Chinese energy supply security and national oil companies investment activities in Canada (2000-2017)

Graduate School of Social Sciences

Chinese Energy Supply Security and National Oil Companies Investment

Activities in Canada

(2000-2017)

MSc Thesis Political Science: International Relations Research Project: The Political Economy of Energy Amsterdam, June 23rd ₂₀₁₇ Author: Supervisor and Second Reader Alexandre L’Huillier Dr. M.P. (Mehdi) Amineh 11261072 Dr. R.J (Robin) Pistorius

ABSTRACT

This thesis will provide a complete analysis of the Chinese state and by extension Chinese National Oil Companies involvement in Canada’s energy sector between 2000 and 2017. The tools used for this analysis are the theory of critical geopolitics and incremental internationalization. These allow for an analysis that explains China’s activities beyond their national borders. The main claim is that China is dependent on energy imports and that China’s overall support for its NOCs is necessary for both ensuring energy supply security but also as a tool to globally project geopolitical and economic power. The main arguments are that China uses trade, investment and finance as means to secure energy supply, to gain access to technologies that would otherwise take years to acquire and to ensure the increased competitiveness of NOCs with regards to other International Oil Companies. Keywords: Transnationalisation, Chinese NOCs, energy supply security, Canada, oil

ACKNOWLEDGEMENT First and foremost, I would like to express my gratitude and appreciation for my supervisor, Dr. Mehdi Amineh for his support and guidance throughout this arduous process. The task was long, and not without its hiccups. Without Dr. Amineh’s help and guidance, I doubtless would have been able to complete my research, nor would I have learned as much as I did. Thank you Mehdi. Beyond the help of my supervisor, I would like to extend empathy to my fellow classmates and friends, some for whom I know this was stressful process. More specifically, I would like to thank the squad, you know who you are, for the many laughs and good times spent together over the course of this year. We truly are lucky to have met each other and to have had the opportunity to study in such a beautiful, culturally, and historically rich city such as Amsterdam. I also want to thank my classmates in our research project for providing a good platform to bounce ideas off of each other and for always showing up on time to our Monday morning classes. Of course, none of this would be possible without the support of my family, who I will always owe a great deal to, literally and figuratively. Finally, I would like to thank my second reader, Dr. R.J. Pistorius for taking the time to read this long piece of work. Yours sincerely, Alexandre L’Huillier

Table of Contents Abstract 3 Acknowledgment 5 Maps 7 List of tables 9 List of Abbreviations 10 Chapter 1: Research design 13 1.1 Introduction 13 1.1.1 Objectives 13 1.1.2 Research Question 14 1.1.3 Social and scientific relevance 14 1.1.4 Delineation of research 15 1.5 Literature review 16 1.2 Theory and Concepts 20 1.2.1 Classical IR theories 20 1.2.2 Incremental internationalization 21 1.2.3 Critical Geopolitics 22 1.2.4 Conceptual Framework 24 1.3 Brief argumentation and hypotheses 25 1.4 Research method 26 1.5 Structure of thesis 26 Chapter 2: China’s Energy Security, Scarcity and Policy Response 29 2.1 Introduction 29 2.2 Structure and energy situation 29 2.3 Scarcity 33 2.4 Government and Policy Responses 35 2.5 Conclusion 36 Chapter 3: Chinese-Canadian Energy Relations 39 3.1 Introduction 39 3.2 State, NOC and energy supply strategy of China 39 3.2.1 China’s power structure 39 3.2.2 State, Energy Supply Strategy and NOCs 41 3.2.3 Strategy of NOCs to secure foreign supply 44 3.3 State, market and political economy of energy in Canada 47 3.3.1 Government, hydrocarbon industry in Canada 47 3.3.2 Canada’s main energy sources, production capabilities and export 48 3.4 China-Canada energy relations 50 3.4.1 The NOCs involvement with energy sector in Canada 53 3.5 Conclusion 58 Chapter 4: China and the North American Geopolitical Challenges 61 4.1 Introduction 61 4.2 China’s geopolitical economic projection 61 4.3 Threats to China’s geopolitical economic projection 64 4.4 Factors affecting Sino-Canadian relations 67 4.5 U.S. response toward Sino-Canadian cooperation 68 4.6 Conclusions 68 Chapter 5: Conclusion 71

MAP OF CANADA Source: Maps of the World (2016)

MAP OF CHINA Source: Maps of the World (2015)

LIST OF TABLES AND FIGURES Tables Table 3.1 List of Chinese Purchases of Canadian Oil Assets from 2002 to 2013 Figures Figure 2.1 China GDP and GDP Percentage Increase/Year (2000-2015) Figure 2.2 China Per Capita Income and Percentage Increase/Year (2000-2015) Figure 2.3 China’s Oil Production and Consumption (1993-2016) Figure 3.1 China’s Energy Sector Figure 3.2 Value of Imports and Exports by Canada of China (2008-2015) Figure 3.3 Chinese Foreign Direct Investment in Canada from (2010-2014) Figure 3.4 Present and Forecasted Chinese Unconventional Production (2008-2019)

ABBREVIATIONS AIIB Asian Infrastructure Investment Bank Bbl/d Barrels per day BP British Petroleum CAD Canadian Dollar CCME Canadian Council of Ministers of the Environment CCP China’s Communist Party CFR Council on Foreign Relations CDB China Development Bank CHEXIM Export-Import Bank of China CID Capitalist Industrial Development CNOOC China National Offshore Oil Corporation CNPC China National Petroleum Corporation CPPCC Chinese People’s Political Consulative Conference EIA Energy Information Administration EMMC Energy and Mines Ministers’ Conference E&P Exploration and Production ERCB Energy Resources Conservation Board FDI Foreign Direct Investment FTA Free Trade Agreement FYP Five Year Plan GDP Gross Domestic Product GLF Great Leap Forward IEA International Energy Agency IOC International Oil Company NDRC National Development and Reform Commission

NEB National Energy Board NOC National Oil Company NPC National People’s Congress NYSE New York Stock Exchange MMb/d Millions of barrels per day MOP Ministry of Personnel MOU Memorandum of Understanding OBOR One Belt One Road ODI Outward Direct Investment PRC People’s Republic of China PSC Politburo Standing Committee RRD Responsible Resource Development SASAC State-owned Assets Supervision and Administration Commission Sinopec China Petroleum and Chemical Corporation SCO Shanghai Cooperation Organization SOE State Owned Enterprise UNDP United Nations Development Programme USD United States Dollar

Chapter 1

Research Design

1.1 Introduction

Since the beginning of the Open-Door Policy implemented by Deng Xiaoping in 1978, China has slowly become an important industrialized country which today can best be characterized as the factory of the world. This fast industrialization process, undertaken in order to catch up to the development of the world’s biggest powers, has led to an intense energy consumption which China can no longer provide on their own. In order to secure enough energy supply to continue and to sustain this growth, China has had to take an active role worldwide in acquiring a variety of energy sources, of which this paper’s focus is oil. This has involved a burgeoning role by Chinese National Oil Companies (NOCs) as set out by the Central Organization of the Communist Party of China (CPC). These NOCs, which are state-owned enterprises (SOEs) are reportedly supported by the CPC and related agencies in order to support China’s economic rise. 1.1.1 Objectives In order to better understand the role of Chinese NOCs and the role of the CPC in China’s energy policy, the objectives of this research will be to (1) determine and examine Chinese investment trends by state-owned multinationals in acquiring foreign oil sources, specifically in Canada as a resource rich advanced industrialized country, (2) to clarify the relationship between Chinese NOCs and the high ranking members of the CCP, determining how and if the policies set out by the government are followed by the NOCs, and (3) to examine the responses of the host country, in this instance Canada, while also determining areas of future cooperation, opportunities and threats. Thus, the units of analysis will be mostly on the state – business relations, the intersection between politics, power and business at the state level and to a lesser extent at an international level. I will look at the level of economic development of both countries in addition to their size and relative capacities. Next, we will examine China’s resource scarcity

problem and the lateral pressures exerted by the state in order to get the resources they need for their continued economic growth and for the maintenance of domestic order. The next logical step is to take a look at the external and transnational relations in addition to the power and economic logics. For Canada, I will look at the nature of power, government, energy sectors and state business relation, and how it differs from the Chinese case. 1.1.2 Research Questions This thesis aims at understanding the interactions between the economic and political

dimensions of Chinese NOCs and the Chinese state, and to study the role of diplomacy in advancing the role of Chinese NOCs. More specifically, it further aims at understanding these dimensions in conjunction with motivations behind Chinese NOCs activities in Canada. Thus, the main research question is: “Why is Canada a target of Chinese FDI and investments by Chinese NOC?” Related sub questions which are answered in the next four chapters are as follows: a. What are China’s energy challenges as a result of their quick development? b. How does the relation between state, market and NOCs operate in China? How financially active are CNPC, CNOOC, and Sinopec in Canada and why? c. How have the Canadian government, the public, and other major powers responded to an increase of Chinese investment in the Canadian oil sector? 1.1.3 Social and Scientific Relevance

Much research has been completed with regards to Chinese energy investments in resource-rich developing countries as a means to secure and diversify their energy supply. However, much less has been done on Chinese energy investments in resource rich advanced industrialized countries such as Canada or the United States. One factor explaining this may be that the size of investments in advanced industrialized countries is marginally smaller than in resource rich developing countries, however this makes the phenomenon of investments in advanced countries all the more interesting. It begs the question, why invest in these countries,

when China could clearly secure oil supply from a variety of resource rich developing country. Moreover, this research is relevant to examine the expansion of China’s quest for energy security. This research will teach us what methods Chinese NOCs are using to secure energy supply sources in advanced developed countries in addition to the reasons behind these particular investments. It will also attempt to link these developments to China’s economic rise and its desire to eventually assert its hegemony. 1.1.4 Delineation of Research The time frame studied will be from the Year 2000 and onwards. The rationale behind this is the year 2000-2001 coincides with the official start of China’s going out policy which was one of the main goals set out in the 10th Five Year Plan (FYP). In addition, the years 2000 and 2001 mark the entrance of the three big oil companies into the international arena, with CNOOC, CNPC and Sinopec all becoming publicly listed on the New York Stock Exchange (NYSE) and the Hong Kong Stock Exchange. The social entities studied from the Chinese perspective will be the Chinese Communist Party and the ruling political elite because of their involvement with the NOCs. Also of interest will be the related government organizations and institutions which have authority or some control over SOEs and of course the three major Chinese NOCs (CNOOC, CNPC, Sinopec).The justification of the above actors is that these entities are all directly or indirectly involved in formulating China’s energy policy be it through actual policy making to actual concrete investments by the NOCs, to the authority over the SOEs by the State Asset Supervisions and Administration Commission (SASAC), the approval by the National Development and Reform Commission (NDRC), the financing through China Eximbank, and etc. The hope is that the focus on these entities will provide an overview of the complexity of China’s energy policy in addition to the study of each individual moving parts working together, or not, to formulate and implement energy policy designed to secure supply for China to fuel their continued economic growth.

Social entities to be studies from a Canadian perspective will be the Canadian Federal Government and the ruling party. In addition, special focus will be given to the Alberta provincial

government as most of Canada’s oil originates from the province. Finally, I will also look at Canadian pressure groups and reaction from civil society. Although China has been able to minimize the impact of civil society, Canada remains a liberal-state society with a civil society that is able to exert pressure and overall impact policy making. The justification of the above actors is that these entities are all involved in developing and implementing Canada’s energy policy. However, unlike the case of China, where the NOCs are under state control, the major Canadian energy companies are all private corporations where max profit and high dividends to shareholders take precedence in business decisions. 1.1.5 Literature Review China’s Resource Scarcity Today, China is now the biggest net oil importer in the world, surpassing the United States (U.S.) in 2013 (Zhu, 2016). For instance, even though China has the most proven oil reserves in the Asia-Pacific region and has greatly increased production by as much as 50 percent over the last twenty years, this is still not enough to meet the growing demand for oil (ibid, 2016: 29). As of 2012, coal still provided the country with 66% of its primary energy sources, while oil accounted for 20% and natural gas 5% (EIA China Analysis, 2015: 2). As Leung (2011) has indicated, the worry is not so much meeting the demand for consumption of natural gas, as China has successfully negotiated long-term contracts expected to meet that demand from places such as Turkmenistan. Secondly, natural gas remains a small proportion of their energy mix at only 5%. Leung (2011), also postulated that the worry is also not rooted in securing sources of coal, as coal remains rather abundant in China and is able to supply most of what it need.

The worry however is that worldwide China accounted for over one third of total oil consumption, highlighting the extent to which China is dependent on it because of its heavy use. This dependence may turn out to be a long-term element, as their consumption in oil is expected to grow by about 2.6% per annum until at least 2040 (EIA China Analysis, 2015: 3). This overreliance on oil is best exemplified by Kennedy’s (2010) work where he indicates that it is expected that by 2030, China may import as much as 80% of its oil. He further attributes this

has and will continue to lead to an inevitable demand for products which were at one point out of reach for the ordinary Chinese citizen. Cheng (2008) claims that one of those products is the automobile, which is now considered a pillar of the Chinese economy and whose government encourages domestic consumption to maintain economic growth. Additionally, according to Leung (2011) oil remains an economic and military necessity as no efficient substitute exists for gasoline, hence the quest for consistent and sufficient oil sources. The evolving role of Chinese NOCs Chinese NOCs play a huge part in securing oil sources from overseas. They first ventured out of the country in the early 1990s but have since become a major oil investor worldwide in various countries. Leung (2011) and others postulate that this policy first was established due to waning domestic supplies of oil and rising demand. Although this policy lost momentum because of low oil prices throughout the 1990s it picked up again in the early 2000s as the NOCs became more profit-oriented and as the government sought to establish them as national champions (Leung, 2011) and competitors of international oil corporations. According to Scissors and Cheng (2012) today, the SOEs account for over 90% of Chinese spending by volume. Due to the concern in securing energy sources from the highest levels of government, the domestic government encourages the quest for foreign oil by the NOCs (Shaofeng, 2011). Not only that, but the Chinese government mandates that Chinese financial institutions provide credit for the NOCs funding of overseas acquisitions (Shaofeng, 2011). Because of Beijing’s oil concerns, these NOCs were given the green light to engage in energy diplomacy through global investment (Leung, 2011: 1335). Of interest to our study is Amineh and Yang’s (2014) indication that this stands in stark contrast with the relationship between states and corporations in liberal society, where private corporations generally tend to act independently from the governments in whose countries they operate (Amineh and Yang, 2014). There is no debate that Chinese NOCs are continuing to transnationalize in an effort to strengthen their bottom line, secure energy supply for security, and to become dominant firms on a world scale to match and sustain China’s economic development.

However, the recent rise in overseas investments also entails a loss of control by the state in what the SOEs actually do in comparison to the instructions set out by the state (Amineh and Yang, 2014). In this area, there exists some debate of whether this is actually true. According to some, these investments can actually run counter to Chinese national interests in some instances (Kennedy, 2010: 139) and has led to Chinese NOCs taking advantage of government support for their own profit-driven interests (Shaofeng, 2011). For example, Chinese NOCs have made a habit to get involved in countries which are generally seen as unstable, which in the long run may well put the oil exports from those countries at risk of being disrupted or stopped completely. According to Liou (2009), Chinese SOEs have increasingly prioritized profit over following government directives, arguing that the corporate structure of Chinese NOCs since their reform in conjunction with China’s fragmented bureaucracy weakens government control over these. SOEs. In The Economist assessment on operational risk, China is partnered with 6 out of the 10 riskiest countries (The Economist Intelligence Unit, 2013: 20). The inability of the Chinese government to exert absolute control over their SOEs had led to Chinese NOCs bidding against one another on the same projects in places like Libya, Sudan, and Brazil (ibid). Erica S. Downs (2007) traces the roots of declining control by the state to the creation of the NOCs out of energy ministries in the 1980s. This decline is control is corroborated by the IEA’s own 2011 report that indicated that while Chinese NOCs are majority owned by the government they continue to enjoy a high degree of independence whereby their actions remain largely profit-driven (Jiang and Sinton, 2011). Hence, the aim of the research is to understand the rationale behind the reasons that Chinese NOCs have looked to politically stable and advanced developed countries like Canada in addition to whether or not the rise of the NOCs has led to less control over their investment policies by the national government and related agencies.

The role of FDI by Chinese NOCs and the state

In the last two five-year energy sector plans, the Chinese have made reference to global energy governance, something that was missing from their previous five-year plans (Zhu, 2016). This signals a shift in strategy in which China now understands the importance and utility in cooperating with other major energy producers in order to secure its own energy sources,

although the official rhetoric focuses on mutual beneficial opportunities (ibid). This focus is undoubtedly rooted in the attributed importance that China puts on maintaining its economic growth and development.

In addition, this focus ties in with Chinese view of their own position within the global world order, one in which they seek to build national champions out of their own corporations in an effort to become more competitive with other major economies and become more dominant worldwide. Thus, China’s Foreign Direct Investments (FDI) and Outward Direct Investment (ODI) have been growing in conjunction with the Chinese Government’s quest to secure access to energy resources (Salidjanova, 2011). As previously explained, the motivation behind this remain the perceived potential shortage of energy resources and the need to keep economic growth going. However, a secondary motivation, especially with regards to investments in resource-rich developed countries, is access to advanced technologies in addition to the avoidance of tax barriers (ibid). This latter point is of particular importance as China lacks the refining abilities and domestic pipeline infrastructure of advanced industrialised countries, and so they remain largely uncompetitive with Western companies despite the large sums of FDI and ODI. It is also supported by Deng (2006), that investment in industrialized states takes place because of the more attractive investment environment. In some instances, Chinese NOCs are not even profitable, as they tend to overpay for assets because Chinese financial institutions backed by the government are willing to give them money to bail them out. This research will also seek to address and clarify what are the motivations of NOCs behind their activities in advanced industrialized resource rich countries.

Canada’s policy toward China

Canada on its side, has expressed a desired purpose to be long-term partners with China in terms of energy collaboration. A shift from the Conservative government of Stephen Harper to a Liberal government of Justin Trudeau has not changed this and if anything, the Liberal government is less hostile to Chinese investments. The Government of Canada’s website indicates that China remains “the third biggest export destination for Canada’s oil” (Government of Canada, 2016) and that it is the fifth largest producer of oil in the world (ibid). Indeed, the last

diplomatic meeting the two countries reiterated the need for cooperation in the area of energy among others and both emphasized the need for two-way investment (Joint statement between Canada and the people’s Republic of China, 2016). Furthermore, similarly to China’s desire to diversify it’s the supply of its oil sources, Canada is keen on diversifying its oil exports, as it faces a shrinking US market due to US goals of becoming energy self-sufficient while China promises more growth potential (MacIsaac, 2014). The strategic partnership of Sino-Canadian relationship transcends party boundaries; as far back as 2005, then Prime Minister Paul Martin and his Chinese counterpart of the time Hu Jintao had already identified key sectors of cooperation including the oil and gas sector (Jiang, 2005). 1.2 Theory and Concepts 1.2.1 Classical IR Theories Before we examine the theoretical framework, which will help posit our research in the realm of the political science academia, we must discount other theories that do not help us in understanding the questions at hand. The most famous classical theory is that of realism, which assumes that the world is anarchic, and competitive, giving rise to a self-help system-) and competitive. Not only is this problematic for us due to the nature of global energy governance, which entails a cooperative and interdependent relationship, realism also focuses on the state as the main units of analysis. While the state is important as a level of analysis in my research, it is not the only point of focus. Other classical theories, such as liberalism or constructivism, are not useful in contributing to our understanding of China’s energy situation and its response, because the former focuses on the liberty and equality of individuals, while the latter is concerned with how socially constructed the political world is. Essentially, for this research project, the classical theories remain too narrow in their level of analysis’ for us to gain an in-depth understanding of the complex geo-economic and geopolitical linkages which characterize global and domestic energy governance.

1.2.2 Incremental Internationalization

The theoretical framework behind the research will be as follows;(I think the right punctuation is ‘;’ thought not sure) in order to understand the Chinese domestic and bilateral relations with Canada, I will look at critical geopolitics in addition to the incremental internationalization theory to further explain China’s energy supply security strategy. To be able to apprehend China’s going out policy and specifically looking at Chinese FDI investments, I will look at incremental internationalization theory otherwise known as the Uppsala model. Incremental internationalization theory is useful in examining the motivations behind Chinese NOCs activities in Canada. This theory explains how firms’ gradual acquisitions and integration with world markets helps increases their knowledge about foreign markets and operations (Johanson & Vahlne, 1979). Additionally, they assert in order for firms to internationalize they must do so through a series of incremental investment decisions. (ibid) This would help explain the strategy of Chinese firms in entering developing countries gradually before entering the markets of developed nations. In this respect, Chinese firms will have emulated the operations of Swedish (and other) firms in the 1960s and 1970s. Further, it is believed that the lack of commitment to foreign markets is largely due to geographic and cultural differences (ibid). More specifically in regards to this research, this means that the further culturally, geographically, and linguistically a host country from China is, the further along in the incremental investment process they would be. They go on to assert that one of the best ways to gain and use market experience is to buy up part of a firm (ibid).

Relating to the research, this would imply that partially buying up or partnering with Canadian oil firms at an above-value price is not only linked to securing sources of oil but also to gain market knowledge, experience, and perhaps technology know how that could be considered invaluable to secure energy supply. Logically, Chinese NOCs would first enter developing markets which have low barriers to entry such as low cost in order to secure oil sources to either ship back home or resell on the international market. However, if Chinese NOCs want to be able to compete on the world market and transition from national champions to world champions, they need to emulate the success of the most profitable and important oil companies in the world, which tend

to be headquartered in developed countries. This means acquiring the managerial and technological know-how of how to operate successfully in a global world market. Chinese NOCs need this expertise considering the official (launch) start of their going out policy was in the year 2000, while other big oil players such as Exxon Mobil or Dutch Royal Shell internationalized much earlier. In essence, in order to successfully catch up and potentially overtake the world’s biggest oil companies, China have had to incrementally internationalize at a faster rate than other big oil companies. Johanson and Vahlne postulate that this process can only have been made possible because of the previous knowledge that a firm acquires through experience, which gradually leads to different views of their own capabilities and of foreign markets (Johanson and Vahlne 2009). The technology gained could also be potentially used to extract oil from unconventional sources in China, much like Canada and its oil sands. 1.2.3 Critical Geopolitics The Chinese state is best characterized by a state-led market authoritarianism, while the Canadian state is best described as a market-led self-regulating liberal state. Hence, critical geopolitics will be particularly useful for the study of the former. Critical geopolitics postulates the importance of economic development and its intricacies in the interactions of all states. It looks beyond the state-centric view of geopolitics and is useful in explaining the relationship between the Chinese state and its NOCs. Moreover, it stresses the importance of sub state and non-state actors whose influence is greater than ever due to globalization. This is particularly important for China as they are in the midst of sustaining their economic development. Additionally, in order to understand China’s role in the international energy markets, there are important historical considerations to take note of. For one, China has, since the 19th _century, been humiliated and bullied by other nations (Agnew, 2010: 576) through for example the Opium wars which established an unwanted foreign presence in many Chinese port cities. In essence, critical geopolitics sees how “geopolitical premises enter into the ways in which political elites and populations see their place in the world.” (Agnew, 2010: 570) Chinese anxiety around energy security is therefore somewhat related to past historical events, the fear of losing to competitors, and also involves the continued legitimacy of the Communist party itself. (Leung, 2011: 1332). It

is believed that as long as the Chinese Communist Party continues to take care of their people economically, no one will challenge their political rule (Breslin, 2005: 74). Following logically, if economic prosperity is tied, in at least some respect, to energy security, the continued legitimacy of the Communist party, is also tied to successful energy policy.

Although Agnew’s work on critical geopolitics is useful in examining China’s historical consideration and how it has contributed to their present situation, Amineh & Houweling’s (2003) and Amineh & Yang’s (2014) contribution on the evolution of critical geopolitics is even more useful. They see critical geopolitics as the merging of different elements of classical theories of political science. Instead of a focus on the state as a level of analysis, they use the state-society complex as the main unit of analysis (Amineh & Houweling, 2003: 325). Within this complex, it is then important to look at the intersection between the state, business and military (ibid). Their approach allows us to fundamentally understand state’s capabilities and actions by looking at a host of different variables, including trade, investment and finance. For instance, it is believed that although the motivation of IOC and NOCs is to further economic development, they are also a tool of power projection (Cutler, 2010:72). Further, their work on critical geopolitics state that the power projection of these state-society complexes has the potential to change world order (Amineh & Houweling, 2003: 328). This will become more evident throughout my research as we attempt to link the energy supply security strategy to China’s evolving role in world order. Because critical geopolitics looks at state-society complexes, and because state-society complexes can largely be defined by the relationship between state-business-and military, all three of those aspects will be examined in order to understand how they contribute to China’s power projection and in the pursuit of energy supply security. Overall, critical geopolitics will help us evaluate the current geopolitical order by helping us understand the intricacies of geopolitics. It provides a way to understand China’s rise as well as the role of NOCs as actors in relation to Canada.

1.2.4 Conceptual Framework In this study, I introduce several concepts which are all interrelated. These concepts are described and outlined below and can be linked back to the critical geopolitics approach. The first concept of interest is Capitalist Industrial Development (CID). This concept in international political economy refers to the transition to industrial society in which the state takes the lead. The CID in China led mainly to two interconnected domestic outcomes: at the one hand this led to increasing power and wealth structure and on the other led to resource-scarcity by increasing consumption of mineral and natural resources (mainly hydrocarbons). This development has important ramifications for our research as the current path of CID has led to an increase in domestic wealth and power but also to a rising middle class whose societal and economic demands are increasing and have yet to be met. (Amineh and Yang, 2014: 515). This industrialization is what has led to China’s current energy scarcity situation, of which their ‘going out policy’ is a response to. How will China address these issues? Continuing to develop economically and securing energy supply are important to keep this rate of development going. The second concept, which is as a result of the first, is demand-induced resource scarcity. In this case the resource is energy, but more to the point of the research, the focus is on oil. Demand-induced scarcity occurs due to high population growth, an increase in capita per income, an increase in consumption levels and thus a higher demand of fossil fuels for the continuation of the production of wealth and power. As outlined in the research, all of these increases have taken place have needed a policy response from the government. The third concept we are interested in is China’s ‘going-out’ policy. This is the response to demand-induced scarcity. Implemented in 1999 by the CCP, this policy is designed to encourage both inward and foreign direct investment for the purposes of developing the national economy, to secure natural resources, and to promote the export of Chinese goods and services (Gov.cn, 2006). This development is of importance to our research because it is a direct policy of the Chinese government and has been followed by Chinese NOCs. In addition, it can be linked to the incremental internationalization theory, as only after being given the green light by the government, have Chinese NOCs started to look abroad for energy investments.

The fourth concept, which acts as the vehicle with which to carry out the third concept, is State-Owned Enterprises (SOE). These are enterprises that act on behalf of and in accordance with state directives. The three major Chinese NOCs are all SOEs. They are part of the focus of this research. There is also a source of debate on how much the state still retains control over them since the going out policy in the early 2000s. Some would argue that the state still has tight control over them (Taylor, 2012) and (Salidjanova, 2011) whilst others would argue that the opposite is true (Amineh & Yang, 2014). The evolution of SOEs is inextricably linked to China’s going out policy, which is linked to CID. SOEs, specifically Chinese NOCs are a main unit of analysis in our study.

The fifth concept is that of energy supply security. This is of interest for obvious reasons. China seeks to develop an energy security strategy to meet the gap in demand versus consumption. As Amineh and Yang indicate, it is China’s “key policy agenda” for the 21st century (Amineh & Yang, 2014: 1). The evolution of China’s energy security strategy is linked to other concepts that are of interest such as China’s going out policy, SOEs and even CID. All concepts are interrelated or are somewhat linked. For instance, in order to play catch up to the rest of the world’s economies, China underwent a state-led industrialization known as CID. This then led to demand-induced scarcity because of the extent of the development. This necessitated a response from the CCP, which is China’s ‘going out policy.’ The vehicle to carry out this policy are the SOEs whose ultimate goal is to secure energy supply over time to continue the rate of development. 1.3 Hypotheses H1: China is able to support and facilitate the growth of their national oil companies because these are state-owned enterprises, accelerating China’s power projection; H2: The growing internationalization of Chinese NOCs entails a partial loss of control over their actions by the state H3: China is investing in resource rich advanced industrialized countries to gain access to technologies and managerial know how they would not otherwise have access to. These technologies are important for China to sustain and continue their economic growth, to secure energy supply, and to compete with IOCs

1.4 Research Method

The research method undertaken in this project will be two case studies, with heavier emphasis being placed on China, and to a lesser extent Canada. The energy relationship between both countries will be analyzed. The energy situation between both countries will also be compared. China will be considered the dependent variable while Canada will be the independent variable. Although both countries are affected by their mutual energy relationship, because the focus of this study is mainly China, we are more concerned with the effect that the mutual energy relationship has for China, than for Canada. In addition, Canada is largely energy self-sufficient, and does not face the same energy supply security issues as China. China will continue to face energy supply security issues for decades to come, especially as their economy and middle class continues to grow and as they seek to match the demand in energy consumption. If anything, Canada welcomes the opportunity to market its oil to those in need. Thus, China will be our dependent variable.

The plan is to use qualitative methods. Mostly, this will involve qualitative data analysis of secondary research and argumentation. Qualitatively, I will also look at financial metrics including the breadth of Chinese FDI in the Canadian energy sector, population growth, increase in trade between both countries to determine if any trends are present or were present, or any upward or downward direction that FDI is taking. Of course, more metrics will be examined such as the GDP of China, their energy consumption versus their energy production, and per capita income. Some of the documents I plan on using include official Chinese documents such as the Chinese Five Year Plans (the current one being the 13th_{), the Chinese White Papers and official} statistics from the PRC’s Ministry of Commerce. Databases and data from the World Bank may also be collected to analyze China’s economic situation further. I will also make use of relevant polling information from pollsters such as Ipsos’s-Reid or the Asia Pacific Foundation of Canada in order to gauge public perspective on the issues at hand, especially from a Canadian perspective. Qualitatively, I will make use of a large variety of resources. Relevant documents from energy organizations such as the Energy Information Administration (EIA) or the International Energy Agency (IEA), or BP Annual Reports. Annual reports from the 3 larges

Chinese NOCs will also be analyzed. Academic journals and relevant texts specifically related to energy will be examined. The most important of these journals is probably the Energy Policy, Energy and Energy Economics. In addition, information will be collected from official policy documents or recommendations such as the Council on Foreign Relations. For a Canadian perspective, I will look at texts from Canada’s Journal of Global Policy Analysis and Canada’s Military Journal. For a Chinese perspective, texts from journals such as the Journal of Contemporary China or China Quarterly or China Security will be looked at. Other sources that may be of interest to us include various news sources, either Chinese or Canadian, the Heritage Foundation, the Economist Intelligence Unit, Stratfor, and various sources from the UN or UN related institutions may also be analyzed.

1.5 The Structure of the Thesis

The structure of the thesis is as follows. Chapter 1 will be composed of the research design. More specifically, what are the objectives of the research, the space and time delineation, the research question and related sub questions. It will also posit the research within the current research and literature that already exists on the topic through a literature review. A theoretical framework will also be developed to frame and explain the research within theories of political science. There will also be mention of concepts and social entities, which are important to our research. Finally, the chapter will include some hypotheses and claims about what my research may yield, in addition to a brief argumentation and explanation as to why these are rational and logical claims.

Chapter 2 will briefly look at China’s historical development but more specifically at China’s energy security situation as well as the present motivation of Chinese NOCs and official government policy in order to answer the first sub question. Chapter 3 will be one of the main research chapters of my research, examining specifically Chinese NOC activities in Canada. This chapter will also look at trade and diplomatic relations between both states, China’s power structure, and Canada’s oil industry in an effort to answer the second sub question. In order to answer the last sub question, section 4 will present China’s geopolitical and economic power projection in addition to threats and challenges to this power projection. This chapter will end

with a section on the U.S. response to China’s increasing power projection, specifically in North America. Finally, chapter 5 will present findings to my research question as well as recommendations based on my findings.

Chapter 2

China’s Energy Security, Scarcity, and Policy Responses

2.1 Introduction The focus of this chapter is China’s energy scarcity situation and policy responses undertaken by China to address this problem. What does China’s energy situation look like? Why is China experiencing energy scarcity? And what are the government policy responses to address these issues? These are some of the questions this chapter will seek to address. China’s growing economy coupled with a large population increase over the last decade and a half have led to China surpassing the United States as the biggest energy consumer in the world. The new leadership of Xi Jinping in 2013 has promised to usher an era of financial and economic reform in order to achieve sustainable long-term growth. As impressive as China’s economic growth has been, it comes with challenges that the leadership must address in order to continue this growth. The biggest challenge is securing energy supply to fulfill the needs of the country and its people. China’s state-society complex, which can best be characterized as authoritarian, entails that the state and its NOCs are directly responsible for meeting this challenge. The chapter is organized as follows, with the first section dedicated to examining China’s energy structure and energy situation. What does their energy mix look like? Next, China’s energy scarcity situation will be looked at. Which energy sources are most scarce and why? Lastly, what is the Chinese government doing in order to address these problems? 2.2 Structure and Energy Situation Despite being the world’s leading country in the development and use of renewable energy, China maintains the use of coal as its leading source of energy. In 2012, coal still accounted for 66% primary energy use in China. While moving up to the 2nd _{biggest importer of oil in the world,} this source of energy provides about 20% of China’s total energy use (EIA China Analysis, 2015). This increase in energy consumption has not matched the growth in production, creating a source of anxiety for the Chinese leadership as they seek to secure oil supply sources from a host of

different countries by expanding the role of Chinese NOCs internationally among other policies. Other sources of energy, such as hydroelectric power and natural gas provide 8% and 5% respectively, while renewables only provide 1% and nuclear less than 1% (EIA China Analysis, 2015: 2). China today accounts for 17% of global total renewables, which is a 15% increase to their 2000 level, and they have made significant progress on the use of coal, which now accounts for 64% of total energy consumption as oppose to 74% ten years earlier (ibid). Despite these promising signs, consumption growth was mostly driven by oil (6.3%); oil imports still increased by 9.6% to the highest level in history (BP Statistical Review, 2016: 1) and this highlights China’s oil problem exacerbated by an increase in material consumption by the average Chinese consumer. Currently, estimates place that 70%-80% of oil from Africa and the Middle East go through the Malacca Strait, coining the term “Malacca Dilemma”1 (Leung, 2011: 1333).

Natural gas is also not the biggest concern as China has successfully negotiated long-term contracts expected to meet that demand from places such as Turkmenistan (Leung, 2011). Secondly, natural gas remains a small proportion of their energy mix at only 5%. The worry is also not rooted in securing sources of coal, as coal remains rather abundant in China and is able to supply most of what it needs (Leung, 2011). However, worldwide China accounted for over one third of total oil consumption, highlighting the extent to which China is dependent on it because of its heavy use. This dependence may turn out to be a long-term element, as their consumption in oil is expected to grow by about 2.6% per annum until at least 2040 (EIA China Analysis, 2015: 3). This increase in consumption is linked to China’s economic rise, the chart below (figure 2.2) shows how GDP has consistently increased year-on-year. 1 _{Malacca Dilemma refers to strategic important of the strait and its potential disruption having huge problematic implications for China’s} energy imports.

Notes: Data collection and presentation by author Source: World Bank

As seen from the figure, China has sustained a period of heavy growth over the last decade and a half. Although the percentage increase year-on-year has decreased since 2011, the early part of the 20th _{century was characterized by percentage increases of at least 10% per year.} At its peak, China was experiencing a GDP percentage increase of 29% year-on-year from 2006 to 2007, and 2007 to 2008. In just 15 years, China GDP rose from 1.2 trillion to 11 trillion USD, an increase of 816%. The drop from 2008 to 2009 can be explained by the US economic and financial crisis, which had repercussions felt around the world. Despite the crisis and having weathered the storm, China still experienced positive growth in the following years and will most likely continue to do so. This growth that China has experienced can be linked back to their energy scarcity situation; the graph shows the extent of this growth, and how the government must now take appropriate policy responses in order to at least maintain this growth and secure energy supply as this is an obstacle to China’s goal of energy supply security. 0% 5% 10% 15% 20% 25% 30% 35% 0 2 4 6 8 10 12 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Figure 2.1 China GDP and Percentage Increase/Year (2000-2015)

GDP (in trillion) % change (year-on year)

Notes: Data collection and presentation by author Source: World Bank Much like China’s GDP, the per capita income increase chart (figure 2.2) shows a similar trend to figure 2.1. Per capita income has increased year-on-year since the turn of the century. Growth accelerated in the earlier part of the century, up until the financial crisis of 2008. A short dip, which was still characterized by overall growth, was followed by a next few years of increased year-on-year growth. While per capita income is still rising, it is doing so at a lesser rate than previous years. With per capita income increasing, people have more disposable income to do with what they please. People are thus more likely to purchase goods which they otherwise did not have access to and which tend to have a higher carbon footprint such as televisions, refrigerators, and especially automobiles. This increase in purchasing goods with higher carbon footprint obviously contributes to China’s energy scarcity situation as is related to oil. Thus, the government, already faced with a scarcity situation, will have to take appropriate policy responses in order to maintain stability and in order to lift more of their citizens into the middle class. 0% 5% 10% 15% 20% 25% 30% 35% 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Figure 2.2 China Per Capita Income and Percentage

Increase/Year (2000-2015)

GDP Per Capita (in USD) % change (year-on year)

2.3 Scarcity

To give a picture of how much oil China is actually consuming, their demand accounted for a third of the total world demand for oil. China’s rising middle class and their demands for more luxury goods, in addition to increased domestic economic growth and increase trade has contributed to this increase in oil demand, consumption, and production (EIA China Analysis, 2015) which has propelled them be the biggest annual net importer of oil as of 2014 (ibid). For instance, China’s transport industry is heavily reliant on oil consumption. People are now more than ever able to afford cars, as indicated by figure 2.3, the exponential rise in per capita income since the early 2000s now means that car manufacturing represents a “pillar industry in the Chinese economy” (Cheng, 2008: 310).China’s oil problem, despite being exacerbated in the last decade or so, has always been present. China has been a net oil importer since 1993 (IEA energy supply security, 2014). However, since 1993, every year has led to a higher increase in consumption relative to the increases in production that China has been able to make. More troublesome is the prospect that by 2020 China’s import dependency will rise to anywhere from 60% to 80%, prompting the fear of demand-induced scarcity (Leung, 2011: 1331).

Currently, China is heavily dependent on oil sources from the Middle East to match its demands. As of 2012, Saudi Arabia alone provided 20% of China’s oil imports, while a mix of different countries in the Middle East provided another 30% of their imports. Overall, the Middle East provides China with about half of its oil imports while roughly another 24% coming from Africa (IEA Energy Supply Security, 2014). Other sources dated to 2014 put Chinese oil imports from Saudi Arabia to 16% (EIA China Analysis, 2015:11). Where does this scarcity come from? And why must China rely so heavily on oil imports to meet its consumption level? Scarcity is related to the natural endowment of resources in the country. However, China is naturally endowed with at least some natural resources. In fact, oil basins exist all over the country. The problem is related to this high GDP and GDP per capita growth examined earlier. In addition to a rise in GDP and GDP per capita, China has been faced with high population growth, this, despite

their one-child policy which was phased out in 2015.2 _{Because China was a latecomer to the world} of globalization, their industrial revolution came from above, being state sponsored. This has led to fast rate of growth in order to play catch up with the rest of the world. Consequently, this fast rate of growth is intimately linked to high energy consumption. This high energy consumption outpaces China’s energy production, leading to demand induced energy scarcity, especially with regards to oil. Figure 3 below shows the rate of consumption vis-à-vis production. If one considers the earlier graphs highlighting GDP and per capita income growth, it is evident that this growth is linked to an increase in energy consumption. Figure 2.3 China’s oil production and consumption from 1993-2016 Notes: Numbers in million barrels/day Source: EIA Country Analysis Brief China 2015 2 _{From the year 2000 to 2015, China’s population grew 100 million to 1.371 billion making it the most populous country in the world (World} Bank, 2015)

2.4 Government and Policy Responses As the world becomes more conscious of the potential disastrous effects of climate change, efforts are underway to reduce dependency on non-renewable sources of energy. At the same time, in order to sustain its economic and military growth, the reality of the situation is a full transition to using only renewable sources to fuel energy consumption is unrealistic for the time being. This is evident through the governments responses and planned proposals for refinery projects and expansions.3 This policy consists of gradually modernizing China’s refinery capabilities in order to become more efficient oil consumers and producers.4 _{Other government}

policy responses to their energy scarcity situation has led them to construct crude oil storage (EIA China Analysis, 2015). Additionally, geopolitical uncertainties and fear of oil supply disruption have led to and other policies designed to prevent any potential oil supply disruptions. China is highly motivated to diversify its oil supply sources and construct storage to manage potential disruptions. China is also keen to improve its current pipeline connections with neighboring countries such as Kazakhstan, Russia, and Myanmar. Some of these pipelines, such as the recent Myanmar – China one which was inaugurated in January 2015, are designed to circumvent the Strait of Malacca which is considered to be a choke point (EIA China Analysis, 2015).

Because China has exhausted its largest domestic oil fields, policy has been undertaken

to invest in technologies to sustain and maintain these mature oil fields. Some of the tools that China has adopted in generating its energy policy is a larger focus on technology and development. For instance, China hopes to double investment in research and development from 1.23%of its GDP in 2004, to 2.5% in 2020 (Cheng, 2008:312). Additionally, a stronger focus has been given to developing untapped reserves in the Western interior provinces in addition to offshore.5 _{The policy of developing new oil fields in the Western provinces does not face many} 3 _{The big 3 Chinese NOCs, CNOOC, CNPC, and Sinopec have all developed plans to increase oil refining capacity. Many of these plans have already} received government approval and underway while others are slated to start between 2017 and 2020+ (EIA China Analysis, 2015). 4 _{For instance, the NDRC, whose one of many roles includes the “formulation and implementation of strategies of national economic and social} development,” (NDRC) issued a directive in 2011 to shut down small oil refineries in order to take advantage of economic of scale. These small refineries thus merged with others or increased their capacity in order to stay open (EIA China Analysis, 2015 5 _{For instance, China’s biggest oil field Daqing, which provides around 19% of China’s crude oil production, has been producing 800,000 bbl/d of} crude oil, down from 1,000,000 a decade ago (EIA China Analysis, 2015:6)

challenges, apart from the need for substantial investment by Chinese NOCs supported by the government. However, the policy of developing offshore oil fields has been controversial and plagued with challenges. These are rooted in territorial disputes between Japan and China. Both countries have attempted to work together in the past but to no avail. The situation remains tense, with both countries claiming sovereignty over the same pieces of land (EIA China Analysis, 2015). The logic in doubling investment into research and development is the fact that China is a very inefficient country when it comes to energy consumption, and the Chinese government would like to become as efficient as the EU or even the USA in some respects. Using this tool of investment for economic development could potentially lead to energy conservation.6 Of course, part of the government’s response and policy changes related to their energy scarcity situation has been to direct the NOCs to increase their overseas acquisitions. The EIA’s brief indicates that this policy has been undertaken for several reasons, one which is due to their overreliance on oil imports, two which is to develop the technological and managerial expertise to deal with exploiting their challenging oil sources, and three to capture value. Over the last 7 years, more than $73 billion have been invested in overseas oil and gas of which some went to oil sands projects in Canada (EIA China Analysis, 2015:9). These overseas investments will be the focus of the upcoming chapters. 2.5 Conclusion Despite efforts to increase renewables as part of their energy mix, China continues to be heavily reliant on fossil fuel use. Although this is mostly in the form of coal, the resource which they are most dependent on and which is scarcest is oil. This chapter sought to examine China’s overall energy situation and energy gap and the demands that this entails. It also sought to highlight that China is experiencing demand-induced scarcity when it comes to oil and must import most of (it) its (x)oil in order to meet these demands. This scarcity exists because China is

6 _{For example, despite being the world’s leading producer of energy efficient light bulbs, only 30% manufactured are sold in the domestic market}

and it is estimated that China could save 60 billion kilowatts – hours, if the bulbs were introduced nationwide (Cheng, 2008: 309).

experiencing heavy GDP growth, important GDP per capita growth and high population growth. As China is experiencing GDP per capita growth, this leads to higher incomes and a population that is able and willing to afford more goods. Often, the production of such goods, like automobiles, refrigerators, television sets, all require the use of energy. This, among other factors, is part and parcel of the reason China is experiencing energy scarcity. Thankfully, the Chinese government has taken notice and chosen to act in order to sustain the level of growth of the past two decades in order to become more powerful economically and to assert itself as at the very least a regional power. Some of these responses have included modernizing and the creation of refineries and building storage systems to store oil in case of supply induced scarcity. Efforts have also been made with regards to higher investments in research and development, and the Chinese Communist Party has also instructed the National Oil Companies to embark on a going out strategy of investing in foreign oil sources. This last point will be the focus of the next chapter.

Chapter 3

Chinese-Canadian Energy Relations

3.1 Introduction As we have seen in chapter 2, China faces major energy challenges. Thus, the main focus of this chapter is on China’s energy relations with other states, but also more specific to our case study, energy relations with Canada. Specifically, the chapter will be broken down as follows. First, the nature of power and the relationship between NOCs and the Chinese state will be examined. What does this relationship look like? What does the Chinese power structure resemble? How can we understand it? After examining this, the next section will turn our attention to the strategy of NOCs in securing foreign supply of oil. Not only will we focus on the strategy of NOCs in Canada, but also more broadly speaking in the rest of the world. What are the NOCs strategies for securing foreign supply? Why? Has this strategy been successful overall? How do the strategies differ from NOC to NOC? Next, a section will look at Canada’s political economy and oil industry to understand the importance of the industry to the country and how it compares to China. How does Canada’s state-society complex differ than that of China’s? How does this affect their relationship and diplomacy? The energy relationship between China and Canada will also be a point of focus, in addition to Canada’s energy sources and production capabilities. Finally, the main section and focus of the chapter will be to examine direct Chinese NOC involvement in Canada’s energy sector. How are Chinese NOCs involved in Canada? Is it through FDI, mergers and acquisitions, strategic partnerships? What are the size of these investments and the general trends?

3.2 State, NOCs and energy supply strategy of China

3.2.1 China’s Power Structure

The People’s Republic of China was established in 1949 under the leadership of Mao Zedong and the Communist Party. As previously mentioned, China can be presently characterized

as an authoritarian state-society complex. But what does the power structure within this state-society complex resemble? The leader of the Chinese Communist Party is Xi Jinping, who is chosen by the National People’s Congress (NPC). The Premier of China, Li Keqiang, is the head of government. The NPC and the Standing Committee is the most powerful body of state power and is made up of politicians elected every 5 years by different provinces, administrative regions, municipalities, etc.7 Of course, since the Great Leap Forward, many changes have been made. For instance, the first constitution established in 1954 has since been revised and suspended and the current constitution outlining rights and the structure of government was written in 1982 with further revisions in the late 80’s, 90’s and 2000’s. Chapter 3 of the constitution specifically talks about the structure of the state. It outlines the powers of the NPC8 among other state bodies. The Standing Committee (usually known as the Politburo Standing Committee or PSC) is usually made up of 5 to 9 members, and is currently made up of 7 of the most powerful politicians in all of China.9 Hierarchically, after the PSC comes the Politburo which is made up of 25 members of which 7 are the PSC. Then comes the central committee, composed of 205 members and 171 alternate members. Finally, the party congress, which is made up of 2,270 delegates. What does this structure tell us? It certainly indicates that the Chinese government is highly centralized but also made up of a complex web of bureaucracy and overlapping responsibilities. It also has implications for the growth of SOEs. According to some, the stability of the political regime and the continued support of its SOEs provides the conditions necessary for economic development (Yang, 2006:44). Yang further indicates that the “purposeful protection of the national economy...is the protection of the political economy” (ibid: 56). This can be linked back to the motivations behind the formulation of a successful energy policy. The government must protect 7 The current power structure evolved out of the transition to a planned economy and out of Mao Zedong’s Great Leap Forward (GLF). The GLF is said to have “established the State power structure with a centralized leadership at its core” (Yang, 2006: 46). 8 _{The NPC is responsible for amending and enforcing the constitution in addition to amending and enforcing basic laws, they also hold the} power to remove the President and the Premier, among others. 9 _{Xi Jinping, Li Keqiand, Zhang Dejiang, Yu Zhengsheng, Liu Yunshan, Wang Qishan and Zhang Gaoli. We have already examined the first two} members. Zhang Dejiang is essentially the Chairman of the PSC, Yu Zhengsheng is the Chairman of the Chinese People’s Political Consulative Conference (CPPCC). Liu Yungshan is leader of Propaganda and Ideology Group among other responsibilities. Wang Qishan is Secretary of the Central Commission for Discipline Inspection and is reknown for being at the forefront of the anti-corruption campaign. Finally, Zhang Gaoli is the Vice-Premier of the PRC. The PSC is elected for the same amount of time as the NPC. The NPC has, among many other responsibilities, the main role to interpret the constitution and laws and to supervise the work of subordinate government bodies.

NOCs and support them insofar as they are reliant on continued economic development for their own stability. Going further, Yang acknowledges that this was purposely done by the state during the earlier reform eras in order to create this co-dependent relationship of which a by-product is stable political rule (ibid: 44).

3.2.2 State, Energy Supply Strategy and NOCs

First established in the 1980s, the three major Chinese NOCs are the China National Petroleum Corporation (CNPC), the China Petroleum and Chemical Corporation (Sinopec) and the China National Offshore Oil Corporation (CNOOC). These companies essentially act as an extension of Chinese foreign policy. As of 2012, the SOEs account for over 90% of Chinese spending by volume (Scissors and Cheng, 2012: 1). Over the last quarter century, Chinese NOCs have become much more powerful internationally as well as domestically. This development is partly due to directives from the Chinese government giving NOCs the go-ahead to start investing in foreign energy supplies to meet energy demand in China. However, this development is also due to the close links between the NOCs and the structure of the Chinese Communist Party. First, we must examine how the increasing power and independence of NOCs has grown before delving into the power the party-state still holds over them, and the structural similarities and overlap between high ranking members of the Communist Party and executives of Chinese NOCs. Certainly, despite a higher degree of freedom given to the NOCs as compared to last century, the NOCs still fall under party-state control despite their relationship vis-à-vis the state having changed (Downs, 2007). One of the biggest ways they have changed is that despite still being under party-state control, the higher degree of independence given to them in regards to their investment decisions has led to the interests of NOCs not always aligning with those of the party-state (Downs, 2010). Regardless, this has not hindered the promotion of NOC’s executives to top political posts within the Communist Party, as the Party considers the managerial skills acquired in developing the NOCs transferable to developing China’s integration into the global economy (Downs, 2007). This link between Chinese NOCs and their Party-State system may be rooted in the fact that the three major NOCs all evolved out of government ministries in the