Sino-Qatari energy relations : Sino-Qatari energy relations ant he role of Chinese national oil companies

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Sino-Qatari Energy Relations

Sino-Qatari Energy Relations and the role of Chinese National Oil Companies

MSc Thesis Political Science: International Relations Research Project: The Political Economy of energy

27 June 2017

Author: A. (Ali) Taha

11258128

University of Amsterdam

Graduate School of Social Sciences

Supervisor: Dr. M. P. (Mehdi) Amineh Second Reader: Dr. Dimitris Bouris

Email: ali.taha@lau.edu

Programme: International Relations

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This paper aims to study whether there is a causal connection between China’s energy supply security in Qatar, and their economic interaction. By applying the theoretical framework of critical geopolitics, and the Rentier state theory, the analysis will be directed towards identifying the main actors and the main strategic principles shaping China’s activities in Qatar. This paper will then claim that considering the nature of China’s relations with Qatar, and the domestic and geopolitical challenges these relations face, China maintain economic presence as the only viable tool to secure its presence in this energy rich country.

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Acknowledgement

I am most grateful to everyone who made a contribution to the completion of this paper. My very sincere gratitude goes to my supervisor Dr. Mehdi Amineh, whom without his continuous encouragement and guidance, I would have not been able to accomplish this work. I would also like to thank Dr. Bouris Dimitris, who will also assist in the evaluation of this research paper. Finally, I thank Alex L'Huillier for proofreading this paper and for his contribution with my other classmates to create an environment for insightful critical debates throughout the completion of this work.

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List of Tables and Figures

Tables

Table 3.1 China’s long-term LNG contracts with Qatar’s

Table 3.2 The distribution of Qatari LNG exports by destination Figures

Figure 1.1 Sino-Qatari energy relations

Figure 3.1 The position of NOCs within the power arrangement in China Figure 3.2 Top 10 importing countries of Qatari LNG 2013

Figure 3.3 China’s LNG suppliers 2013

Figure 3.4 Qatar’s import and export partners Figure 3.5 Trade between Qatar and China

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List of abbreviations

CCP Chinese Communist Party

CNOOC China National Offshore Oil Corporation CNPC China National Petroleum Corporation EIA Energy Information Administration FSRU Floating Storage and Regasification Unit FYP Five Year Plan

GCC Gulf Cooperation Council GDP Gross Domestic Product LNG Liquefied Natural Gas IEA International Energy Agency MFA Ministry of Foreign Affairs

NDRC National Development and Reform Commission NEA National Energy Administration

NOC National Oil Companies PSC Politburo Standing Committee PV Photovoltaic

RPR Reserves to Production Ratio RST Rentier State Theory

SASA State Assets Supervision and Administration Commission Sinopec China Petroleum and Chemical Corporation

SPC State Planning Commission (SPC), the predecessor to today’s NDRC National Development and Reform Commission (NDRC UAE United Arab Emirates

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Map of China

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Map of Qatar

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Location of Qatar in the Middle East

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Chapter I

Introduction

1.1 Background overview

China seeks to increase its use of natural gas as it aims to diversify its energy mix away from high emitting fossil fuels. Nevertheless, the lack of this energy source domestically implicates a growing dependency on foreign imports (Jiang & Sinton, 2011). Qatar controls 15% of the world’s conventional reserves and accounted for 31% of global Liquefied Natural Gas (LNG) production in 2014, thus it presents an obvious energy partner to China (United States Energy Information Administration, 2015, p. 1). However, prior to 2009, Qatar did not feature as one China’s traditional energy suppliers. This changed a year earlier, when the conclusion of a sales and purchase agreement signaled the beginning of bilateral energy relations between the two countries. Soon after, China became Qatar’s fourth consumer of LNG importing nearly 38% of its LNG from Qatar in 2013, a clear indication of the increasing role that the latter is playing in China’s energy security (Al-Tamimi, 2014). This resonates economically in an increased mutual engagement in trade, finance and infrastructural investments inside and outside China. The activities of Chinese National Oil Companies (NOCs) with the Qatari energy sector are a major part of this engagement, particularly in the area of joint infrastructural projects, an example of which is the construction of Qatar’s first terminal in the eastern coastal province of Jiangsu.

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This development happened after having signed the first long-term LNG supply contract between the China National Petroleum Corporation (CNPC) and Qatar Gas for 3 million tons of LNG per year (Canty, 2011).

My research papers aims to examine the energy relations between China and Qatar, in order to understand the dynamics of their interaction on the economic level, and how the resulting ties can play a role in sustaining these relations. It will do so by pinning down the main actors involved in weaving and maintaining these economic bonds with a focus on China’s National Oil Companies, and how they operate within the Chinese power structure. In addition, the focus will be to investigate the activities of these NOCs on the international level and the way their investments impact governance in countries receiving or partnering in investments, in this case Qatar. Moreover, it will inspect the impact of geopolitical forces on China’s supply security in Qatar.

1.2 Social and academic relevance

Despite its small share in the overall energy consumption in China, natural gas has grown in importance to China’s energy security, and to its aims to cut down CO2 emissions. However, the dependence on foreign imports confronts the Chinese leadership with a myriad of challenges, centered on securing energy supply using political, diplomatic, and economic tools. Herein, the National Oil Companies are a major instrument for the Chinese government to build and secure sustainable relations with supply countries, in this case Qatar. Hence, it is of great importance whether for Chinese policy makers, or for policy makers and for the companies operating in the gas sector in Qatar to have a comprehensive understanding of the fundamental principles guiding their energy relations, and the role of China’s NOCs in developing and securing these relations.

On the academic level, the newly established energy relations between China and Qatar mean that there is a lack of literature focused particularly on this topic, what stresses the necessity for further academic concern in this case study. Moreover, most of the literature found on the Sino-Qatari relations, is only empirically descriptive, rather than theoretically analytical, hence, this research will contribute to the development of scientific knowledge about this understudied case.

1.3 Literature Review

My research question involves a multitude of dimensions and number of key concepts including energy security, power structure and the relation between state and business in both China and Qatar. Moreover, it involves a theoretically framed analysis of the empirical data related to the subject.

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1.3.1 China’s energy security-Natural gas/LNG

The starting point of my literature review is China’s energy security and the status of natural gas in China’s energy strategy. Much has been written about this issue, which have been extensively studied whether by national research institutions or by international specialized institution like the International Energy Agency (IEA), paralleled with a growing academic interest in the subject which has produced a sizable literature dealing with all aspects of China’s energy security. Governmental documents are primary sources of empirical data and statistics covering the issue, and published by public institutions like the Chinese State Energy Bureau. Moreover, governmental policies and plans reflect the Chinese state’s outlook and approach to securing China’s energy future and help identify the main strategic tools devised by the Chinese leadership to reach that goal. Some of the main governmental documents in that regard are the Five Year Plan with a focus on China's 13th FYP for Economic and Social Development published in 2015. The white paper on energy policy published in 2012 is also a major governmental source of information of China’s energy security and strategy.

1.3.2 Power structure and state-society relation

On the theoretical aspect, one of the main concepts I explore is the power structure in both China and Qatar and the relation between the state and social forces (like industries, businesses, unions). Both China and Qatar are examples of an authoritarian centralized society, where the state has an overarching control over all aspects of society and the market place.

One of the insightful works on this issue is ‘State, Society And International Relations in Asia’, a book that brings together a number of articles by different authors, and edited by professor of Energy Politics, Mehdi Amineh. In the chapter titled China and the transformation of the post-Cold War geopolitical order, M. Amineh and H. Houweling bring a brief contextualizing overview on the state –society complex in China and the conditions under which it evolved.

In another article by Mehdi Amineh and Yang Guang, the state-society complex is explored in more depth, identifying the main (ideal) types of state society complex

On the descriptive empirical level, many information-based institutions like the Congressional Research Service are a good source of empirical data regarding China’s power structure. In one of its reports by Susan V. Lawrence, titled China’s Political Institutions and Leaders in Charts, the author presents a concise, Chart- and table-based illustration of China’s institutions and current political elite.

The IEA also provides a detailed empirical account of China’s internal structure connecting the energy sector to the power structure.

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1.3.3 Sino-Qatari energy relations, and Middle East geopolitics

The energy relations between China and Qatar are relatively recent hence there are relatively few works that specifically investigate this topic. Most of the scholarly articles tackling these relations are focused on the whole Gulf or Middle East regions, with Qatar as one of their case studies. In an article published by the Brookings institute in Doha, titled Embracing Interdependence: The Dynamics of China and the Middle East, Chaoling Feng offers an inclusive portrayal of the growing interdependence between China and different Middle-Eastern energy exporting countries covering mutual investments and financial and trade agreements. He also lays forward an understanding of the dynamics governing these relations using a historical geopolitical approach however he does not frame his research theoretically, deciding to remain on the descriptive level. One of the most insightful sources on regional geopolitics in the Middle East, and the political economy of energy in the Gulf States is a ten years multidisciplinary research program based in the London School of Economics and funded by the Kuwait Foundation for the Advancement of Science. The Kuwait Program on Development, Governance and globalization in the Gulf States, focuses its area of study on globalizations and the repositioning of the Gulf States in the global order, and on the specific challenges facing carbon-rich and resource-rich economic development, as well as studying the future of regional security structures in the post Arab Spring political and geopolitical environment. One of the articles produced by the program under the title ‘Qatar ‘rises above’ its region: geopolitics and the rejection of the GCC gas market, Jim Krane and Steven Wright connect market forces in the energy sector with a focus on natural gas and LNG, with domestic politics to convey a comprehensive image of the energy sector in Qatar, and the geopolitical dynamics shaping it.

1.4 Research Question/s

This research is aimed to answering the question: How do China’s energy relations with Qatar shape their economic ties and how does this affect China’s energy security?

A set of sub-questions arises to contextualize and operationalize the main research question;

• What are the domestic forces and conditions shaping China’s energy security?

• What is China’s strategy in energy supply countries, and what is the role of NOCs herein?

• What are the domestic risks to China’s energy supply security in Qatar?

• What are the geopolitical obstacles and challenges facing China’s energy strategy in the Middle East?

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1.4.1 Hypothesis

H1: The economic ties between China and Qatar are stimulated yet not causally correlated to their energy relations, thus serving as a supportive element to China’s energy security. H2: China’s most effective strategic tool to secure its energy supply security in Qatar and become an aggressive player in the energy market in the Middle East is through increasing economic interaction.

H3: China’s economic ties with Qatar are independent of their energy relations and are driven by market forces, maintaining that the nature of any potential correlation between manifestations of the two is not causal in nature.

1.5 Theoretical Framework

My research tackles a multidimensional subject that includes a set of concepts, each of which needs to be theoretically addressed on its own to bring about a coherent theoretical basis for my research. When dissecting the main research question and sub-questions, three ideas arise as the focus of study: Energy security and resource scarcity, state-society relations in china and Qatar, energy relation between china and Qatar.

1.5.1 Energy security and Resource scarcity

China’s energy security is the starting point of my research, as it is the fundamental element to which all other elements are contingent. China’s energy security dictates China’s energy strategy, hence its domestic policies targeting both consumers and domestic suppliers, and connecting the main actors in the energy sector to the power structure and decision makers on the one hand, and its foreign policy in energy rich countries, and regions of geostrategic importance to its supply security, on the other. Therefor, this essential aspect will be explored in depth in Chapter II, by applying the resource scarcity model, paralleled with an empirical analysis of China’s energy situation, both of which will lead to a clear comprehensive portrayal of China’s energy security.

The ‘resource scarcity’ model was developed by M. Amineh and H. Houweling to provide an analytical classification of the main types of energy scarcity, and to identify their fundamental causes. They present three main forms of scarcity: demand-induced scarcity, supply-induced scarcity, and structural scarcity (Amineh & Houweling, 2007). These types of scarcity are common to most produced goods and not just to energy, however, this theory is not centered on identifying a typology of scarcity, rather it seeks to highlight the different implications and challenges of each type of energy scarcity on energy security and on the economy as a whole and how it is possible to bring about viable plans and policies to mitigate these challenges. In my research I will apply the demand-induced scarcity model, considering the increasing consumption of natural gas both in China and globally.

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The supply-induced scarcity model does not apply to my research, first, considering the growth in the gas upstream supply market and the relative stability in production along with the flexibility provided by LNG, regarding the choice of supply sources. Second, the huge size of gas reserves means that this source of energy is likely to keep on satisfying demand for the foreseeable future. These reasons, mainly the flexibility in the gas market renders the structural scarcity model irrelevant to my research.

1.5.2 State-society relations in China and Qatar

Western scholars distinguish two ideal types of state-society complex paradigms in the post-hegemonic era: authoritarian state-society complex, and liberal state-society complex. China and Qatar both present two cases of authoritarian regimes, where power is completely centralized, and social forces have very little influence on the decision making process (Amineh & Guang, 2014). However, as M. Amineh and Y. Guang (2014) clarify, these two types are not polar opposites. Thus, to better understand how China’s and Qatar’s NOCs fit within their power structure, I will explore in chapter III, the ideal type of state-society complex to be able to position both China and Qatar on that spectrum, and to identify to what degree they conform with the ideal authoritarian state-society complex model.

This model thought explaining the overarching characteristics of such states, it however, falls short of describing the peculiarities of states like Qatar. Here, the rentier state theory (RST), delves deeper into the underlying factors leading to the rise of an authoritarian state-society complex in an energy rich country like Qatar. This political economy theory identifies the main forces shaping state-society relations in states with incomes mostly generates through rents and then distributed to the population. This means that in those states, any form of political entitlement is replaced with a financial one that once fulfilled by the state towards its citizens, exempts it from being subject to public scrutiny or accountability. In Qatar, this rent relies on the country’s vast natural gas reserves, and generates enough money to sustain what is considered to be one of the highest standards of living in the world, which results in a satisfied population that is both politically distanced, yet supportive of the royal rule.

1.5.3 Energy relation between china and Qatar and geopolitical challenges

This aspect of my research is of particular complexity, since it hinges on the previously discussed concepts, and on other geopolitical forces. The absence of an all encompassing theory that describes, explains and predicts all aspects of political interaction on the international level, means that applying an IR theory to a particular area like energy relations will have its shortcomings. To make a strong case for my use of theory, I will put

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forward a brief overview of the main IR theories relevant to the specific area of focus in my research, clarifying their main assumptions, and critically identifying their weakness with regards to their relative explanatory power.

Realism is one of the oldest schools of thought in the study of interstate relations. Conceptual traces of this well established IR theory can be found in the writings of Thucydides and Hobbes, who like their contemporary proponent Hans Morgenthau are seen as classical realist who attribute power politics to the human nature. Their position contrasts with their modern neo-realist successors who emphasize the structure of the system. The earliest coherent and all encompassing account of this theory can be found in the writings of Kenneth Waltz, who wrote a handful of prominent works in the field, most notably ‘Man State and War’, and ‘Theory of international Politics’. Walt’s theory is based on two basic assumptions; his first assumption takes states as a key actor in an international system characterized by an anarchical structure ( (Mearsheimer, 2009).

His second assumption asserts the primary motive in this self-help environment as the survival of the state, or more technically, the maintenance of the sovereignty of the state (Mearsheimer, 2009, p. 242). Under such conditions states find themselves in a competitive environment where each state seeks to increase its chances of survival by gaining more power than its potential adversaries (Mearsheimer, 2009).

Realists underweight the impact of interdependence and dismiss the role of international institutions and subnational actors as insignificant. They see the causes of peace, or more accurately the absence of the causes of war, as going deeper that what the democratic peace theory suggests. (Mearsheimer, 2009, p. 243). Having briefly introduced realism, this theory fails to provide a coherent account of what this research aims to focus on, which is the connection between economic relations and social entities like state owned corporations with states foreign relations and activities. Moreover, the emphasis it puts on hard power misses the assertion that this research aims to establish, that under the conditions of globalization, and integrated markets, the major tools used by the state to push its foreign agenda on the international level particularly with regard to energy supply-security, are economic rather than military.

In contrast to realism, complex interdependence theory stresses economic interdependence, which it considers to be the cement of international relations, as well as highlighting the role of non-state actors in fostering peaceful and perpetual relations between states. The theory offers a useful analytical paradigm, in particular regarding energy security issues, since it marries between high politics and low politics, or in other terms between elements of power politics and those of economic liberalization. Costs and benefits are both highlighted in this theoretical approach, and are measured in absolute terms rather than in relative terms. Hence the resulting outcome of interstate interaction does not necessarily end up as a zero sum game, which is an eventuality in the realist point of view. Despite

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agreeing with some realist thinkers on the rationality of state, and on their self-interested nature, they assert that under certain conditions, cooperation does not have to conflict with these premises (Keohane, 1984).

However, one of the main assumptions of complex interdependence and of neoliberalism is that growing economic interdependence will increase cooperation among states not just on the governmental level, but also on the transnational level through non-state actors who in the neoliberal approach, play a significant role in framing and guiding modern interstate affairs. Joseph Nye and Robert Keohane, found that the growing number of channels of interaction between societies, and the reluctance of governments to resort to military force in addition to the reprioritization of security in international relations, are three main features of complex interdependence (Gomichon, 2013).

When scrutinizing the Sino-Qatari energy relations, it is clear that economic ties play a crucial role in its molding. However, the state-society complex in both Qatar and China contradicts quite clearly with the potential agency of subnational actors and of civil society that this theory tries to assert. Moreover, the notion of interdependence suggests having mutual impact between interacting states. Nonetheless, in the case of China and Qatar, the enormously disproportionate size of their economies and of their overall power makes interdependence -even in asymmetric terms- a trivial aspect to make a case for.

Critical Geopolitics

The term ‘geopolitics’ was first coined by Rudolph Kjellen in 1899, and defined as “the science, which conceives of the state as a geographical organism or as a phenomenon in space” (Dodd, 2005). The term mainly aims to convey the impact of a state’s geographical position on its foreign policy, and on the relations it weaves with other states, emphasizing certain strategic considerations like –spatial- access to resources (BU Č KA * & Wanda , 2011). Francis Sempa describes geopolitics as being “about perspectives – it is about how one views the world”, hence the end of the cold war which brought a change to perspectives also affected geopolitics (Sempa, 2009).

The globalized economic structures and dynamics along with the increasing significance of multinational corporations and national enterprises active on the international and transnational level, converted the geopolitical thinking into a geo-economic one (BU Č KA * & Wanda , 2011). Critical geopolitics defies the spatially dictated state behavior conception, considering that industrialization, economic development and globalization gave economic actors substantial mass in foreign strategy, leading to the gradual demise of the relevance of traditional factors like territories or boundaries (BU Č KA * & Wanda , 2011). The economization of foreign politics shifted rivalry from territorial one towards the control of resource and international trade (BU Č KA * & Wanda , 2011). This geo-economic outlook has risen in importance as it tries to analytically and critically connect economic and political activities, with geopolitical strategies, replacing as explained by

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Edward Luttwak, the traditional military means with investment capital accumulated and controlled by the state (BU Č KA * & Wanda , 2011). Within this perception military presence and diplomatic tools are substituted by market penetration (Luttwak, 2000). This theory tackles my research subject with more complexity and refinement than the previously discussed ones. Firstly, China’s presence in countries outside its direct geopolitical surrounding like Qatar indicates that its foreign policy is emancipated from predetermined spatial conditions. Secondly, China’s aggressive economic engagement in supply countries reflects its adoption of economic cooperation as major foreign policy tool using NOCs as major actors developing and sustaining these economic ties. Thus, critical geopolitics will be applied in this research as the overarching theory for its greater explanatory potentials with regard to energy relations between China and Qatar.

Moreover, the last chapter will rely on geopolitical economy theory, to identify the main geopolitical challenges to China’s energy supply security in Qatar. This theory explains how certain geopolitical conditions can lead to specific economic outcomes or vise-versa, which is a theoretical outlook of great importance when studying regions like the Middle East, where the linkage between geopolitics and economic considerations have been a perennial characteristic of regional politics.

1.5.4 Levels of Analysis

China and Qatar both present two cases of authoritarian regimes, where power is completely centralized and social forces have very little influence on the decision making process. This necessitate taking the state as the principal agent, hence the main level of analysis. However, this does not deny non-governmental actors from having an impact on policy outcomes, whether through the alliances that arises between the business elite and the ruling elite, or through their role in informing policy makers through studies, reports and policy recommendations. For this reason, the role of these social entities will be thoroughly explored, while reserving the prime agency to the state throughout the theoretical analysis.

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Title: Sino-Qatari energy relations

Note: a schematic diagram Illustrating the main forces involved in the Sino-Qatari energy relations as well as the power structure both in China and with regards to the energy sector (presented by the author).

1.6 Delineation

The bilateral energy relations between China and Qatar are recent, with the first shipment of Qatari LNG delivered in 2009, hence, the research will focus on the period from 2009 till 2016. However, I will be referring to data prior to that period to establish a longitudinal comparative illustration of the Sino-Qatari economic relations prior and after the initiation of their energy relations. Moreover, I will not dismiss investigating certain relevant events and developments prior to 2009 that heralded their energy and economic relations. Moreover, certain major historical events on the regional level will be highlighted when studying the geopolitical environment to which the Chinese foreign policy adapts itself, as well as uncovering the historical forces shaping the nature of alliances in the region, and how the Chinese energy security, hence, national interest fits within the sharp rifts, and antagonistic alliances of the region.

Figure 1.1

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1.7 Operationalization

1.7.1 Social entities and relevant actors in China

When studying energy security in China, the state emerges as a principal actor both because of the vital importance of energy security to its economic development and national security as well as the monolithic nature of the political system. The exertion of government power takes place partly through regulations and partly through considerable ownership interests in production, processing and distribution.

The main agents of the state regarding energy security are:

The leadership of Chinese Communist Party (CCP), consisting firstly of the Communist Party’s Politburo Standing Committee (PSC), which serves as China’s most senior decision-making body. Within this body the organization department is in charge of assigning jobs across the different public institutions, and enterprises; it is therefor responsible for the appointment and promotion of the chairman and CEOs of all state owned corporations state including NOCs. The State Council oversees all government institutions and administration in charge of regulating and administrating the energy sector, including: The State Assets Supervision and Administration Commission (SASAC), which is in charge of managerial appointments in the NOCS, While the National Development and Reform Commission (NDRC), is responsible for setting domestic oil and gas prices. Further, the National Energy Administration (NEA) is the institution responsible for the authorization of projects embarked on by NOCS. Finally, the Ministry of Foreign Affairs (MFA) plays a crucial role in providing the international activities of NCOs with

diplomatic support.1

On the financial level, the Chinese banks play a strategic role in sustaining a flow of capital into the investments of the NOCs.

I have chosen for my research three NOCs that have an active role in China’s LNG market. Despite being the third in revenue after Sinopec and CNPC, CNOOC has been the most profitable compared to other NOCs, moreover it holds a competitive edge having been the first to pioneer the development of regasification terminals. It completed the construction of a floating storage and regasification unit FSRU, in Tianjin, in 2013, and by 2014 this NOC was operating seven running terminals. Today, the CNOOC makes up 63% of the country’s total LNG capacity, or 34 BCM (Lawrence & Ratner, 2016, p. 18)). CNPC on the other hand was commissioned its first two regasification plants in 2011, marking its entrance to the LNG market, and it now runs three existing plants and is constructing one in the South of Guangdong province. The last to enter the LNG market was Sinopec after

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being commissioned the construction of a –now operational- terminal in Shandon province in 2014. These three companies are the major market player controlling the LNG supply to China.

1.7.2 Social entities and relevant actors in Qatar

Qatar and China share some major characteristics regarding the power structure and state-society relation that make up their political system. Similar to the CCP’s centrality to the political life in China, in Qatar, the whole of political power is concentrated in the Royal family who decides on all public job assignment, and holds absolute control over the country’s energy resources. Within the Qatari government, the Ministry of Energy and Industry will be looked at as a major actor. On the non-governmental level different gas producers in Qatar with joint investments with Chinese entities will be considered, mainly Qatar Petroleum and its subsidiary Qatar gas.

1.7.3 International actors

Regulations or guidelines can also be put into effect by supra-national authorities, thus I will also look at actors on the international level. Nevertheless, unlike oil, there’s no globally integrated market for natural gas, with the absence of regulatory bodies on the international level to oversee production and with pricing mechanisms changing between different regional markets. However, a number of information-based international

institutions will be important to this research not as relevant actors with regard to the main aspects of this research, but as major sources of statistical data whether descriptive or predictive. The most relevant of these institutions is the IEA, which is concerned with the oil and natural gas downstream and upstream sector, and will be a central source of information in this paper.

1.7.4 Definitions

In this research energy security or supply-security is defined as the availability of energy at all times in various forms, in sufficient quantities, and at reasonable and/or affordable prices (Amineh, Correlie, & De Jong, Study on Energy Supply Security and Geopolitics, 2004). Regarding the study of the internal state-society relations, the theoretical paradigm termed State-society complex refers to “State-made institutions that connect and regulate markets at home and abroad “ (Amineh & Guang, Energy and geopolitical economy in China, theory and concepts, 2014).

1.7.5 Variables and indicators

This research aims to understand whether there is a causal relationship between China’s energy relations with- and interests in- foreign suppliers, which will be considered as the independent variable, and the development of its economic ties with these countries, which

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will be considered as the dependent variable. The main indicators for are in the form of long-term trade agreements between China and Qatar, and economic interactions like trade in goods or financial investments between the two countries.

1.8 Methodology

The research will explore in-depth the different aspects of the Sino-Qatari energy relations, using a case study methodological outline, and resorting to qualitative data supported by statistical numbers.

This paper will rely primarily on governmental documents and reports produced by the Chinese and the Qatari governments, as well as reports published by other foreign governmental institutions, or international ones. Moreover, the annual reports of Chinese and Qatari NOCs and their subsidiaries will provide a detailed account of the activities of these companies, hence, they are a major source of statistical data. The research will also make use of news outlets especially in the Gulf States, to help identify major events and developments on the level of bilateral relations between China and Qatar (Aljazeera, Gulf News, and Doha News being some of the main news outlets).

Qualitative data will help portray a more detailed image of the Sino-Qatari energy relations, as well as provide support for my arguments, by covering the historical, geopolitical, and organizational, aspects of the topic. This form of data will be obtained through secondary sources like articles published in peer-reviewed journals, reports by national, international and non-governmental organizations. I will also be able to cover these sources in Arabic, which will give a greater insight on developments in the energy sector in Qatar, and on the geopolitical dynamics in the Middle East.

A number of research institutions, journals and annual publications are of great importance to this research: King Abdullah Petroleum Studies and Research Center Brookings, Doha Center for Strategic Studies, Dubai Center for Strategic Studies, the Oil and Gas Year, China today, Foreign Energy, Heritage foundation, Foreign Policy.

1.9 Structure of the thesis

I will start my research with a theoretical analysis of the geopolitical economy of energy in China, by exploring its power structure, and the course of its developmental growth and rapid industrialization. I will also frame China’s energy security challenges, within the resource scarcity model, followed by an overview of china’s gas needs and the role LNG plays in China’s energy security, which will help positioning China’s gas relations with supplying countries like Qatar in its energy strategy on the macro level, and how these countries relate to China’s national interest and energy security. The second chapter will study the inner political structure that is involved in shaping these relations, by identifying the main actors taking part in the decision making process and the dynamics of interaction

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between these actors with regards to energy issues. In this part I will focus on the role of NOCs in shaping China’s foreign energy relation with an emphasis on the three NOCs that are active in the LNG market which are: CNOOC China National Offshore oil Corporation (CNOOC) CNPC China National petroleum Corporation (CNPC) and Sinopec China Petroleum & Chemical Corporation (Sinopec).

I will look at the size of their offshore investments, and at the nature of their mutual investments with Qatar. A deeper insight on the role of Chinese banks in supporting the activities of Chinese NOCs in Qatar will be sought. This chapter will also explore the political economy in Qatar, and will provide an overview of its energy sector. Moreover, I will examine the responses of businesses and actors in the local energy sector in Qatar to the presence of China’s NOCs in the Qatari markets, and will end that section by studying the securitization of China’s energy security in Qatar. The final chapter is designed to frame all the previous knowledge in the regional geopolitics of the Middle East. Here, the main domestic, regional and international actors are identified, to uncover the main – geopolitical and geoeconomic- challenges facing Chinese foreign policy in the Middle East.

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Chapter II

State-economy and energy security in China

2.1 Introduction

The purpose of this chapter is to serve as a foundational step towards the specific inquiry of this research, by addressing the first sub question: what are the main domestic factors and conditions shaping China’s energy security? The first part of this chapter will present an overview of China’s energy situation, including its energy production and consumption. It starts by shedding light on the economic factors that form these needs. This part will also illustrate the slow paced, yet noticeable development of China’s renewable energy sources, and the growing share of these energy sources in the overall energy-mix. The second part of this chapter will frame these indictors within the concept of resource scarcity and the theoretical model that explains the main challenges relating to the demographic, economic and technological developments conditioning China’s energy security. Moreover, it will highlight the resulting dependency on imports as a main challenge in securing China’s energy supply security.

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2.2 Industrialization and state-led development

To better understand China’s energy profile, the data presented in this chapter should first be contextualized within the greater economic and historical reality that shaped the rise of China as the global power, and the economic giant that it is today. The Chinese developmental model successfully asserted the country as an industrial and export powerhouse in a seemingly impossible short period of time (Ma, 2015). This fast economic transition has led to a sharp increase in energy consumption, whether through the established energy intensive industries, or through an increasing per capita income and a growing urban population. Urbanization in China has risen drastically over the years of, from 17.92% in 1978, to 52.57% in 2015 (Zhao & Wang, 2015, p. 5610), which translates into higher standards of living, inconveniently paralleled with higher consumption of

energy.2

This state lead development confronts its engineers in the Chinese leadership with the challenge of securing China’s energy needs, when those needs are too big to be accommodated through domestic production. This is rendered more problematic for the Chinese Communist Party as it relies on economic growth for legitimacy and public support, thus, energy supply security is not just vital for the country’s sustainable economic

rise, but also to the survivability of its ruling party.3

Today China has one of the fastest growing economies in the world at an average rate of 9-10% (Xing & Woodrow, 2010, p. 4). This growth gave way to China’s emergence on the global level as powerful economy and a major industrial hub. This fast development however, is paralleled by an increased consumption of energy, which from 2002 has been growing faster that the GDP, rising by 60% from 2000 to 2005, making about half of the world’s energy consumption growth (Xing & Woodrow, 2010, p. 4). China is also one of the world’s largest producers, accounting for 60% of the world’s cement production and 45% of its aluminum (Ma, 2015, p. 4). Moreover, in 2012 for example, Chinese annual steel production (about 716 million tons) was eight times bigger than that of the US (World Steel Association, 2012). Chinese Industry is the largest energy consumer in China, taking 72% of the total demand market, while residential/commercial and transport both accounted for 14% percent of the total demand on energy (Ma, 2015, p. 5).

2_{See The Relationship between Urbanization, Economic Growth and Energy Consumption in China: An}

Econometric Perspective Analysis by Yabo Zhao 1 and Shaojian Wang, 2015 doi:10.3390/su7055609

3_{For more detailed literature on the developmental state model, see Mark Beeson, Regionalism and}

Globalization in East Asia (Palgrave Macmillan, 2007), chapter 7.

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2.3 Indicators on the energy situation 2.3.1 Energy production

2.3.1.1 Fossil Fuels

One of the only abundant domestic resources in China is coal, whose consumption it is able to meet through its domestic production, which in 2010 reached 3.2 billion tones (Ma, 2015, p. 7). This however, is not the case with oil, which despite a slow increase in production from 1.34 to 1.55 billion barrels fails to meet the country’s needs (MLR, 2016). China nevertheless, holds 24.6 billion barrels of proved oil reserves, making it the fourth largest petroleum producer in the world ( EIA Beta, 2015, p. 3).

As of 2015 China’s proved natural gas reserves amounted for 164 trillion cubic feet (Tcf), the largest in the Asia-pacific region ( EIA Beta, 2015, p. 18). China’s production of natural gas has risen in the past decade, tripling from 2003 to 2013 to 4.1 Tcf, and then rising to 4.3 Tcf in 2014, in the government’s attempt to reach a target of 6.5 Tcf by 2020 ( EIA Beta, 2015, p. 18).

2.3.1.2 Renewables and nuclear energy

The environmental impact of China’s use of fossil fuels has led the Chinese government to invest in renewable energy sources. On the legislative level the Renewable Energy Act is a major step towards constructing a legal framework for this transition. The act determines the duties of the government, businesses and different users of renewable energy. It includes goals relating to grid connection, price management regulation, differentiated pricing, special funds and tax reliefs while setting 2020 as a deadline for achieving a 15% share of renewable in the energy supply (LSE, 2006).

Wind energy in China has great development potential, with 75% of its land mass and coastline capable of utilizing this resource (Wang, 2010, p. 3). As of 2006 China became one of the fastest growing wind power market in the world (Ma, 2015, p. 19). This aggressive expansion happened before the growth of solar energy market, stimulated by the governments aims to meet its 12th FYP goals of reaching 100GW of wind capacity by 2015 (Ma, 2015, p. 20). However some see this as an overexpansion of the wind energy

sector, which is negatively affected by overcapacity.4

4_{One
of
the
main
challenges
facing
wind
energy
in
China
is
the
inability
to
connect
all} wind farms to the grid. For a more detailed account of wind energy in China, and the main challenges it faces you can read Effective policies for renewable energy—the example of China’s wind power—lessons for China’s photovoltaic power by Qiang Wang et al (Renewable and Sustainable Energy Reviews, 2009)

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Despite being rich in solar energy and having massive production capacity of solar cells, China lacks behind in its use of PV technology with a very small installation capacity, with 90% of produced PV cells exported overseas (Wang, 2010, p. 8). China’s solar energy output in 2007 was 1088MW, putting it ahead of the world in term of total output (Wang, 2010), however when considering the share of solar of the per capita energy consumption it is clear that China is lagging behind.

The main challenge facing solar power in China is the high cost of PV cells, with an average of 58.9UScents/kWh for the on-grid electricity price of PV power plants (Wang, 2010, p. 9).

China maintains a subtle appetite for nuclear power increasing the share of nuclear out of the total energy mix from 1.1% in 2011 to 2.9%, which doubled the decade average of 12.4% in growth, reaching an increase of 28.9% in 2015 (BP, 2016). This share is expected to grow with 20 nuclear reactors under construction expected to join the existing 34 nuclear plants (World nuclear Association, 2016).

2.3.2 Energy consumption by source

The disproportionate size of industries relative to other domestic energy consumers, and the abundance of coal within its territory, led China towards a coal based economy, where coal contributes to around 70% of the total energy mix (Ma, 2015, p. 5). Despite the abundance of this source domestically, its environmental impact has led China to increase the share of other fossil fuels like gas and oil in its total energy consumption. Oil consumption has been on the rise with petroleum and other liquids accounting for 20% of the country’s energy consumption ( EIA Beta, 2015, p. 2). The increasing need for oil is triggered by a rapidly growing domestic car and transportation market, which despite the lack of accurate data, is seen as the major sectoral consumer of oil (Cheng, 2008).

In 2011, the share of natural gas in the total Chinese energy mix was around 4.6% sitting far below the 23.8% world average (Chinese State Energy Bureau, 2012, p. 6).5 However, since 2006, China’s consumption of natural gas has witnessed a steady increase at a rate of 16% annually (Feng, 2015, p. 2). This growth did not greatly affect the share of gas in the total energy mix, since other sources are also witnessing a sizable increase in demand. Thus it fell short of China’s vital need to diversify its energy mix, towards a greater share of less harmful fossil fuels like gas, which had led the Chinese government to develop strategies to stimulate demand on these sources. The country’s growing liquefaction capabilities makes

5_{The
original
report
by
the
Chinese
State
Energy
Bureau,
titled;
Natural
gas}

development "Twelfth Five -‐ Year Plan", is written in simplified Mandarin. This source however is used in Chaoling Feng’s article, embracing interdependence: the dynamics of China and the Middle East p. 1.

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LNG a more attractive and competitive choice for an energy source, considering the relatively easy transportation methods, and the resulting flexibility in adapting to any sudden disruptions in supply. China had acquired the technology to liquefy natural gas in the 1960s, but it was not until 1995 that the first industrial LNG liquefaction facility was built in Sichuan province (Qiao et al., 2005). The industry however, remained underdeveloped until 2003 when the first LNG terminal in the country was constructed in

Guandong province ( Shi , YinJing, LingWang, & TaoZha, 2010).6

Beijing also has even more ambitious plans when it comes to renewables, as it has set a target to raise non-fossil fuel energy consumption to 15% of the energy mix by 2020 and to

20% by 2030 in an effort to ease the country's dependence on coal ( EIA Beta, 2015, p. 3).7

2.3.3 Energy efficiency and policy response

China lags behind major industrialized countries in terms of its technological advancement, as it was estimated that in 2008, China was at an efficiency of energy use equivalent to Europe and the USA in the 1970’s. The recent past years however showed a serious commitment to technological development directed towards achieving higher energy efficiency. For instance, China hopes to double investment in research and development from 1.23% of its GDP in 2004, to 2.5% in 2020 (Cetron & Davies, 2010, p. 38). Moreover, the severe and direct environmental impact of coal on the daily life of average Chinese is more concerning than in any previous period (Ma, 2015, p.11). As a result, Sustainable development and management of resource consumption were emphasized in the economic reform plan presented at the Third Plenum in 2013 (Ma, 2015, p. 11).

6_{For
more
information
about
the
developments
in
the
LNG
industry
in
China,
see
Shi,} YinJing et. Al article titled Development status of liquefied natural gas industry in China, 2010.

7_{This
target
is
faced
with
a
lot
of
skepticism
considering
the
difficulty
of
energy} transition in a late industrial economy. For more literature about the topic see Energy Concern in China’s Policy-‐Making Calculation: From Self-‐reliance, Market-‐dependence to Green Energy by Li Xing and Woodrow W. Clark. 2010.

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One of the main directions of China’s policy to develop a more sustainable and green energy sources is to impose certain constraints on the use of coal. One of goals of the 12th Five Year Plan was to eliminate about 400 small coal producers, which equates 20 million tons of production capacity, successfully capping its production to 3.9 billion tons in 2015 (Ma, 2015, p. 9). The diversification of energy supply away from coal and the improvement of its energy efficiency in addition to large investments in clean energy and pollution mitigation were embraced by China’s government as a strategic road map towards an environmentally conscious energy security (Ma, 2015). However, this current strategy focuses primarily on energy supply, with a smaller emphasis on the demand side (Hengyun , Oxley , & Gibson , 2010, p. 12).

2.4 Energy scarcity and growing dependency

In their article titled ‘Global Energy Security and Its Geopolitical Impediments—The Case

of the Caspian Region’, Mehdi Amineh, and Henk Houweling explain how late industrialization, population growth, and an increase in income, are the main factors contributing to demand- induced scarcity (Amineh & Houweling, 2007). This model

Figure 2.1

Title: China’s imports, production, and consumption of natural gas Source: Data from BP Statistical Review of World Energy, 2015,

http://www.bp.com/en/global/corporate/about- bp/energy-economics/statistical-review-ofworld-energy.html.Graphic by CRS.

Note: unit = billion cubic meters (Bcm)

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unravels the fundamental impediments to achieving China’s energy security, asserting that the core causal relationship to be looked at in cases like China is between scarcity of energy sources and increasing demand for energy. By 2020, projections estimate China’s coal consumption to increase by 76% to 2.4 billion tons a year, its oil demand to grow to 11 million barrels, and its natural gas consumption tripling to 3.6 trillion cubic feet annually (Zhao S. , 2008, p. 209). China’s energy production has not been able to fulfill the increasing demand, standing as of 1992 below its total energy consumption (Cheng J. , 2016). The energy intensive economic phase that China is still going through, coupled with its need to mitigate the environmental impact of the use of coal, by slowly transitioning to other less emitting fossil fuels, have resulted in China’s reliance on energy sources abroad, as it is estimated that by 2020, China’s import dependency will rise to anywhere from 60.67% to 63%, prompting the fear of demand-induced scarcity (Ma, 2015, p. 4). This dependence creates fear over China’s ability to develop a viable energy policy that can sustain its developmental growth. Meeting the growth in demand will involve a greater reliance on foreign imports, which according to the NDRC will provide 35% of these increased needs by the end of 2015 (Feng, 2015, p. 2). China’s oil imports grew 6.3%, accounting for the largest growth in world demand (BP, 2016). Moreover, the New China News Agency estimates that by 2025, China will exceed the EU in its oil imports (Cheng J. Y., 2008). Ding natural gas, estimates by the NDRC indicate that the gap between demand on natural gas and indigenous production will keep on growing, reaching 80 billion cubic meters (Bcm) of imports in 2020 ( Shi , YinJing, LingWang, & TaoZha, 2010, p. 7458). This will certainly promote gas rich countries like Qatar as important energy partner, as well as pushing Chinese decision makers to accommodate their foreign policies in supply countries accordingly.

2.5 Conclusion

China has grown in the past few decades to become the world second economic power, and its first energy consumer. The country has witnessed what many consider to be a successful model of rapid industrialization, and state-led economic planning. This reality however, confronts the Chinese government with the challenge of developing an effective energy strategy that can sustain its ongoing industrialization and economic growth. The primary reliance on coal is bringing its toll on the environment and on air quality in Chinese cities, which has prompted the government to seek a more diversified energy mix, increasing the share of renewables, and of oil and gas. Doing so is a challenging task, especially when dealing with the growing energy demand opposed to insufficient domestic production of oil and gas (Kumar , TaeKwon , & HoChoi , 2011). This demand-induced scarcity lays its weight on China’s leadership, which aims to mitigate its impact by a greater reliance on

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foreign imports, making energy security a major component in its foreign policy in energy rich countries.

Chapter III

State, NOCs and energy supply security in Qatar

3.1 Introduction

This part of the research will focus on China’s NOCs, in an attempt to clarify how these organizations function, how they relate to China’s power structure, and their role in securing its

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energy supply. Moreover, it will investigate the Qatari political system, and energy market, in order to identify who governs the energy sector, and what are the main markets for Qatar’s energy exports, specifically Liquefied Natural Gas (LNG). This chapter will begin with an overview of China’s power structure, by exploring the country’s main political institutions and the power distribution within. Establishing the knowledge of the arrangement of power within China’s political system, enables a better understanding of the position of NOCs in relation to that arrangement, and to the dynamics of interaction between them and their governing institutions. Then, the strategy of China’s NOCs in supply countries will be explored, after which a summary of their activities will be presented to answer the second sub question: What is China’s strategy in energy supply countries, and what is the role of NOCs herein?

The following part will change focus to Qatar, looking at its power structure and political economy, its energy sector and the relations with China.

This part will also identify the main markets of Qatari liquefied naturel gas, to develop an understanding of the environment that China’s NOCs are trying to assert themselves in. The final part of this chapter will study the diplomatic and economic relations between China and Qatar, and their symbiotic relations spurring out of their energy affairs.

3.2 State, NOCs and energy supply strategy of China:

3.2.1 Overview on China’s power structure

The CCP is the ruling party in China, assuming power in 1949 after a civil war that ended in the defeat of Chiang Kai-Shek’s Nationalists and the relocation of their government in Taiwan. The implementation of the CCP policies, and daily administrative affairs are entrusted in the state’s institutions, lead by the State Council which is described in the third chapter of the constitution as the “the highest organ of state power”, which includes ministries and commissions, and different levels of “people’s governments” on the subnational level (Lawrence & Martin, 2013). The CCP ensures Party control, by assigning top state positions to senior Party members. Nevertheless, despite its continuous rule, China’s political institutions and political culture did not remain stagnant and did evolve, though in a subtle manner, to accommodate the socio-economic changes that have marked the country’s ascendance towards industrialization. The Communist Party however, remains in full control, with little or no serious challenges from within, which can be traced

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back to China’s seemingly idiosyncratic authoritarian state-society complex. This type of state-society relation is characterized by a highly centralized power structure, and a weak impact of social forces on political outcomes (Amineh & Guang, 2014).

China’s constitution grants the National People’s Congress (NPC) the power to oversee the State Council, as well as the presidency, the Supreme People’s Court, the public prosecutor’s office and the military, in addition to the power to approve budgets, agency reports and personal appointments, and also has the ability to initiate and influence legislation (Lawrence & Martin, 2013). The State Council is “the highest organ of administration”, and is entitled to oversee the state bureaucracy and managing the daily affairs of the country (Lawrence S. V., 2013). Finally, on the judicial level, the Supreme People’s Court is the highest judiciary organ in China, while the Supreme People’s Procuratorate, serves as the country’s top prosecutor.

3.2.2 How do NOCs operate within the power structure in China and who governs them? One of the main hurdles researchers aiming to study China are faced with, is the lack of transparency with regard to China’s different state institutions who keep large amount of data undisclosed even for academic research. This leaves room for speculations –in this case– regarding the details of governance in China’s NOCs, (Amineh & Houweling, 2007). Hence, this part of the research will rely on disclosed and accessible data dealing with the subject.

Following the creation of the People’s Republic of China in 1949, the energy industry was entirely managed by the Ministry of Fuel Industry, which included three bureaus: the Bureau of Coal Administration, the Bureau of Petroleum Administration, and the Bureau of electric Power Administration (Meidan, 2016). The ministry back then fell under the governance of the State Planning Commission (SPC), the predecessor to today’s National Development and Reform Commission (NDRC) (Meidan, 2016). In 1955, as a result of its inability to deliver the growing needs in the energy sector, the ministry was dissolved and replaced by three ministries the Ministry of Coal Industry (MOC), the Ministry of Petroleum Industry (MPI), and the Ministry of Electric Power (MEP) (Zhao J. , 2001). In line with the Cultural Revolution’s inclination towards institutional simplicity two of these ministries (MPI & MOC) were merged with the Ministry of Chemical Industry, however, the merger reform was reversed because of the poor performance of the energy sector during that period (Meidan, 2016). A series of merging, reshuffling, and restructuring followed these ministries, until Den Xiaoping started the first wave of reforms (1981 to 1983), that is when the Chinese government created the China National Offshore Oil Corporation (CNOOC), the first state corporation in China (Lieberthal & Oksenberg, 1988). Sinopec was created in 1983 under the State Council by merging petrochemical assets from the Ministry of Petroleum Industry and the Ministry of Chemical Industry

Sino-Qatari energy relations : Sino-Qatari energy relations ant he role of Chinese national oil companies