China's energy supply security from Iraq : the case of CNPC in Rumaila

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Graduate School of Social Sciences

China’s Energy Supply Security from Iraq: The case of CNPC in

Rumaila

Master Thesis Political Science: Political Economy

Research Project: The political economy of energy 2017-2018 June 29th_{2018, Amsterdam}

Author: Bart J. Oudijn Supervisor: Dr. M.P. Amineh

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Acknowledgements

When I started my master political science with the specialisation Political Economy in Amsterdam in September of 2017, my main interest was in hard (military) power. In my bachelor at Leiden University, I took a course on geopolitics and began to understand the link between hard power and geopolitical- and geo-economic interests. Due to the good experience I had in my bachelor, I signed up for the elective Energy and geopolitical economy in Eurasia, taught by mr. M.P. Amineh (Mehdi) in the first semester of my master. During this course, Mehdi invited me to join his research project the political

economy of energy. Over the course of the elective, the subject fascinated me more and more and I

became determined to write my thesis in Mehdi’s research project.

In this research project, I focus on the geopolitical economy of Iraq and China and their energy relation. This thesis is the result of six months hard work, nights of reading, and extensive research. I have tried to produce a comprehensive and inclusive report on the most important determinants for China-Iraq energy relation. Although there is always room for more analysis, this thesis has provided me, and hopefully my readers, with a good basic knowledge about this interesting topic.

With regard to the process of writing this thesis, I would like to express my sincere gratitude to several people whose help was indispensable in the writing process. First and foremost, I would like to thank Mehdi. His dedication to geopolitical economy and science is admirable and was an inspiration throughout this thesis. His continuous support, extensive knowledge and firm but constructive critics were of tremendous help. Secondly, I would like to thank the interviewees for their essential input. Thanks to their selfless cooperation, they have provided key insights for this thesis. My special gratitude go out to two persons. First of all, I would like to thank Niek Ong, a fellow student with whom I have had numerous discussions, brainstorm sessions, and deliberations about our theses. Secondly, my gratitude goes out to Suzanne van Oosterum for her hours of work in editing and her critical notes. Finally, I would like to thank my friends and family, who missed me out when I was working on my thesis, but kept supporting me.

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Map 1

Map 1 ---- China

China

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Map 2

Map 2 ---- Iraq

Iraq

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Map 3

Map 3 ---- The Middle East

The Middle East

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List of abbreviations

b/d Barrel of oil per Day

BP British Petroleum

CCP Chinese Communist Party

CIA Central Intelligence Agency

CNOOC Chinese National Overseas Oil Company CNPC Chinese National Petroleum Company EEAS European External Action Service EIA Energy Information Administration

EIU Economist Intelligence Unit

EU European Union

FDI Foreign Direct Investment

GDP Gross Domestic Product

IEA International Energy Agency

IMF International Monetary Fund

INOC Iraqi National Oil Company

IOC International Oil Company

IR International Relations

IS Islamic State

Mb/d Million barrels of oil per day

MoO Ministry of Oil (Iraq)

Mtoe Millions of Tonnes of Oil Equivalent NATO North Atlantic Treaty Organisation

NDRC National Development and Reform Commission (China) NEA National Energy Administration (China)

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NOC National Oil Company

NPC National People’s Congress (China)

OBOR One Belt One Road

OECD Organisation for Economic Co-operation and Development RCREEE Regional Centre for Renewable Energy and Energy Efficiency

RMB Renminbi

SCO Shanghai Cooperation Organisation

SEC State Energy Commission (China)

Sinopec China Petroleum & Chemical Corporation

SOE State Owned Enterprise

SOMO State Organisation for Marketing of Oil (Iraq)

TSC Technical Service Contract

UAE United Arab Emirates

UK United Kingdom

UN United Nations

UNDP United Nations Development Programme U.S. United States (of America)

USD United States Dollar

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List of

List of Tables and Figures

Tables and Figures

Tables:

2.1 China's forecasted energy mix in mtoe (2000-2040) 31

3.1 Proven oil -reserves and -production in the Middle East 49 3.2 Iraqi oil production, consumption and exports in mb/d (2006-2016) 50 3.3 Iraqi oil revenue as share of export and governmental revenue (2006-2016) 52

3.4 Characteristics of different types of oil contracts 54

3.5 Licensing rounds in Iraq 56

4.1 Key numbers of the Chinese NOCs in Iraq 61

4.2 Key numbers of the Rumaila TSC (2009) 63

4.3 The value of Iraqi – Chinese trade in million USD (2006- 2016) 66 5.1 Classification of domestic and geopolitical economic risks and challenges 73 5.2 Annual development of Iraq on the Democracy Index (2006 – 2017) 74 5.3 Dependency on oil and gas revenue for the Middle Easter economies (2016) 82 5.4 The fragility index score of countries in the Iraqi region (2016) 83

5.5 Qualified foreign oil companies in Iraq 93

Figures:

1.1 Conceptual model of geopolitical economy 21

2.1 China’s energy mix compared to the rest of the World (2000-2040) 28 2.2 China’s sectoral energy mix in millions of tonnes of oil equivalent 29

2.3 Origin of China’s oil imports (2014) 30

2.4 Structure of China’s energy institutions 33

3.1 Interaction in Iraqi system, example Baghdad province 45 3.2 Iraqi institutional framework regarding the Iraqi energy governance 46 3.3 The Iraqi oil production and destinations in mtoe (2012) 50 3.4 Sectoral energy consumption and energy mix in Iraq in mtoe (2011) 51 4.1 Composition of Chinese export to Iraq by value in USD (2016) 67

4.2 Chinese investment in Iraq per year (2007 – 2017) 69

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Abstract

This thesis aims at providing a comprehensive and inclusive analysis on the development of the energy relation between China and Iraq between 2003 and 2018. The current academic literature on the (energy) relation between China and Iraq is underdeveloped. Moreover, due to the developments in Iraq and the region in the past years, most literature is outdated. From a geopolitical economic point of view, a new perspective within critical geopolitics, the crucial factors for the energy relationship are analysed, making a contribution to fill this gap. The starting point of these activities is the assumption that in order to maintain economic growth, China increasingly has to rely on imported energy resources. The activities of CNPC in Iraq in general, and in the Rumaila field in particular, are taken as a case study. In this regard, this thesis explains Chinese activities beyond their geographical borders and the geopolitical and geo-economic relevance of these activities in the international sphere. In this thesis, it will be argued that China’s comprehensive approach to secure resources abroad is exemplified in the Iraqi case. Moreover, the activities of CNPC in Iraq played a key role in improving the Chinese-Iraqi energy relation, allowing Iraq to contribute to China’s energy supply security. Finally, this thesis finds that, despite the war against IS and instability in the region, the energy relation between China and Iraq remained strong.

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Chapter 1: Research Design

hapter 1: Research Design

1.1

1.1 Overview of the Research

Overview of the Research

Introduction IntroductionIntroduction Introduction

In the last couple of decades, China transformed from a regional actor with relatively little economic and political power, into the world’s second-largest economy. In order to fuel this transition from an economy focused on agriculture to an increasingly developing industrialised country, China’s energy consumption has skyrocketed in the last few decades. With limited domestic resources, China increasingly relies on the import of energy in order to supply its energy demand. Therefore, the Chinese government implements a large variety of energy policies, in order to increase the country’s energy supply security.

Iraq is a good potential candidate to supply China with energy. With one of the world’s largest reserves of oil, Iraq can contribute significantly to China’s energy mix. For this reason, Chinese National Oil Companies (NOCs), and the Chinese National Petroleum Company (CNPC) in particular, have started with large-scale petroleum activities in Iraq. Besides these upstream activities, the Chinese government has started with large infrastructural projects under the “One Belt One Road” framework. However, the recent war against the Islamic State (IS) and the instability in the region, could pose a threat for Iraqi oil production and the energy relation between China and Iraq.

1.1.1 1.1.11.1.1

1.1.1 Research ObjectivesResearch Objectives Research ObjectivesResearch Objectives

The research focus of this thesis is on the petroleum activities of CNPC in Iraq, in which the Rumaila oilfield is used as a case study. The main objective of this thesis is to explore China’s energy supply security in relation to its activities in Iraq. The energy relation between China and Iraq will be the core of this thesis.

The objectives of this thesis are the following:

- To analyse the relation between the state and the energy sector in both China and Iraq; - To analyse the Chinese and Iraqi energy policy and energy institutions;

- To analyse the activities of CNPC in Iraq in general and, the Rumaila field more specifically, by looking at trade, finance and investment in the Iraqi oil sector;

- To analyse the Iraqi (civil) war and other domestic and geopolitical economic risks and challenges for Iraqi oil production and the Chinese-Iraqi energy relation.

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1.1.21.1.2

1.1.2 Research question and sub questionsResearch question and sub questions Research question and sub questionsResearch question and sub questions

Following from these objectives, the following main research question can be formulated:

Research question: What are the comprehensive challenges of the Chinese energy relation with Iraq?

In order to answer this research question, the following sub questions will be answered:

1. What is the relation between the state and the energy sector in China and what is the energy situation in China?

2. What is the relation between the state and the energy sector in Iraq and what is the energy situation in Iraq?

3. What are CNPC’s activities in the Iraqi energy sector in general and the Rumaila field in particular?

4. What are the risks and challenges for the sustainability of the Chinese-Iraqi energy relation on the domestic and geopolitical economic level?

1.1.3 1.1.31.1.3

1.1.3 Social and scientific relevanceSocial and scientific relevanceSocial and scientific relevance Social and scientific relevance

Firstly, the social relevance of this research comes from the salience of energy supply security in China and the instability of Iraq in recent years. Although a transition towards renewable energy sources started in recent years, oil will remain a major source of energy in the coming decades. Chinese activities in Iraq could affect the energy supply security of other nations. Moreover, the (civil) war in Iraq is an important subject in the international news over the past two decades. With the recent (civil) war against IS and the tensions with the Kurdistan Regional Government (KRG), the country remains unstable. As a result of the several wars, Iraq is heavily disrupted. In order to combat radicalism in the country, economic development is key. The oil sector in Iraq is at the centre of the country’s economy. Therefore, the successful development of the Iraqi oil industry and a stable relation with China are key for the prosperity of the citizens of Iraq. Because of the geographical location, the stability of Iraq is also necessary for the stability of the region.

Secondly, this research is also academically relevant. Regarding the topic, there is relatively little academic written work on the energy relation between China and Iraq. It should be noted that most academic work is outdated, due to the geopolitical changes in Iraq and the Middle Eastern region in the past years. This thesis contributes to that knowledge. Moreover, it also contributes to the work on the relation between China and other oil-rich countries in the Middle East.

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13 1.1.4 Delineation of the research

1.1.4 Delineation of the research1.1.4 Delineation of the research 1.1.4 Delineation of the research

From 1972 until the 2003 US’ invasion in Iraq, the Iraqi oil industry was completely nationalised. During this period, only Iraqi oil companies produced oil in the country. After the US’ invasion, the Iraqi oil market opened for foreign companies, including the Chinese NOCs. Therefore, this research focuses on the period after the US’ invasion in 2003. Although some data may not be available for 2018, the Iraqi elections in May 2018 and the recent developments in the region are important determinants for the Chinese-Iraqi energy relation. Therefore, the time-period on which this thesis focuses is 2003 – 2018. The relevant space mostly regards China and Iraq, however, as events in the Middle East could affect the energy relation between China and Iraq, the entire region is seen as relevant space. Because of the focus of this thesis, the NOCs are the most important actors. The biggest active Chinese NOC and its Iraqi counterparts are the main actors in this research. These NOCs are: CNPC, the Iraq North Oil Company and the Iraq South Oil Company. However, these actors cannot be analysed without looking at both the Chinese and Iraqi government and their relation with these NOCs.

1.2

1.2 Literature review

Literature review

In order to place this thesis in the field of energy studies, a brief review of the academic literature on the topic will be provided. First, the literature on China’s energy -scarcity, -security, and –policy will be discussed. After that, the focus is on the academic research on the Chinese NOCs, and CNPC more specifically, since they are the main actors of this thesis. Finally, the relevant academic literature about Iraq is reviewed. In this part, the focus is mostly on Iraqi energy policy, the Iraqi NOCs and the work on the consequences of the (civil) wars in Iraq.

1.2.1 China 1.2.1 China1.2.1 China 1.2.1 China

Until 1993, China was an energy exporting country. However, due to increasing domestic energy demand and decreasing domestic supply, China became an energy importer (IEA, 2012). In the academic literature, there is sufficient work on the energy situation in China (e.g., Lee, 2012; Coa & Bluth, 2013; Chen, 2014; Yao & Chang, 2014; Zhang, 2016; Geng & Qiang, 2016; Amineh & Yang, 2017). Zhang (2016) provides a detailed overview of China’s energy shortages. The total energy consumption of China increased fivefold between 1980 and 2014 (Ibid.). According to Zhang (2016), this sharp rise has different reasons. Firstly, the Chinese population doubled between 1962 and 2013 (Ibid.). Secondly, China’s Gross Domestic Product (GDP) increased by thirty times between the 1970’s and 2013 (Zhang, 2016). This led to an increase in the demand for energy. Moreover, since the second half of the 1990’s the Chinese energy-intensive industry started to grow, which increased the demand for energy even further (Ibid.).

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14 As Cao & Bluth (2013) notice, however, the prospects for increasing the domestic production of energy are limited. The oil and gas fields are depleting and even coal is becoming more expensive (Ibid.). Zhang (2016) outlines the Chinese domestic coal, oil and gas reserves. Due to the insufficient reserves of especially oil and gas, China relies increasingly on the import of energy (Coa & Bluth, 2013; Chen, 2014; Amineh and Yang, 2017). Energy is key for economic development and growth of the country, and therefore, at the heart of China’s policy (policy (e.g., Lee, 2012; Meidan, 2016c; Amineh & Yang, 2017). As Lee (2012) notes, “securing such access [to foreign oil, red.] is also essential for mitigating risks to

the survival of the regime in China” (p. 78).

Many academics have discussed the domestic energy policy of China (e.g., Dannreuter, 2011; Andrews-Speed & Dannreuther, 2011; Coa & Bluth, 2013; de Graaf, 2014; Zhang, 2016; Yao, Chang, Shao, Qiao & Wang, 2017). Zhang (2016) starts by mentioning that all energy policies in China should be viewed in the light of the interaction between the state’s interests and interests of the Chinese NOCs, which are more based on market incentives (p. 20). Zhang (2016) discusses China’s energy policy in the light of the three grand International Political Economy (IPE) theories (Realism, Liberalism, and Marxism) of which none of them is able to explain China’s policy (Ibid.).

The basics of China’s energy policy can be found in two key documents. In China, the state’s five-year plans are leading in all types of economic policies. These plans outline the state’s economic targets for the coming years, regarding, for example, GDP and energy intensity, and are leading for the economic policy of the country. Lee (2012) analyses the 2010 12th_{five-year plan, while Meidan (2016) evaluates} the 2015 13th_{five-year plan. In the last two five-year plans, renewable energy resources have become} a new important policy area for the Chinese state. Renewable energy resources could potentially decrease the reliance on foreign energy sources, such as oil imports and help to fight climate change. The other key document is the white paper on China’s energy policy by the China Information Office (2012). In this document, the Chinese energy policy is outlined more specifically. An entire chapter of this white paper is dedicated to “International Cooperation in Energy”, or in other words, securing energy resources beyond China’s geographical borders (Ibid.). In this chapter, the China Information Office stresses their focus on fair trade, mutual benefit, and common development. Interesting is the focus on stable prices, showing that for China, energy supply security is more important than market incentives.

Several scholars have researched the foreign energy policy of China (e.g., Andrews-Speed & Dannreuther, 2011; Cheng, 2012; Lee, 2012; Cao & Bluth, 2013 Meidan, 2016a, 2016c; Zhang, 2016; Shao & Wang, 2017). In order to fuel their appetite for energy, China has to import energy, such as oil and gas. Therefore, the Chinese foreign policy is focused on building long-term relations with

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resource-15 rich countries by closing trading contracts rather than relying on market exchange (Coa & Bluth, 2013). According to Amineh and Yang (2017), these relations can be achieved either by force or by cooperation. Zhang (2016), and Coa and Bluth (2013) put emphasis on the focus of cooperation by the Chinese energy policy. According to Coa and Bluth (2013), part of China’s policy is focused on China’s image as a trading nation instead of a “military-territorial state” (p. 383). Meidan (2016a) discusses examples of these partnerships. An example of these types of relations are loans by the China Development Bank (CDB), which are repaid in oil. China made such deals with, for example, Venezuela, Brazil, and Turkmenistan.

Additionally, Lee (2012) argues that the Chinese foreign energy policy is more geopolitically driven than based on market incentives. However, Lee (2012) does not fully agree with Zhang (2016), and Coa and Bluth (2013) on the Chinese focus on cooperation instead of conflict. Lee (2012), for example, argues that Chinese activities undermine western efforts to promote human rights in authoritarian regimes. This could increase tensions between China and the West, and, potentially, lead to conflict (Ibid.). Moreover, Lee (2012) argues that the increasingly assertive and aggressive attitude of China in the South China Sea can be partly explained by the presence of oil.

1.2.2 China’s NOCs 1.2.2 China’s NOCs1.2.2 China’s NOCs 1.2.2 China’s NOCs

Within the academic literature, there is a debate about the degree to which the Chinese NOCs are under control of the state. First of all, as Meidan (2016) notes, “the relationship between the NOCs and

the government has been a story of successive waves of centralisation and decentralisation” (p. 55).

The discussion in the academic literature, therefore, focuses on the general trend of the amount of independence from the state. One side argues that the NOCs can operate relatively independent from the state (e.g., Downs, 2007; Kong, 2011; Chen, 2014; Dong, 2014; Zhang, 2016). Chen (2014), for example, notices that the NOCs compete with each other abroad. Kong (2011) and Downs (2007), on the other hand, focus on the interests of the NOCs, which can be opposite of the state’s interests. A key example here is that the NOCs sell a substantial part of their oil, instead of transporting it to China (Ibid.). Zhang (2016) notes that there is still formal governmental oversight over the Chinese NOCs. However, he argues that the NOCs have become more independent and powerful in recent years (Ibid., p. 227). The key point in Zhang’s (2016) argumentation is that; first, the state has withdrawn most of its institutional power, and second, in some fields, the NOCs have gained leverage over the Chinese government. Therefore, he concludes that the NOCs can operate relatively independent.

The other side argues that the NOCs are under strict control of the state, and that the activities of the NOCs are part and parcel of the Chinese security policy (e.g., Lee, 2012; Taylor, 2014; de Graaff, 2014; Amineh and Yang, 2017). Acquisitions in foreign oil fields are not necessarily based on market

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16 incentives but rather on state policy. For China, “energy security (…) is too important to be left to

market-forces alone” (Lee, 2012, p. 83). The state class and the NOCs work together with the help of,

for example, diplomacy, trade deals, and investment. Moreover, although De Graaff (2014) admits that the NOCs got some independence in the early 1990s, she argues that the state recentralised the NOCs in 1998. In recent years, Xi has been able to centralise power even further. Therefore, this side argues that Chinese NOCs should be analysed as an integral part of the Chinese state.

Due to the large share of imports, China tried to diversify its energy supply geographically (Cao & Bluth, 2013). The Chinese NOCs were used as tools of the state to secure energy abroad, by developing oil and gas networks with other country’s NOCs and International Oil Companies (IOCs) (Ibid.). This strategy of ‘going abroad’ or ‘going out’ was first mentioned in the tenth five-year plan, which was published in 2001 (Ibid.). The strategy encouraged companies to invest outside of China’s geographical borders (Ibid.). The strategy is elaborately discussed in the academic literature (e.g., Downs, 2007; Kong, 2011; Victor et al, 2012; Cheng, 2012; Coa & Bluth, 2013; Chen, 2014; Taylor, 2014). Moreover, China tries to increase its presence in the resource-rich countries not only with its NOCs but also with initiatives such as One Belt, One Road (Lin, 2017). Mostly based on infrastructural projects, the initiative is aimed at opening new markets for Chinese Exports. However, as other scholars argue (e.g., Lin, 2017), the initiative is also aimed at infrastructural projects in the energy sector, in order to increase China’s energy supply security.

1.2.3 Iraq 1.2.3 Iraq1.2.3 Iraq 1.2.3 Iraq

The production of Iraqi oil goes back to the late of the 19th_{century (AIE, 2016). Until the Second World} War, mostly British oil companies were active in Iraq (Ibid.). However, in 1962, the Iraqi government expropriated nearly all oilfields in the country (Ibid.; Jaffe, 2007). Under Saddam Hussein, this policy continued with the slogan “Arab oil for the Arabs“(Ibid.). The effectiveness of this policy is discussed in academic literature (e.g., Mabro, 2002; Jaffe, 2007; Katheeb, 2016; EIA, 2016). The EIA (2016), for example, argues that due to the tactic to rely on the domestic industry, the Iraqi oil industry fell behind international companies. Mabro (2002), on the other hand, argues that it was mostly the wars against Iran and the US that hampered the domestic oil production.

After the US’ invasion in 2003, the Iraqi oil market opened up for international oil companies (EIA, 2016). Nowadays, almost all major international oil companies are present in Iraq (Ibid.). In 2012, the Iraqi government, in cooperation with the World Bank, released the “Iraq Integrated National Energy

Strategy” (World Bank, 2012). It outlines multiple potential scenario’s regarding a stable Iraqi oil

production ranging from 4.5 million barrels a day (low production planning scenario) up to the goal of 13 million barrels a day (high production planning scenario) by 2020 (Ibid.). The Iraqi government aims at the medium planning production scenario of 9 million barrels a day (Ibid.). However, others (e.g.,

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17 Merza, 2011; IEA, 2012; EIA, 2016) argue that the production in 2020 will be maximum six million barrels a day, and that it will not reach the nine million until 2030.

Due to the nationalised character of the domestic oil industry, Iraq has had a long history of large NOCs. Nowadays, the two largest upstream Iraqi NOCs are the North Oil Company and the South or Bashra Oil Company. Jaffe (2007), IEA (2012), World Bank (2012), and EIA (2016), have discussed the relation between the Iraqi NOCs and the Iraqi government. All Iraqi NOCs fall under the control of the Iraq Ministry of Oil (MoO). In 2018, however, the Iraqi NOCs were placed under the recreated Iraqi National Oil Company (INOC). Nevertheless, the academic literature on the state-market complexes regarding Iraqi NOCs after Saddam Hussein is underdeveloped since Jiyad (2018) is the only one who discussed the recent changes on the structure of the petroleum sector and the NOCs in. He argues that the legal and institutional framework in the Iraqi oil industry remains weak (Ibid.).

The more recent literature on Iraq focuses on the war against IS. On 9 December 2017, the Iraqi prime minister, Haider al-Abadi, declared that IS was defeated (England, 2017). However, after five years of (civil) war, the country is disrupted (Ibid.). Many authors and reports (e.g., Kattheeb, 2016; EIA, 2016; Robinson, 2017; Ramani, 2017; EIU, 2018b; Crisp, 2018) argue that the war damaged the Iraqi economy severely. However, few articles measure the degree to which the economy is damaged. Robinson (2017) tries to assess the influence of IS on the economy on the local level. In his research, he compares the economy of major cities in Iraq and Syria before and after the invasion of IS (Ibid.). However, Robinson’s analysis does not focus on the Iraqi oil industry. There is a gap in the academic literature in this regard. Moreover, there are also indirect consequences of the war in Iraq. The potential consequences might be even bigger and could include the relation with investors. If investors would fear more disruptions in the country, this could prevent future investment in the country.

1.2.4 China 1.2.4 China 1.2.4 China

1.2.4 China ---- Iraq relationIraq relationIraq relationIraq relation

In the current academic literature, there is little work on the bilateral relation between China and Iraq. This is partly due to the nature of the relation between China and Iraq. Before the privatisation of the Iraqi oil industry in 2003, the China-Iraqi relation was modest. Although CNPC made plans to develop a minor oil field in Iraq in 1997, this plan was not executed due to UN sanctions on Iraq. Only after the US’ invasion in 2003, China strengthened their ties with Iraq, mostly focused on oil.

In his research, Dong (2014) focuses on the ‘going out strategy’ of Chinese NOCs towards Iraq and Iran. He argues that the activities of the NOCs are mostly based on commercial interests (p. 578). Moreover, he argues that the Iraqi state has been very friendly towards foreign investors and oil companies. Dong (2014) argues that besides the Chinese NOCs, also major western IOCs have revived their investments

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18 in the Iraqi oil industry. However, this is disputed in literature. Jaffe (2007), for example, argues that the role of IOC’s have become smaller. Vivaldo (2007) adds to this that the Iraqi government prefers China’s NOCs to IOCs because NOCs focus less on, for example, human rights and good governance. Arango and Krauss (2013), on the other hand, have a different explanation for the decreased interests of IOCs relative to NOCs. They argue that China’s NOCs are more willing to accept Iraq’s strict terms and low-profit margins because the NOCs are less focused on profit than the IOCs (Arango & Krauss, 2013).

1.2.5 Gap in literature 1.2.5 Gap in literature1.2.5 Gap in literature 1.2.5 Gap in literature

From this literature review, it has become clear that there is a gap in the academic literature regarding the Chinese - Iraqi energy relationship. Nonetheless, because of Iraq’s significant oil reserves and its strategic location, the country has the potential to become an even bigger oil supplier to China. The second main gap derives from the recent developments in Iraq and the Middle Eastern Region. Due to the end of the war against IS, the characteristics for oil production in Iraq have potentially changed. Therefore, there is a necessity for more up-to-date academic work. This thesis aims at filling in this gap.

1.3

1.3 Theoretical and conceptual framework

Theoretical and conceptual framework

In order to fill in the gap that is described above, geopolitical economy, a branch of critical geopolitical theory, will be applied in this thesis. Theory is necessary for guiding the research, giving direction for selecting right actors and important concepts. Therefore, with the use of theory, this thesis can further specify the appropriate actors and the concepts. In order to construct a concrete theoretical framework, first, the ‘grand’ theories will be discussed, after which critical geopolitics and a more specific framework will be outlined. Furthermore, the relevant concepts will be deliberated, based on a model by Amineh (2018).

O’Brien and Williams (2016) discuss the main theories in the IPE. Theory in IPE differs from theory in International Relations (IR) since IPE does not only has its origin in political economy and IR, but also in, for example, economy and geography. In IPE, three broad theories are dominant. These three theories are the economic statist perspective, which is comparable to realism in IR, liberalism, and critical theory (O’Brien & Williams, 2016).

The economic statist perspective focuses on power and the role of the state (O’Brien & Williams, 2016). The key assumption of the economic statist perspective is the anarchy within the international system and conflict instead of cooperation (Ibid.). Moreover, the world is seen as a zero-sum game, where the relative gain of power by one is the loss of power by another (Ibid.). The unit of analysis of the economic statist perspective is the state (Ibid.). This theory, therefore, ignores the ever-growing importance of transnational actors and non-state actors. The economic statist perspectives cannot

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19 explain the complicated state-market relations, interaction, and dynamics. This makes this theory unsuitable for this thesis.

The second main theory, liberalism, sees the world as interdependent instead of anarchical (O’Brien & Williams, 2016). Government interference in the world economy should be as low as possible in liberalist views (Ibid.). According to liberalists, the world is not a zero-sum game, but rather a positive-sum game. For this reason, liberalists tend to focus more on cooperation rather than conflict (Ibid.). However, liberal perspectives focus too much on the free market. China’s five-year plans and other characteristics of China’s state-led development show how the economy is not necessarily managed by market forces (Chen, 2008). Therefore, liberalism is not suitable either (Ibid.).

The third grand theory, critical theory, is a set of post-structuralist perspectives (O’Brien & Williams, 2016). One of the best-known perspectives within critical theory is Marxism. Marxism focuses on the nature of oppression of classes across societies and the role of capitalists and their connection with the state (Cox, 1981; O’Brien & Williams, 2016). In critical theory, international conflict due to the search for profit, because of a zero-sum game perspective is inevitable (Ibid.). Moreover, the outward drive of states due to domestic under-consumption in order to remain economic growth could be useful to analyse Chinese behaviour.

Cox (1981) is one of the important thinkers within critical theory. He divides theory into two different types: problem-solving theory and critical theory. Cox (1981) notes, “theory is always for someone and some purpose” (p. 128). Arguing that the prevailing world order influences problem-solving theory. Problem-solving theory, therefore, searches for patterns in structures or social relations and builds from there on (Cox, 1981). Critical theory, on the other hand, does not necessarily research the world order (Ibid.). It could also look at different world orders and possible structures and relations in that order. Cox further notes that the state is seen as a product of the hegemon and it is, therefore, necessary to understand the power relations. Moreover, critical theory acknowledges the importance of non-state actors, which play a key role in this thesis.

Also within geopolitical theory, which also includes the effects of geography on politics and economy, critical perspectives are applicable (Kelly, 2006, 24). In this thesis, the concrete theoretical framework comes from the latest stream within critical geopolitics. This stream of critical geopolitics, the geopolitical economy approach, also uses theory from IR and Economics and combines it with geopolitics (Houweling & Amineh, 2003, p. 325). The work of Harvey (1985, 2003) and Mercille (2008) form the foundation of this approach. In Harvey’s 1985 article, he adds geographical and geo-economic dimensions into the IPE. Here, he links the two concepts “territorial logic of power” and the “capitalist

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20 logic of power”. The “territorial logic of power” refers to the desire of the elite class to keep production within the geographical borders of the state, in order to keep control over the production. The “capitalist logic of power”, on the other hand, refers to the fact that capital has the tendency to flow across geographical borders (Ibid.). This is an opposite force of the “territorial logic of power”. This leads to a certain form of tension between the two logics of power (Ibid.). In his 2008 article, Mercille reformulates Harvey’s two logics of power into the “Geo-economic logic” (for the capitalist logic of power) and the Geopolitical logic (for the territorial logic of power). Moreover, Mercille (2008) stresses that there should be more emphasis on the geo-economics behind policy. The interaction between these concepts form the basis of geopolitical economy (Amineh & Yang, 2017). According to Amineh and Yang (2017), these two logics form the context of the current capitalist global system.

Amineh and Yang (2017) apply the logic of Harvey (1985, 2003) and Mercille (2008) to the Chinese case. China has developed rapidly in the past decades (Ibid.). In order to fuel the growing industrial economy, China increasingly is in short supply of vital resources for its industry. With the societal demand to find possibilities to remain the rate of growth, China is forced to let capital flow outwards towards other countries (Ibid.). Energy is a key example of this logic. China, lacking the domestic resources, is forced to move out to other countries due to lateral pressure. Within this geopolitical economy approach, a key point is that actors, in the state-market complexes, engage in acquiring resources beyond the borders of the state (Houweling & Amineh, 2003). Amineh and Yang (2017) add to this:

“Geo-economics can be regarded as the cross-border flows of trade, investment, and finance, taking into consideration the political aspects behind such movements” (p. 32). Moreover, Amineh and Yang (2014,

2017) apply some concrete concepts from the geopolitical approach. The starting point in geopolitical economy are the forces within society (Amineh & Yang, 2014. In figure 1.1, a model, made by Amineh (2018) shows the most important concepts within geopolitical economy and their interaction with each other.

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21

Figure 1.1 Conceptual Model of Geopolitical economy

Source: Amineh (2018)

The unit of analysis in geopolitical economy are the state-market complexes and can be defined as “state-made institutions that connect markets at home and abroad” (Amineh & Yang, 2014, p. 498). Amineh and Yang (2018), elaborately discuss the nature of geopolitical economy and state-market relations and the institutions, which regulate and connect the state and the market (p.10). Here, the focus is also on the capacity of the state and on the question of who controls the market and how (Ibid.). Based on this framework, two ideal types, the liberal state-market complex and the authoritarian or centralised state-market complex, are described (Ibid.). These ideal types should not be viewed as complete opposites. In liberal state-market complexes, there is a clearer distinction between the state and the market (Ibid.). Here, companies can conduct business more independent (Ibid.). Businesses have, however, an indirect influence on policymaking, where they can provide input for this process.

In authoritarian state-market complexes, on the other hand, societal forces are relatively weak (Ibid.). Here, these forces cannot act without the support of the state. Amineh and Yang (2014) argue that in China the state class is able to overrule demands from society. This also applies to businesses, which are part and parcel of society, and who have to rely on the support of the state (Amineh & Yang, 2018, p. 11). Regarding China, Amineh and Yang (2018) note that “the business class is part and parcel of

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22 state-power, directly or indirectly controlled by the state” (p. 11). As a result, the strategic choices of the companies are more aligned with the government’s interests. Moreover, in authoritarian state-market complexes, a substantial part of businesses is nationalised (Ibid.). Moreover, the state has significant influence over the economic factors, which are determined by the market in liberal state-market complexes (Amineh & Yang, 2018). These factors include, for example, wages, interest rates, labour mobilisation (Ibid.). China’s state-market complex can, therefore, be seen as authoritarian. Pivotal in China’s state-market relations is the state class, which has firm political control (Amineh & Yang, 2014). It is estimated that the Chinese state class exists out of roughly 41 million members of which 500,000 hold a leadership position (Goodman, 2014, as described in Amineh & Yang, 2018). The key elite in China is chosen from the state class and, therefore, can be seen as an inner circle of the state-class (Amineh and Yang, 2018). These are not only politicians, but also high managers of important economic sectors in China (Ibid.). This can refer to the top managers of State Owned Enterprises (SOEs), but also to entrepreneurs (Goodman, 2014 & Rothenberg, 2015 as described in Amineh & Yang, 2018). As a result, the state class has substantial influence via both formal and informal networks over the Chinese Communist Party (CCP), the institutions, and Chinese (energy) policy. The formal networks are structured around the CCP. In line with the constitution, the party is interwoven throughout society. The party has a large bureaucratic structure and is hugely powerful in the country. Although some scholars argue that Chinese governance and policy is decentralised (e.g., Downs, 2007; Chen, 2014; Zhang, 2016), the party has the political and organisational capacity to project sufficient power through top-down mechanisms (Taylor, 2014, 60). The government appoints key officials of SOEs, which is under the strict control of the CCP. Moreover, for the top position in large SOEs, such as the Chinese NOCs, affiliation with the CCP is essential (Ibid.). This allows for close and formal relationships between the market and the state.

Besides these formal structures, informal networks allow the state class to exert its influence. These social networks, called Guanxi in Chinese, are pivotal in the development of local economies and the private sector in China (Fligstein & Zhang, 2010). Fewsmith (2015) argues, for example, that these networks play an important role in the formulation of policy (p. 36). These networks are characterised by trust and interpersonal relations (Witt, 2010). Especially in the higher levels of government, these structures are less institutionalised and less organised (Fewsmith, 2015). These relations are not only key for economic development, but also for the power of the state class (Amineh and Yang, 2018). Through these networks, the state class is able to exert power besides the existing formal structures in China.

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23 The second concept, lateral pressure, deals with the socio-economic forces within societies (Amineh & Yang, 2014, p. 509). Amineh and Yang (2017) define lateral pressure as “the build-up of

socio-economic pressures on the government by forces released by market actors in order to expand economic transactions beyond state boundaries” (p. 27). In China, lateral pressure is a consequence of

societal demands for foreign energy resources, which are needed to sustain the economic growth (Ibid.). As a result, sufficient energy is key for the survival of the state class and energy policy is at the centre of both domestic and foreign policy.

The third concept, resource scarcity, explains the reason why China has to search for resources beyond its own borders in the first place. Amineh and Houweling (2003, 2010), and Amineh and Yang (2014, 2017) have elaborately discussed the scarcity of energy and its consequences on the geopolitical level. Fossil energy resources are finite and unevenly distributed around the world (Amineh & Yang, 2017). Since these resources are key for economic growth, there is pressure on the political elites to secure these resources abroad. Amineh and Yang (2014) discuss three types of energy scarcity. Firstly, demand induced energy scarcity, which is caused by, for example, the rise of population and/ or income (Ibid.). Secondly, supply induced energy scarcity can be caused by, for example, the depletion of known resources (Ibid.). The third type, which is discussed by Amineh and Yang (2014), is structural energy scarcity. This type is somewhat related to supply induced energy scarcity. However, the motivation is different. A key example of structural scarcity is the Organisation of the Petroleum Exporting Countries (OPEC).

Besides the concepts mentioned in figure 1.1, a definition of energy supply security is needed. Energy is more than a product that can be bought and sold on the global market (Correlje & Van der Linde, 2006). Fossil fuel is the dominant energy source for a majority of the developed states, and, therefore, key for economic development (Correlje & Van der Linde, 2006; Amineh & Yang, 2017). Within the academic literature, numerous definitions of the concepts are provided. Some of them are rather narrow, and focus solely on the physical flow of energy, while other definitions also take political and economic consequences of changes in the energy market into account (Amineh & Yang, 2017). Cao and Bluth (2013) mention three key factors of energy supply security namely reliability, affordability, and environmental sustainability (p. 381). In this thesis, a rather broad definition of energy supply security by Yergin (1988) is used, namely:

“To assure adequate, reliable supplies of energy at reasonable prices and in ways that do not

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24

1.4

1.4 Brief argumentation and hypotheses

Brief argumentation and hypotheses

As mentioned in the theoretical framework, the starting point of geopolitical economy is the interaction between social forces and the (energy) market. In these centralised complexes, factors as, for example, human rights are perceived to be less of an impediment. Due to the close connection between the NOCs and the state class, a more long-term view pursued. Therefore, it is expected that, due the complex domestic relation between the state class and the energy market, the Chinese and Iraqi state elites were able to build a stable, long-term relation, with the focus on oil. In line with this argumentation, hypothesis 1 is drafted:

H1: The centralised nature of the Chinese and Iraqi state forms the basis for their bilateral relation, which is focused on oil.

Moreover, geopolitical economy assumes that there are two strategies to secure foreign resources abroad, namely conflict or cooperation. China has chosen for the latter. In the centralised state-energy market relation, the NOCs are tools of the state class for power projection. Therefore, in order to discuss Chinese energy objective and the implementation of Chinese energy policy, the NOCs will play a key role in China’s quest for foreign energy. The petroleum activities of CNPC are, therefore, part and parcel of China’s energy policy. CNPC has become an important player in Iraq, with large upstream oil activities, aimed at increasing China’s energy supply security. This is, therefore, translated into the second hypothesis:

H2: The petroleum activities of CNPC in Iraq, and Rumaila in particular, led to an increase of Iraqi oil production and flows from Iraq to China, allowing Iraq to contribute to China’s energy supply security.

Iraq’s domestic oil production has gone up and down over the past decades. However, when production data is reviewed, it can be seen that production was relatively low in the years after major wars. With the 2003 US’ led invasion, the subsequent disruptions and the civil war against IS, Iraq encounters significant sources of turmoil that have potentially influenced oil production. However, these disruptions could also have more long-term consequences. If on-going violence or tensions threaten oil production for a long time, oil companies may decide that the potential revenue no longer outweighs the risks. With almost two decades of continuous war, violence, disruptions, and tensions, it is expected that the relation between the Chinese NOCs and the Iraqi government is significantly affected due to the war against IS and the tensions that remain since IS is defeated. This is, therefore, translated in the third hypothesis:

H3: The (civil) wars and unrest in Iraq and the region considerably affected the Chinese – Iraqi energy relationship.

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1.5

1.5 Research Method

Research Method

This thesis is a structured comparative case analysis. Due to the complexity of the analysis and the case, multiple methods are used to adequately and fully answer the research question. The thesis will mostly use qualitative research methods. However, some quantitative elements will be used to complement the qualitative research methods. Firstly, a substantial part of the information will come from academic literature. The analysis of this literature is mostly aimed at forming a contextual framework for the other parts of the research. The information will come from books and academic articles. The most important books in this regard are Andrews-Speed and Dannreuther (2011), Taylor (2014), Fewsmith (2015), Zhang (2016), and Robinson (2017). The academic articles mostly come from leading academic journals in the field of energy studies, such as International Affairs (e.g., Yergin, 1988; Dannreuther, 2011) and Energy Policy (e.g., Cao & Bluth, 2013; Sun, Gao & Shen, 2014; Yao & Chang, 2014).

Besides the books and journal articles, reports by think tanks will be used. Examples of these think tanks are The Oxford Institute for Energy Studies (e.g., Meidan; 2016a, 2016b, 2016c; Mills, 2016); The

International Energy Agency (IEA) (e.g., Iraq energy outlook, 2014; Update on Overseas investment by

China’s NOCs, 2014); and the Colombia Institute on Global Energy Policy (Kattheeb, 2016).

As mentioned in this literature review, there currently is a gap in academic literature. In order to fill in this gap, two research methods will be applied, namely semi-structured interviews and descriptive statistical analysis. Experts can contribute with their knowledge or provide data, which is missing in the literature. Therefore, structured interviews will be conducted. Franklin (2013) defines semi-structured interviews as “an interplay between an interviewer and interviewee (...) where the

interviewer brings a set of predetermined questions (…) and allows the interview to develop in various directions” (p. 185-186).

Statistical data from large databases could support the findings from the semi-structured interviews with the experts. Therefore, a descriptive statistical analysis will be conducted on databases on, for example, trade, investment and finance from Chinese Companies in Iraq. Descriptive statistics “summarise the data, instead of using the data to learn us something about the population the data

represents” (Toshkov, 2016). The data analysis in this thesis focuses on summarising the data and

showing general trends in the data. Therefore, only a descriptive statistical analysis is used and not inferential statistics. The most important databases, which will be used are UNCTAD (FDI Statistics, 2016) China Statistical Yearbook (2017), AidData (Global Chinese Official Finance Dataset, 2017), World Bank (Foreign Direct Investment – Iraq, 2018), and AEI & Heritage Foundation (China Global Investment

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1.6

1.6 Structure of the thesis

Structure of the thesis

This thesis is divided into six chapters, of which this research design is the first. Chapter two will analyse Chinese state-led development and the Chinese formulation of energy policy. In section 2.2, the Chinese energy situation and -outlook is discussed, while section 2.3 discusses China’s energy policy and the relevant institutions. Finally, in section 2.4, the Chinese NOCs, and their role in the energy policy will be elaborately deliberated.

The state-market relations of Iraq, as the case study of this thesis, are analysed in chapter three. Firstly, the relevant legal and institutional framework in Iraq will be discussed in section 3.2. After that, the Iraqi energy situation, -outlook, and -policy are analysed in section 3.3. In this section, the conditions and contracts under which foreign oil companies operate in Iraq are elaborately deliberated.

Chapter 4 focuses on the activities of the Chinese NOCs in Iraq. This requires an in-depth analysis of the activities of the most active Chinese NOC in Iraq, CNPC. In section 4.2 the Iraqi-China energy relation is outlined and an in-depth analysis of CNPC’s activities in the Rumaila field is provided. In section 4.3, the focus is on the trade, investment, and finance between China and Iraq.

In the fifth chapter, the classified risks and challenges on both the domestic and the geopolitical economic level are analysed. In section 5.2, the domestic risks and challenges are discussed. Afterwards, the nature of geopolitics in the Middle-East are deliberated in section 5.3. Subsequently, in section 5.4, China’s geopolitics in the region are discussed. Here the focus is on, for example, China’s peaceful cooperation and the recent One Belt, One road initiative. Finally, in section 5.5 the geopolitical economic actors and their influence in both the region and Iraq specifically is analysed. The last chapter, chapter six, is the conclusion. In this chapter, the main findings of the previous chapters are placed into context. This chapter tries to answer the research question, as stated in chapter one.

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Chapter 2:

Chapter 2: The Chinese State and Energy in China

The Chinese State and Energy in China

2.1 Introduction

In the theoretical framework in chapter 1, the state-market complex in China was discussed. With the help of this framework, the Chinese energy sector will be analysed in this chapter. This is key to understand Chinese energy policy and the role of NOCs in China. Key determinants, such as domestic production, consumption, and reserves, are at the basis of energy policy. Following the theoretical framework, the underlying forces are key to research China’s energy policy. Therefore, the analysis focuses on these forces and the relevant institutions, which form this policy. The role of the Chinese NOCs in China’s energy policy and energy supply security is elaborately discussed in this chapter. Concerning these focus-points, this chapter aims at answering the first sub-question: What is the

relation between the state and the energy sector in China and what is the energy situation in China?

This chapter consists of five sections. In section 2.2, the energy situation and energy outlook is analysed. Here, the focus is on the oil-consumption, -reserves, and -imports. Section 2.3 focuses on China’s energy -institutions, -policy, and -supply security. The institutions and forces, which underlie the formation of energy policy in China, are key in this section. Section 2.4 discusses China’s NOCs. Here, the difference between the Chinese NOCs and IOCs will be reviewed. Moreover, the role of the NOCs for the energy supply security in China is discussed. Section 2.5 is the conclusion.

2.2

2.2 2.2 China’s

China’s

China’s Energy Situation

Energy Situation

Energy Situation and

and

and Energy Outlook

Energy Outlook

2.2 2.22.2

2.2.1 Energy Situation in China.1 Energy Situation in China.1 Energy Situation in China.1 Energy Situation in China

In order to completely understand the activities of CNPC beyond China’s geographical borders, China’s energy situation needs to be understood. The Chinese energy situation has changed significantly since Mao came to power in 1949. Since China rapidly developed, the demand for energy increased sharply, and is likely to increase in the coming decades (BP, 2017). Since 2010, China is the biggest energy consumer in the world (EIA, 2015; BP, 2017). In 2016, China’s energy consumption accounted for 23% of the world’s total (BP, 2017). Moreover, China also accounted for over a quarter of the global energy consumption growth (Ibid.). Additionally, China is the world’s largest energy-related emitter of CO2. To a large extent, this is a result of the Chinese energy mix, which relies for a large part on fossil fuels.

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Figure 2.1 Chinese energy mix compared to the rest of the World (2016)

Note: Data collection and presentation by the author Source: based on IEA, 2017

As can be seen in figure 2.1, both the Chinese energy mix and energy consumption by sector substantially differentiates from the rest of the world. Coal is the major source of energy in China and accounts for 64% of the entire energy consumption (EIA, 2015). Oil accounts for roughly 20% of the energy consumption, while hydroelectric and natural gas account for 8% and 5% respectively (Ibid.). Nuclear energy, although increasing, makes up less than 1% of China’s primary energy consumption. Besides hydroelectric power, the share of renewable energy sources is still low (Ibid.).

As stated in chapter one, energy is very important for the Chinese economy. The industry is by far the major user of energy in China, while the transport sector uses relatively little energy in China. The Chinese industry is mainly focused on labour and energy-intensive sectors, for example, the steel industry, cement, electronics, and textiles (IEA, 2017). As can be seen in figure 2.2, the share of coal is especially high in the industry sector. Oil consumption is used in all three sectors, but most important in the transportation sector.

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Figure 2.2 China’s sectoral energy mix in millions of tonnes of oil equivalent (mtoe) (2000-2040)

Source: EIA, 2017, p. 515

Although China is the biggest consumer of energy, due to its reliance on coal, it only is the second largest consumer of oil, after the US. The daily oil consumption in China was roughly 10.7 million barrels, or 3.9 billion barrels per year in 2014. However, China’s oil consumption has increased notably in the past years (e.g., 11% in 2011), but is easing in more recent years. Oil will remain an important source of energy for China in the coming decades. Despite efforts of the Chinese government to curb the increase of the oil demand, oil consumption, in absolute terms, will continue to grow in the coming years. The EIA (2015) expects that the oil consumption will rise to 13.1 million b/d in 2020, 16.9 and 20.0 million b/d in 2030 and 2040, respectively (Ibid.).

In order to fulfil its demand for energy, China relies on a combination of domestic energy production and the import of resources. China’s domestic production of energy is mostly focused on coal. Chinese estimated coal reserves were around 126 billion tons in 2012, which accounts for roughly 12% of the world’s coal reserves (EIA, 2015). The yearly coal production in China is roughly 4.4 billion tons per year, which accounts for half of the world’s coal production (Ibid.). Since 2009, the Chinese coal production cannot fulfil the Chinese demand anymore. Therefore, China has to import coal, mainly from Indonesia and Australia (Ibid.). In 2013, China imported 360 million tons of coal.

The domestic reserves of oil, on the other hand, are relatively low. China holds 24.6 billion barrels of oil, which makes it the world’s thirteenth largest (EIA, 2015). The domestic oil production in China is around 4.6 million b/d. However, the domestic oil production is expected to grow to 5.5 million b/d in 2030. Most of China’s oil reserves and production are onshore (Ibid.). Offshore oil production only accounts for 20% of China’s yearly oil production, although this share is increasing. The largest oilfields

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30 in China are located in the Northeast, which includes the Daqing field, which produces 800,000 b/d or 19% of China’s total production (Ibid.). However, most of China’s large oil fields start to deplete, and the production of these fields is expected to decrease (Ibid.).

Due to the significant differences between the oil consumption and the domestic oil production, China is forced to import a substantial part of their oil consumption. In 2014, China imported 6.2 million b/d or 2.2 billion b/y (EIA, 2015). This makes China the largest importer of oil in the world, surpassing the US in 2014 (Ibid.). China’s import dependency rose from 30% in 2000 to 57% in 2014, and is likely to continue to grow, despite intentions of the government to curb the dependence on oil imports (Ibid.; Meidan, 2016c). This dependency on other countries could pose a threat to China’s energy supply security (Cao & Bluth, 2013). This threat is reinforced by the origin of the oil, which mostly came from the Middle East and Africa, which are both historically unstable regions (EIA, 2015). Therefore, China has tried to diversify its oil imports in recent years. In figure 2.3, the origin of Chinese oil imports is displayed. Only four countries account for half of China’s oil imports.

Figure 2.3 Origin of China’s oil imports (2014)

Note: Data collection and presentation by author Source: based on EIA, 2015

2.2 2.22.2

2.2.2 Energy Outlook.2 Energy Outlook.2 Energy Outlook.2 Energy Outlook

In 2017 the IEA (2017) elaborately discussed China’s energy outlook in their yearly energy outlook. In this report, the IEA (2017) analyses China’s energy - consumption, -mix, -production, and import until 2040. The IEA (2017) predicts that the growth in the energy consumption in China will decrease to only 1%. This is a significant change since the average yearly increase in energy consumption was over 6%

16% 13% 11% 10% 9% 9% 4% 4% 4% 20%

Saudi Arabia Angola Russia Oman Iraq Iran Venezuela UAE Kuwait others

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31 in the period 2000-2015 (IEA, 2017). The reasons are the slower population growth, due to the ageing population, and a significant decrease in China’s energy intensity, which will be on average 3.4% per year until 2040 (Ibid.).

Table 2.1 China's forecasted energy mix in mtoe (2000-2040)

2000 2016 2020 2025 2030 2035 2040 Average Annual growth rate Coal 668 1957 1932 1908 1873 1803 1706 -0.6% Oil 227 552 613 676 711 716 716 1.1% Gas 23 172 234 309 374 428 469 4.3% Nuclear 4 56 102 166 218 261 287 7.1% Renewables 220 296 318 380 455 534 619 3.5%

Fossil -fuel share 80% 89% 87% 84% 81% 79% 76%

Total 1143 3006 3199 3439 3631 3742 3797 1%

Note: data collection and presentation by author Source: based on IEA, 2017

Despite recent efforts to increase the shares of renewables in the energy mix, the IEA (2017) predicts that fossil fuels will remain the main source of energy in China until 2040. The share of oil in China’s energy-mix slightly increases until 2040, as can be seen in table 2.1 (Ibid.). However, due to a rise in the total energy consumption, the demand for oil rises with 35% (from 11.5 million barrels per day in 2016 to 15.5 million barrels per day in 2040) (Ibid.). Moreover, the domestic production of oil will fall back to 3.1 million barrels a day, due to the depleting reserves (Ibid.). Therefore, China will have to rely to a greater extent on the import of oil. The IEA (2017) estimates that China’s import dependency ratio will be around 80% in 2040. As a result, China will keep its position as the largest importer of oil until at least 2040 (Ibid.). The costs of oil imports are, therefore, expected to rise from 110 billion USD in 2016 to 460 billion USD in 2040, due to price and quantity increases (Ibid.).

2.3. Energy

2.3. Energy –

–

–Institutions,

Institutions,

Institutions, ----Policy and

Institutions,

Policy and

Policy and –

–

–Supply security

Supply security

2.3.1 China’s energy institutions 2.3.1 China’s energy institutions2.3.1 China’s energy institutions 2.3.1 China’s energy institutions

The formal institutions play an important role in China’s energy policy. According to Andrews-Speed (2010), Chinese institutions are characterised by three facets. Firstly, the organisation of the institutions is unclear since there is a lack of definitions of power or the scope of institutions. Moreover, the institutions lack organisation of procedures or guidelines on the relation between the institutions (Andrews-Speed, 2010, p. 23). Secondly, and part and parcel of the first point, the institutions are very

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32 personalised. The power of the leader, and his connections to other institutions, are key for the institutions (Ibid.). Finally, the system is hierarchical in nature, with ranks that determine the position of the institution in for example negotiations (Ibid.).

The fragmentation and chaotic organisation would suggest that a breakdown of the state or government in imminent (Taylor, 2014). However, the CCP is a strong unifying instrument in the Chinese state (Ibid.). The party is leading in all governmental institutions and political decision-making processes. Furthermore, all major state officials are party members, whose position is conditional to their loyalty towards the party (Andrews-Speed & Dannreuther, 2011). These government officials also hold important positions in all major companies (Ibid.).

The top of the Chinese state class can be reviewed by looking at the ranking of the Politburo Standing Committee. The seven men of the Standing Committee are the most powerful people in China and are distinctly ranked. Currently, at the top of this key elite, and first in the ranking, is President Xi Jinping, the president of China and the Secretary General of the Politburo Standing Committee (Taylor, 2014). Moreover, Xi Jinping is also Chairman of the Central Military Committee (Ibid.). Since the rule of Deng Xiaoping in 1992, the focus on leadership in China is on collective leadership instead of a supreme leader (Amineh and Yang, 2018). However, this seems to change in recent years. In 2018, the Chinese constitution was changed by the National Peoples Congress, abolishing the maximum of two 5-year terms (Buckley & Lee Myers, 2018). This allows Xi to become, in principle, president for life. In recent years, Xi tries to centralise the power in China even further (Ibid.).

Second in ranking is Li Keqiang who is the Party Secretary of the State Council, the executive branch of government. The chairman of the Standing Committee of the NPC, Li Zhanshu, is third in the ranking, despite the Standing Committee of the National People’s Congress (NPC) is the highest organ in China according to the constitution (Andrews-Speed & Dannreuther 2013). Other high officials are, for example, the chairman of the Vice-Premier of the State Council, Han Zheng, or the Party Secretary of the Chinese People’s Political Consultative Conference, Wang Yang.

According to the Chinese constitution, the Standing Committee of the National People’s Congress is the highest authority. The NPC consists of almost 3,000 members and only convenes once a year (Andrews-Speed & Dannreuther, 2013). Therefore, the Standing Committee of the NPC is the permanent body and officially the highest political and legislative organ in China (Ibid.). However, in practice, the NPC as well as the NPC’s Standing Committee approves almost all proposed legislation (Ibid.).

Although the NPC’s Standing Committee is officially the highest political organ in China, in practice, the most powerful institutions in China are the State Council, the Politburo, and the NPC (Amineh & Yang,

China's energy supply security from Iraq : the case of CNPC in Rumaila

Graduate School of Social Sciences