced their staffing by over 50 percent and eliminated the great industrial ministries (e.g.: Ministries of Mining, Coal, Metallurgy, Petroleum, etc.) (Walter & Howie, 2012). Consequently, the ministries transformed into small bureaus that needed to regulate the newly created companies in their sectors. These companies are the current ‘state-led enterprises’ (SOE’s), and in the energy sector known as ‘national oil companies’ (NOC’s)11. Initially these companies were overseen
8 The introduction of Household Responsibility System (HRS), the rise of township and village enterprises
(TVEs), and the allowance for ‘market’ and enterprises to play their dual roles in the national economy—all reflected this thought of decentralization and the government's reform measures at the micro-level (Yao & Chang, 2015).
9 The size of the Chinese population (1,37 billion, CIA World Factbook), like that of India (1,26 billion) is at the
heart of its immense economic potential for the future, even more so when compared to the traditional Western populations of the EU (515 million) and the US (324 million).
10 Illustrative for the new investment climate that characterized China from the 1990s onwards were the major
Western (particularly US-) banks that carried out IPO’s of Chinese (poorly managed) industrial companies for a total amount of 73.2 billion dollars in the period between 1997 and 2006 (Walter & Howie, 2012).
11 The objectives were to introduce competition; promote economic efficiency and a wider share of ownership;
subject SOEs to market discipline; develop a national capital market; raise tax revenues to the state and reduce government outlays (Jiang & Sinton, 2011).
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by the State Economic and Trade Commission (SETC). In 2004, the State-owned Assets Supervision and Administration Commission (SASAC) was created to bring order to the SOE’s (and NOC’s). The complex structure in which these governing bodies, institutions, and companies operate is shown in Figure 2.1. It partly explains the present close ties between the government and the energy sector. The role of the (Central) Organization Department (COD) (in the left-upper corner of Figure 2.1) and it’s connection to the executives (chairmen and CEO’s, connected by the arrow ‘appoint’), is elaborated on more thoroughly in the next chapter.
Figure 2.1 The reformed Chinese energy sector
Notes: NEC = National Energy Commission, SASAC = State Assets Supervision and Administration Commission, MOF = Ministry of Finance; MOFA = Ministry of Foreign Affairs; NDRC = National Development and Reform
Commission; NEA = National Energy Administration; CBRC = China Banking Regulatory Commission; SOE = state-owned enterprise.
Source: Jiang, J., & Sinton, J. (2011). Overseas investments by Chinese national oil companies. IEA Research Report.
From exporter to net importer
Since 1993, China’s total energy production has been below its total energy consumption (Cheng, 2008; EIA, 2014). Consequently, the country pursuit for fuels to keep its economic development running at the same speed as previous decades needed to be extended to outside its borders. As outlined above, the transition to market economy required the creation of new organizational
structures within the government. A plan for the institutional reform of the State Council was adopted in February 1998 to establish a government administrative system suitable for the ‘socialist market economic system’ (Peng and Chen, 2011; Vogel, 2011). This round of restructuring led to the decentralization of leadership in various government departments in the energy sector, which are outlined in Figure 2.1.
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Since the end of the 1990s, the pace of Chinese investments in foreign oil and gas resource has accelerated greatly. According to International Analysis (2015) on China by the EIA, are most of the overseas investments located in regions with frequent ethnic conflicts, political chaos, and even local wars. The Middle East, for example, as one of the major hosting regions for Chinese NOCs, is a region of key strategic importance for future investments. This makes the Chinese quest for energy security vulnerable to developments in regional relations. On the one hand, the Chinese government pursues a wide range of interests via involvement in the oil sector in the region; on the other hand, certain governments of Middle Eastern countries use China’s interests in their resources as a counter-balance to the western countries (Yao & Chang, 2015). This balancing between different interests is also done by China and is further elaborated on in the next chapter. Considering the vulnerability of these interests, apart from looking outside its borders to secure energy supply, China has put emphasis on the use of renewable energy. This process has started in 1992, in the year that the country also became a net importer. In that year China’s Agenda 21 was issued which showed the strong willingness to support renewable energy (Yao & Chang, 2015). Consequently, several policies regarding renewable energy-technology development have been put forward12. All these policies promoted energy technology development in China, but the pace of development could not keep up with China’s growing appetite for energy. Therefore, the next section will look into the current Chinese energy situation.
2.3 The current Chinese energy situation
In recent decades China’s domestic development, as outlined above, has given the country a position at the top of the international energy market. According to the International Monetary Fund (IMF), China's annual real gross domestic product (GDP) growth slowed to a reported 7.4% in 2014, which was the lowest since 1990, after registering an average growth rate of 10% per year between 2000 and 2011 (EIA, 2015). China developed from 1992 to 2013 into the world’s largest importer of petroleum products and other liquids (EIA, 2015). Furthermore, the country also quickly climbed the ranks of oil consumption. In 2014 it accounted for 43% of the world’s increase in oil consumption growth. The country is still ranked 2nd after the United States when on oil consumption. EIA forecasts that China's oil consumption will exceed that of the United States by 2034 (ibid). However, the vast majority – in fact, two-third – of China’s total primary energy consumption is still based on coal. The second largest source is petroleum and other liquids, accounting for nearly 20% of the country's total energy
consumption. Usage of other sources is still marginal. Although China has made an effort to diversify its energy supplies, hydroelectric sources (8%), natural gas (5%), nuclear power (nearly 1%), and
12 In 1994, the State Planning Commission (SPC) formulated the ‘Brightness Program’ and ‘Ride the Wind
Program’ (NREL, 2004). In 1996, the State Economic and Trade Commission (SETC) advanced the ‘Nine Year Plan of Industrialization of New and Renewable Energy’. In 2001, the SETC proposed the ‘Tenth Five-Year Plan for New and Renewable Energy Commercialization Development’. In 2003, the Renewable Energy Promotion Law was promulgated (Yao & Chang, 2015). For detailed information see (NREL, 2004).
