Graduate School of Social Sciences
The energy supply security of China: Sinopec and
CNPC in Saudi-Arabia and Kazakhstan
Msc Thesis Political Science
International Relations
The Political Economy of Energy
05-06-2020
Supervisor:
Author: Dr. M.P. Amineh
Jeroen Rijswijk Second Reader:
Table of Contents
Acknowledgments 5
Abstract 7
Maps 8
List of tables and figures 11
List of abbreviations 12
Chapter 1: Research Design 15
1.1 Introduction 15
1.2 Social and academic relevance 16
1.3 Literature review 17
1.4 Theoretical framework 24
1.5 Hypotheses and operationalization 27
1.6 Methodology 29
1.7 Structure of thesis 30
Chapter 2: The People`s Republic of China: Energy Situation, Policy and
National Oil Companies 33
2.1 Introduction 33
2.2 China`s rising import dependence 33
2.3 China`s power structure and energy policies 37
2.4 The role of National Oil Companies in China 42
2.5 Towards a new external energy security policy 47
2.6 Conclusion 54
Chapter 3: Oil, Power and the external relation with China in Saudi-Arabia & Kazakhstan 55
3.1 Introduction 55
3.2 Power structure, economy and energy in Saudi-Arabia 56 3.3 China-Saudi relationship: diplomacy, trade, investments & energy 62 3.4 The role and position of Saudi-Arabia in the BRI 66 3.5 Power structure, economy and energy in Kazakhstan 68 3.6 China-Kazakhstan relationship: diplomacy, trade, investments & energy 75 3.7 The role and position of Kazakhstan in the BRI 78
3.8 Conclusion 80
Chapter 4: The activities of Sinopec and the CNPC in Saudi-Arabia and Kazakhstan 83
4.1 Introduction 83
4.2 Trade, Investment & Finance in Saudi-Arabia 84
4.3 Trade, Investment & Finance in Kazakhstan 91
4.4 Yanbu Aramco Sinopec Refining Company 99
4.5 Development of Kashagan oil field 101
4.6 Kazakhstan-China oil pipeline 103
4.7 Conclusion 105
Chapter 5: Geopolitics and Geo-economics in the Middle-East and Central-Asia 109
5.1 Introduction 109
5.2 Domestic challenges for the Sino-Saudi & Sino-Kazakhstan energy relations 110 5.3 Geopolitics and Geo-economics in the Middle-East 113
5.4 Geopolitics and Geo-economics in Central Asia 120
5.5 Conclusion 127
Chapter 6: Conclusion 129
Acknowledgements
This thesis, on the energy relationship between China and Saudi-Arabia & Kazakhstan, is the final results of 6 months of hard work and study. While I say 6 months, I have actually been studying the energy supply security of China and the impact of the Belt and Road initiative on China`s energy situation for almost 2 years now. Already during my bachelor, I was very interested in geopolitics. This eventually led me to the course ‘Security and Geopolitics in the Middle East and Central Eurasia’, which was taught by mr. M.P. Amineh (Mehdi). Here I was first introduced to the study of energy and the interesting case of China.
After that, in my master, I signed up for the ‘Energy and Geopolitical Economy in Eurasia’, which was also taught by mr. Amineh. During these classes, my interest for the energy supply security of China further increased and mr. Amineh invited me to study this topic within his research project ‘the political economy of energy’. The cases of Saudi-Arabia and Kazakhstan really attracted me since they arguably both play a large role in the energy supply security of China, but on different levels. This has resulted in the work that lies before you. Although there is always room for improvement and further analysis, I am proud of what I have achieved in the past six months.
With regard to the completion of this thesis, I would first and foremost like to thank mr. Amineh. Over the past 2 years, I have come to know mr. Amineh as the most inspiring, dedicated and caring teacher I have encountered during my academic career. He is always willing to provide support, additional information and feedback on my work. Throughout this process, his efforts have tremendously increased the quality of this thesis. Second, I would like to thank Dr. H. Houweling for his time and effort to read my work. Furthermore, I would especially like to show my gratitude for my twin brother, Kevin, who has helped me
tremendously by supporting me and proof-reading a large part of this thesis. Finally, I would like to thank my family and friends, who have had to miss my presence during these intense months, but kept on supporting and encouraging me.
Abstract
This thesis provides a comprehensive analysis of the activities of Sinopec and CNCP in the energy sectors of Saudi-Arabia and Kazakhstan. To do so, it uses the geopolitical economy theoretical framework that helps to understand the configuration between market forces and the state and explains the combination of geopolitical and geo-economic tools for the power projection of the Chinese state. It will be argued that the import dependency of China has grown because of its economic development. To satisfy domestic consumption, Chinese NOC`s are stimulated to acquire access to overseas resources, such as in Saudi-Arabia and Kazakhstan. The BRI plays a large part in this, since it arguably forms the new external energy policy of the PRC. It redirects investment towards resource-rich countries and intensifies the activities of Chinese NOC`s. Furthermore, it will be argued that the activities within Saudi-Arabia focusses mainly on trade and investments in the downstream production process. Saudi-Arabia is the second largest import destination for China and therefore
important for the energy supply security of China. In the case of Kazakhstan, most activities focus on the upstream production process and the acquirement of equity oil in the country`s oil and gas fields. Oil from Kazakhstan lowers China`s dependency on energy imports from the Middle-East and, therefore, arguably increases China energy supply security.
Keywords: China, Saudi-Arabia, Kazakhstan, energy supply security, BRI, NOC`s, trade investment and finance
Maps Map 1: China
Source: Nations Online Project. Map of China. Available from:
Map 2: Middle-East
Source: Nations Online Project. Map of Western Asia and the Middle East. Available from: https://www.nationsonline.org/oneworld/map/small_middle_east_map.htm
Map 3: Central Asia
Source: Nations Online Project. Small Map of Central Asia. Available from: https://www.nationsonline.org/oneworld/map/central-asia-map-800px.htm
List of tables and figures Figures
2.1 China`s total energy consumption and production 34
2.2 China`s total energy consumption by sector 35
2.3 China`s total primary energy supply per energy resource 36
2.4 Origin of oil imports in 2017 37
2.5 Hierarchical structure state-class China 39
2.6 Energy institutions in China 40
3.1 Saudi-Arabia oil export/total export, oil revenue/GDP & oil revenue/total state
revenue (1995-2018) 58
3.2 Global oil price & profit and loss account of Saudi-Arabia (1990-2018) 61 3.3 Value of top 4 crude petroleum importing countries from Saudi-Arabia (1995-2017) 65 3.4 Rank and value of China`s crude petroleum imports from Saudi-Arabia (1995-2017) 66 3.5 Kazakhstan petroleum exports to major importers (1995-2017) 77 3.6 Rank and value of China`s crude petroleum imports from Kazakhstan (1995-2017) 78 4.1 Total value of imports from Saudi-Arabia to China, compared with crude petroleum
imports (1995-2017) 85
4.2 Value of OFDI flow from China to Saudi-Arabia per sector (2005-2019) 86 4.3 Value of investments by Sinopec and CNPC in Saudi-Arabia (2005-2019) 89 4.4 Timeline of major investments by Sinopec in Saudi-Arabia 91 4.5 Total value of imports from Kazakhstan to China compared with crude petroleum
imports (1995-2017) 92
4.6 Value of OFDI flow from China to Saudi-Arabia per sector (2005-2019) 94 4.7 Value of investments by Sinopec and CNPC in Kazakhstan (2005-2019) 97 4.8 Timeline of major investments of CNPC in Kazakhstan 99
Tables
2.1 China`s National Oil Companies on the Fortune 500 43
2.2 Overview key figures CNPC in 2018 45
2.3 Overview key figures Sinopec in 2018 46
3.1 Saudi-Arabia oil and natural gas statistics in 2016 60 3.2 Major oil and gas fields, operating companies and reserves in Saudi-Arabia 61 3.3 Kazakhstan oil export/total export, oil revenue/GDP & oil revenue/total state revenue
(2000-2019) 71
3.4 Kazakhstan Oil and Natural gas statistics in 2016 72 3.5 Major oil and gas fields, operating companies and reserves in Kazakhstan 74 4.1 Investments by Sinopec and CNPC in Saudi-Arabia (2005-2019) 88 4.2 Investments by Sinopec and CNPC in Kazakhstan (2005-2019) 96
List of abbreviations
AEI American Enterprise Institute
AIIB Asian Infrastructure Investment Bank
AMG AktobeMunayGaz
BBL Barrel
BPD Barrels Per Day
BRI Belt and Road Initiative BTC Baku-Tblisi-Ceyhan
CA Central-Asia
CNOOC China National Offshore Oil Corporation CNPC China National Petroleum Company CPC Caspian Pipeline Consortium
CPC Communist Party China
CSTO Collective Security Treaty Organization
CU Customs Union
EEU Eurasian Economic Union EuraAsEc Eurasian Economic Community
FPCL Fujian Petrochemical Company Limited FREP Fujian Refining & Petrochemical
FYP Five Year Plan
GCC Gulf Cooperation Council GDP Gross Domestic Product IEA International Energy Agency IMF International Monetary Fund KSA Kingdom of Saudi-Arabia Ktoe Kilotons of oil equivalent M&A Merger and Acquisition mb/d Million Buckets per Day
MBS Mohammed Bin Salman
ME Middle-East
MMG MangistauMunaiGas
MoC Memorandums of Cooperation MoU Memorandums of Understanding NCOC North Caspian Operating Company
NDRC National Development and Reform Commission NEA National Energy Administration
NOC National Oil Company NPC National People`s Congress
NPCSC National People`s Congress Standing Committee
OBOR One Belt One Road
OEC Observatory for Economic Complexity OFDI Overseas Foreign Direct Investment ONGC Oil and Natural Gas Corporation
OPEC Organization of the Petroleum Exporting Countries PRC People`s Republic of China
PSC Politburo Standing Committee R&D Research and Development
RMD Renminbi
SASAC State-owned Assets Supervision and Administration Commission SCO Shanghai Cooperation Organization
Sinopec China Petroleum & Chemical Corporation SOE State-Owned Enterprise
SPR Strategic petroleum reserve SV30 Saudi Vision 2030
tcf Trillion Cubic Feet USD United States Dollar
WITS World Integrated Trade Solution
Chapter I Research Design
1.1 Introduction
In the past 40 years, China has undergone a process of unprecedented industrialization and economic development. This has significantly improved the country`s capabilities and opportunities and enhanced its position on the global stage. However, a side effect of this development has been the rapidly increasing domestic energy consumption in China. To satisfy energy demand, the country is forced to look abroad for its energy supply. Due to the large negative consequences inherent to a shortage of energy, the availability of these resources can be considered as a security issue. To increase its energy supply security, the People's Republic of China (PRC) has, since the 1990s, incentivized its National Oil
Companies (NOC’s) to acquire resources abroad. Over the years, these NOC's have grown out to be among the largest companies in the world and play a large role in the energy supply of China. As these companies are state-owned, they, for the most part, follow the national interest. Therefore, their activities can be seen in light of the national interest of the country.
This research will look at the economic activities of these NOC's for the cases of Saudi-Arabia and Kazakhstan. These economic activities are related to the trade, investments, and finance of these companies. Both Saudi-Arabia and Kazakhstan, arguably, play a role in the energy supply security of China for different reasons. Saudi-Arabia is the largest oil exporter in the world and the second-largest (behind Russia) exporter to China. Supply disruptions from this country will, therefore, have a substantial impact on the energy supply of China. Kazakhstan, on the other hand, is a less significant exporter to China. However, as China aims to decrease its dependence on Middle-Eastern resources and thereby reduce its oil imports through the 'strait of Malacca', this enhances the importance of Kazakhstan as an alternative to the Middle-East. Diversification of the oil exporting countries and supply routes also increases the energy supply of China.
The aim of this thesis is to analyze the economic activities of two of the largest
Chinese NOC's (Sinopec and CNPC) in the energy sectors of Saudi-Arabia and Kazakhstan. It will do so in the context of the ‘Belt and Road initiative’ (BRI). This initiative has arguably shaped the external energy policies of the PRC and had a significant impact on the activities of Chinese NOC's. It has, arguably, both intensified and redirected the trade and investment businesses of these companies. To investigate the role of the activities of Chinese NOC's in Saudi-Arabia and Kazakhstan in the energy supply security of China, the main research
question that this thesis will answer is: What are the activities of Sinopec and CNPC in
Saudi-Arabia and Kazakhstan, and to what extent do they contribute to the energy supply security of China?
In order to answer this question, this thesis will first answer the following sub-questions: 1. How has the energy situation in China developed over the past 20 years, and what is
the role of the NOC's in China's energy supply security policy?
2. How has the 'Belt and Road' initiative improved China's external energy security policy?
3. How are the energy sectors in Kazakhstan & Saudi-Arabia regulated, and what is the role of energy in the economies of these countries?
4. How has the relationship between China and Saudi-Arabia & Kazakhstan in terms of diplomacy, trade, investments, and energy developed?
5. What are the activities, concerning trade, finance, and investments, of Sinopec and CNPC in Saudi-Arabia and Kazakhstan, and how have these changed over time and between these countries?
6. What are the domestic challenges for the energy relationship between China and Saudi-Arabia & Kazakhstan?
7. What are the geopolitical and geo-economic dynamics within the Middle-East and Central-Asia, and how do these affect the power projection of China in these regions?
1.2 Social and academic relevance
In recent years, China has become an increasingly dominant player on the world stage and may even threaten our contemporary world order. Economic development and subsequent rising energy demands have forced China to look abroad for its energy supply. Chinese activities in resource-rich countries with relation to trade, finance, and investment are
increasing China's influence in the resource-rich regions in the world. As a result, many of the countries within these regions are reorienting their energy export from the West to the East. This reorientation has even further accelerated under the new 'Belt and Road' Initiative that aims at connecting China to the world. The importance of this new initiative for the cross-border activities of the ‘State-Owned Enterprises’ (SOE) in China cannot be understated. Almost every action from the Chinese government on the international stage has been in light of this initiative. Every investment of SOE`s or investment banks now falls under the banner of the BRI.
Due to the importance of this initiative, research that analyzes the motivations and effects of the BRI is needed to provide a coherent picture of the Chinese strategies. Similarly, the rise of China and its growing energy demands can have severe implications for the energy supply security of Europe. These different energy importing countries compete with each other over the available resources. This competition can be a catalysator of conflict. Studies that analyze the energy supply security of China are of significant importance since it is paramount to get a better understanding of China's strategies concerning energy.
On top of that, this thesis aims to contribute to two current debates within the topic of China's energy supply security. The first debate is on the relationship between the Chinese government and the National Oil Companies. Do these companies operate fully according to the interest of the state, or are they equipped with a degree of autonomy? The second debate is on the motivations of the Chinese government for the implementation of the 'Belt and Road' initiative. Is this initiative mainly driven by economic incentives to increase trade with other parts of the world? Or is it more politically driven to establish a new political order in the region?
1.3 Literature review
This section will provide an overview of the already existing literature on the topics relevant to this thesis, as well as analyze some academic debates within these issues. Doing so will enable three things within this thesis. First, the literature review is the foundation of this research since it shows the already available knowledge on topics related to this research. Second, this makes it possible to identify gaps in the literature that this research could contribute to. Third, analyzing the academic debates enables this thesis to position itself within these debates and provide the argumentation to do so.
This literature review will first review existing work on the economic development and subsequent rising energy demand within China. After that, it will discuss the Chinese policies for its energy supply security. The most recent policy is the BRI, and this thesis will analyze the debate surrounding the motivations of the PRC for the implementation of this initiative. This will be followed by a section on the dynamics in the relationship between the Chinese government and the state-owned NOC's in China. After that, this thesis will review the literature on the relationship between China and Saudi-Arabia & Kazakhstan, with a special focus on energy. The final section of this analysis will highlight the main points in which this research aims to contribute to the debates.
Economic development and energy demands in the PRC
The study of energy as a security issue started with the Copenhagen school, which was led by Buzan, de Wilde & Waever. They argued for a much broader conceptualization of security that encompasses all areas of government (Buzan, Waever & de Wilde, 1998). Since issues like health, education, environment, and poverty have a large impact on the quality of life, they can also be considered security issues. Similarly, the availability of energy resources is also considered to be a prerequisite of economic development and, therefore, has a large impact on the state (Cao & Bluth, 2013). Thus, the sufficient and sustainable supply of energy resources was considered to be a matter of energy supply security. This further enabled academics to investigate the activities of countries to enhance their energy supplies.
Within the study of energy supply security, China is particularly interesting because of its recent economic development and industrialization. While this development has
significantly improved the living standards of the population and created a new middle-class in China, it has also caused a rapidly increasing demand for energy sources (Amineh & Yang, 2014). While China has sufficient coal supplies, its oil and gas reserves are lacking. Until now, the country mainly relies on coal as its source for energy (Danreuther, 2011). However, because of the damage coal does to the environment, the PRC is increasingly aiming to diversify its energy sources towards oil and gas (Lin, 2010). Therefore, the country is dependent on imports from other countries to sustain its energy demand.
China's external energy policies and the BRI
In the 1990s, three general issues forced China to increase its overseas economic activities. First, the large production of industrial commodities required extra export markets. Second, the export of these commodities led to a capital surplus in China. Therefore, the SOE's in China started to invest in overseas projects to further increase their profit (Gonzalez-Vicente, 2011). Third, rising energy consumption increased the import dependency of China, which caused the country to enhance its economic relations with resource-rich countries (Wu, 2012, p. 59).
Because of these problems, from the 1990s, the Chinese government started to stimulate its SOE`s and especially its NOC`s to move abroad and interact with the global market. This ‘going out’ policy was further upgraded with the implementation of the BRI in 2013. The BRI constitutes a continuation and intensification of the internationalization process that was initiated in the early 2000s. Through the BRI, China is providing loans to other countries, including many resource-rich countries in the Middle-East and Central-Asia.
In these countries, the projects that China is funding are mainly connected to the energy sector (Umbach, 2019). According to Duan et al. (2018, p. 535), the majority of the energy resources in the world are located in countries along the BRI routes. These percentages are 58.8% of all oil, 79.9% gas, and 54.0% coal (Duan et al., 2018). This shows the focus on and importance of energy resources in the BRI. One of the ways in which the government in China is trying to enhance its economic relations with these resource-rich countries is by diverting the 'outward foreign direct investment' (OFDI) of its companies. Liu et al. (2017) argue that the PRC has been successful in this objective since the percentage of OFDI towards countries included in the BRI, relative to total OFDI, has risen from 10.8% in 2015 to 44% in 2017.
A large number of articles are written about the motivations behind and the
consequences of the BRI project. Some of this work has focused on the issue whether the BRI is a politically motivated program, meant to enhance the political position of China in both the region and the world, or an economic program that aims at increasing the trade relations with other countries (Leverett & Bingbing, 2017, p. 111). On the one hand, academics like
Summers (2016) and Yu (2019) have argued that the BRI, as a program, is implemented to further increase the economic development of the PRC. According to Summers (2016), this initiative displays China's compliance with the international capitalist system and its
assumptions, such as the beneficial aspect of enhanced trade relations for domestic economic prosperity. Furthermore, he argues that the BRI is not a geopolitical strategy but a spatial fix. This means that the current era of globalization forces countries, such as China, to integrate their economy in both the regional and global economies. For China, this is done through the BRI (Summers, 2016, p. 1638).
On the other hand, according to experts like Fallon (2015) and Yu (2017), the BRI is a geopolitical strategy in which China wants to exert its regional dominance and counterbalance US hegemony. Yu (2017, p. 355), for example, argues that this initiative reveals China's aspirations to establish a new world order. The BRI increases the diplomatic and economic influence of China within a number of countries in the region. This enables China to become the political and economic center of the region (Yu, 2017, p. 354). On top of that, the PRC is increasingly providing countries with an alternative against US hegemony. According to Yu (2017), definitely developing countries that rely on China for financial aid and investments are eager to go along with this alternative. Similarly, Fallon (2015, p. 141), has argued that the BRI is the grand strategy of the PRC to restore the Chinese nation and once again establish itself as a superpower. Therefore, he argues that the BRI is the revelation of Chinese global and regional ambitions (Fallon, 2015).
In contrast to the two earlier points of view, recently, a new strand of scholars has combined the geopolitical and geo-economic aspects of this initiative (Leverett & Bingbing, 2017; Pu, 2016; Wong, 2014). For example, according to Leverett & Bingbing (2017, p. 124), the BRI is indeed a grand strategy of China, but one that both encompasses economic,
environmental, and strategic challenges, as well as the Chinese desire for a more multipolar world. Similarly, Pu (2016) emphasizes the five objectives of the BRI, which are: connecting infrastructure, enhancing trade, increase financial activities, policy communication, and people to people bonds. According to him, the first three focus on economic activities, while the latter two are more strategically oriented (Pu, 2016, p. 115). He, therefore, argues that in reality, "political factors and economic factors are not separable in the design and
implementation of OBOR. As China's new global action plan, OBOR could be largely viewed as China's new geo-economic strategy" (Pu, 2016, p. 115).
Dynamics of the relationship between China's NOC and the Chinese government
The Chinese NOC's are so-called 'State-Owned Enterprises' (SOE's). This means that the shares of the company are in the hands of the government, and all profit eventually runs back to the state. While one would think that this gives the government ultimate control over these companies, different experts have different opinions on the extent to which they are fully regulated by the state or exert some form of autonomy. The first group of academics has argued that the government remains in control of these businesses. They, for example,
highlight the role of the 'State Assets Supervision and Administration Commission' (SASAC) as the supervising power of these SOE's (Francisco & Beachler, 2013). According to
Francisco & Beachler, 2013, pp. 20-21), although the NOC's might have some operational autonomy, "the strategic and administrative control of the SASAC over them limits their capacity to pursue their own interests that may be divergent from the state's interest". Meidan (2016, p. 55) agrees with this and argues that the autonomy of the NOC's remains within the playing field of the state interest. However, she also emphasized the dynamical character of the relationship between state and companies, by arguing that it is characterized by times of centralization as well as decentralization (Meidan, 2016, p. 55). Similarly, Amineh & Yang (2018, p. 29) have also argued that the Chinese NOC's activities can be seen in light of the national interest of the PRC. Overall, these companies are not driven by economic motives that include the maximization of profit, but by increasing the energy supply security of China (Amineh & Yang, 2018, p. 29). Therefore, the commercial interest of these companies is subordinated to the national interest of the PRC.
However, on the other hand, other scholars have argued that this is not the case and describe a trend of increasing independence and autonomy for these NOC's. Kong (2006, p. 67), for example, has identified cases in which the economic interest differs from the national interest of the state, and in which the NOC eventually chose to pursue its own commercial agenda. One of these cases is when the international oil price is higher compared to the domestic Chinese oil price. In such instances, the profit of the NOC's is higher if they opt to sell oil on the international market. However, it is in the national interest to sell it
domestically. In some of these cases, the NOC still chose to move the energy to the international market and increase its profit (Kong, 2006, p. 75). Similarly, Ma & Andrew-Speed have also argued that the autonomy of these companies has increased in recent years. They emphasize the growing difference between national state interest and company interest and also argue that these businesses, therefore, receive less support from the government (Ma & Andrew-Speed, 2006 p. 27). According to Liao (2015, p. 55), the increasing autonomy of the NOC's is due to the inability of the government to supervise and control the companies. The size of these large businesses has increased their political influence and technical knowledge, and this has enabled them to seek their own commercial interest (Liao, 2015). Related to that, Wang (2019, p. 305) has argued that even in China, where the market is supposedly dominated by state forces, companies exercise an intrinsic form of power. This is due to the technological advantage of these companies. Therefore, it is impossible for the government to assess to what extent the NOC's comply with the national interest (Wang, 2019, p. 305). Finally, according to Jiang & Sinton (2011, p. 7), the NOC's in China are state-owned but not state-led. They also believe that the increasing size of these companies
provides them with political power. Therefore, these NOC`s can also influence decision making on the state level. Consequently, Jiang & Sinton (2011, p. 27) argue that the relationship can be described as a two-way stream in which both the companies and the government affect each other and have an influence on the interest and activities of the other.
Relationship between China and Saudi-Arabia
One of the resource-rich countries along the BRI that has a large priority for China is Saudi-Arabia. Sino-Saudi relations have historically been good, and Saudi-Arabia is the second-largest supplier of oil to China (Chen & Han, 2019, p. 19). In 2018, 12.4% of all oil imports in China came from Saudi-Arabia (Workman, 2019). Between 2005 and 2015, the total investment flows between Saudi-Arabia and China have increased by more than twenty times (Chen & Han, 2019, p. 12). Also, Saudi-Arabia has already indicated that the BRI is an
excellent opportunity for the country to attract new investments from China (Chen & Han, 2019, p. 6).
There are many scholars that have investigated the energy relation between China and Saudi-Arabia. Al-Tamimi (2012), for example, has argued that the relationship between these two countries is an energy-economic partnership. China's influence in Saudi-Arabia is not incentivized by desires to gain power in the Middle-East but by economic interest in the energy sector of the country. For China, the large energy reserves in Saudi-Arabia make it an important partner to trade with, while for Saudi-Arabia, the large and growing market in China provides it with a reliable export market (Al-Tamimi, 2012).
Similarly, Qian has argued that China's overall strategy in the Middle-East is one of "strategic cooperative relationship based on long-term friendship" (2016, p. 615). The Middle-East is also an important region for the BRI. This initiative tries to further develop China's relation with the resource-rich countries in the Middle-East, as these countries are inherently crucial for China's energy security. However, Qian (2016) also points to China's aim of preventing overdependence on supplies from the Middle-East and diversify its import routes to Africa, South-America, and Central-Asia.
Also, a number of scholars have identified the rivalry between Iran and Saudi-Arabia as a possible challenge for China's energy relation with Saudi-Arabia (Zavareh & Barzoki, 2018). China aims at diversifying its energy imports and, therefore, has good relations with almost all resource-rich countries, including Iran. According to Zavareh & Barzoki (2018), China aims to make a balance between all countries in the Middle-East. This is against the interest of Saudi-Arabia who aims at maximizing its share in China's energy market. This may result in conflict and decreasing energy relations between the two countries.
There are also experts, such as MacGillivray (2019), who argue that the Sino-Saudi relationship is moving beyond mere energy security and is evolving into a more political and strategic partnership. According to him, Saudi-Arabia is using its ties with China to influence their decision making on Iran. However, since both Saudi-Arabia and Iran are part of the BRI strategy, a conflict between these countries is against Chinese interest. Therefore, China's aim in the Middle-East is to act as a neutral negotiator and prevent conflict (MacGillivray, 2019).
Relationship between China and Kazakhstan
Since the disintegration of the Soviet-Union in 1991, a large number of scholars have identified a rivalry among large actors (China, the US, the EU, and Russia) for increased influence in the new countries that were formed in Central-Asia (Afridi et al., 2017; Griffin,
2018; Misiągiewicz, 2020). This rivalry has mostly focused around the access to the resources within the countries of Central-Asia, and has been called 'the new great game'. According to Smit-Stegen & Kusznir (2015), this 'new great game' is increasingly being won by China through their large investments in the energy sectors of these countries. Access to the
resources in Central-Asia, and predominantly Kazakhstan, is essential for China since it aims to diversify its energy supply, while most energy now originates from the Middle-East (Misiągiewicz. 2020). Energy from the Middle-East is transported over the sea through the 'strait of Malacca', which is strategically risky in the case of a blockade (Duarte, 2019). Even though Kazakhstan is only ranked 12th in the world concerning energy reserves, Duarte (2019) argues that the country can still play a big part in the energy supply security of China because the oil is transported through pipelines. These pipelines can be better protected in the case of conflict. Other scholars have similarly argued that securing access to the resources in Central-Asia can help China to diversify its supply of energy, and thereby increase its energy supply security (Xuanli Liao, 2019).
One of the strategies for access to the resources is through the investments of the NOC's. In her master thesis, van Driel (2017) tried to analyze the activities of the Chinese NOC's in trying to secure energy supply security from Kazakhstan and Turkmenistan. She argued that China is actively using its economic and political tools to acquire resources in these countries through the CNOC's. However, the regional instability and vulnerability of the government of Kazakhstan can potentially be detrimental to the energy supply security of China from these countries.
Contributions of this research for academics
There has been a large number of studies that investigated the motivations and importance of the BRI. However, most of these studies have identified this initiative as either a political project to create a new (regional) order or as an economic plan to increase its overseas economic activities and capitalist expansion. Thereby, these studies have, arguably, overlooked the connection and interaction between the geopolitical and geo-economic components of this initiative. This research will contribute to the debate concerning the BRI because it will argue that the BRI is a tool of the PRC to enhance its power projection overseas and especially in the Middle-East and Central-Asia. Through this power projection, China will increase its influence in both the political as well as the economic domain. This enables the PRC to better address domestic security issues such as the sufficient supply of
energy. The BRI is, therefore, both a geopolitical as well as a geo-economic tool. It is arguably incorrect to separate these two and treat them isolated from each other.
Previous research has also focused on the energy relationship between China and Saudi-Arabia, as well as the energy relationship between China and Kazakhstan. Some of these studies also have, although briefly, touched upon the role of Chinese NOC's in these relationships. There are two ways in which this thesis will contribute and add on to these studies. First, although these studies have shortly noticed that the NOC's play a role in the energy relationship between China and Saudi-Arabia & Kazakhstan, they have not fully explored the ways in how they do so. This thesis will look in-depth at the economic activities, related to trade, investment and finance, of both Sinopec and CNPC in Saudi-Arabia and Kazakhstan. It will also analyze to what extent these activities contribute to the energy supply security of China. This allows for a more comprehensive understanding of the role of these Chinese NOC's.
Second, this research will also look at the role of the BRI in the energy relationship between China and Saudi-Arabia & Kazakhstan. While many studies have either discussed the BRI or the role of the NOC`s in the energy security of the PRC, studies that combine these two and identify the influence of the BRI on the businesses of the NOC`s are limited. The BRI has, arguably, redirected and intensified the economic activities of Chinese NOC`s towards the countries included in this initiative. It, thus, has had a large impact on the endeavors of these companies. This thesis aims to provide an analysis of the economic activities of Sinopec and CNPC in Saudi-Arabia & Kazakhstan. The BRI has had a large impact on these activities, and it is, therefore, highly relevant to include the initiative in the analysis of this research.
1.4 Theoretical framework
This research will apply the theoretical framework of geopolitical economy. This framework has its foundation in the critical approach that was developed by the Frankfurter Schule in the first half of the second century. The works of both Harvey (1985) and Mercille (2008) have been influential in the development of the geopolitical economy. Harvey (1985) tried to explain the structure and mechanics of capitalism and introduced two concepts that are prevalent in capitalist societies. First, the capitalist logic of power is the tendency for the market to grow and for businesses to keep looking for new markets to sell their products. The second logic is the territorial logic of power. This refers to the incentives of countries to interact with one another and exchange capital and goods (Harvey, 1985). Mercille (2008)
reformulated these logics into the geo-economic logic of power and geopolitical logic of power and argued that these elements could diverge for states and capitalist. This tension between the geo-economic logic of power and the geopolitical logic of power is the crux of the geopolitical economy theory.
Amineh & Guang (2014) have argued that in order to gain or maintain access to the resources in the resource-rich countries, energy importing countries use their geo-economic and geopolitical power. This usage of power in other countries is what they called power projection. According to Amineh & Yang (2018, p. 26), the amount of power projection a country has economically is determined by the amount of control over the capital flows between countries. These capital flows are characterized by both trade, investment and finance. Therefore, to assess the geo-economic power of a country in a specific case, it is essential to analyze the level and nature of the trade, investment and finance that this country has in the case.
The ability to project power into foreign countries is determined by the current geopolitical order. According to the geopolitical economy theory, this geopolitical order is created by the sequence in which countries transformed their mode of production from an agrarian to an industrial base of production. This has allowed these countries to have strong economic development and create wealth for its citizens. This increase in wealth gave them, consequently, also an increase in power in comparison to other states.
The fear of exclusion and peripheralization creates an incentive for other countries to kickstart this same process of industrialization. The sequence in which countries around the world have initiated this process of industrialization has been called the process of
'sequential industrialization' by Amineh & Houweling (2010). Britain is the only country that industrialized naturally without state intervention. In all other countries, this process has to be inserted and supported by the state. The same applies to China, which tried to prevent
domination by western nations and therefore had to initiate a process of state-led industrialization and economic development.
After a country has transformed from an agricultural society into an industrial society, its economy is totally reliant on the access to energy resources. Energy sources, on which all industries run, are fossil fuels (coal, oil and natural gas), nuclear energy & renewable energy (solar, wind, hydro, geothermal, biomass & tidal). The availability of these resources is paramount to keep the economy running. The term that is established to assess the availability of these resources is 'energy supply security'. A secure supply of energy implies the steady availability of affordable energy in every form (Cao & Bluth, 2013).
Animeh & Guang (2014) have introduced a resource scarcity model for analyzing the level of energy supply security in a country. According to them, there are three different forms of scarcity that can negatively influence the access to the resources. The first is
demand-induced scarcity. As a result of increasing energy demand, there is no longer enough supply to satisfy demand. This increasing demand is caused by a process of industrialization. As a consequence of industrialization, countries rely more and more on fossil fuels to keep their economy running. The second form of scarcity is supply-induced scarcity. Here, the domestic production of energy supply can no longer satisfy demand because of a lack of supply. The domestic production can no longer increase because of the limited reserves available in a country or other technological problems that make production impossible. When domestic production can no longer satisfy demand, countries are forced to look at resource-rich countries for their energy supply security. The reliance on these resource-rich countries gives them another option to induce scarcity. This is called structural-induced scarcity, which refers to the ability of third parties to block the supply of energy to a country. Structural scarcity is often used as a political tool to influence the actions of energy importing countries.
The theoretical framework of geopolitical economy has some apparent advantages that are helpful for this particular research. First, in contrast to realism and liberalism, geopolitical economy is more capable of explaining the complicated relationship between the Chinese government and the NOC's within China. On the one hand, realism would focus on the Chinese government and argue that they have absolute control over the actions of the NOC's (Francisco & Baechler, 2013; Meidan, 2016). On the other hand, liberalism would emphasize the power of cooperate businesses within politics and argue in favor of these NOC's (Ma & Andrew-speed, 2006; Wang, 2019). The unit of analysis within geopolitical economy is not the state nor business but the state-market complex. This means that this theory recognizes and focusses on the interplay between government and businesses and the ways in which one holds control over the other. Therefore, this theory is better able to explain the relationship between China and the NOC's that operate in the market.
Second, the theoretical framework of geopolitical economy is, arguably, best able to describe the relationship between the quest for energy supply security of the Chinese state and the BRI strategy. There is a lot of scholarly debate whether the BRI has a pure economic incentive or whether it is more politically orientated. However, this thesis would argue that the BRI is a geo-economic strategy that combines both political and economic motivations. Economic and political motives are interlinked with each other and, therefore, inseparable.
While realism focusses on the geopolitical aspect and liberalism on the geo-economic element of this initiative, the theoretical framework of geopolitical economy combines them with each other. Therefore, this framework is best in understanding the link between economic and political motivations without prioritizing one over the other.
1.5 Hypotheses and operationalization
The objective of this study is to analyze how the economic activities of Sinopec and CNPC in both Saudi-Arabia and Kazakhstan contribute to the energy supply security of China. It will do so by answering the following research question: What are the activities of Sinopec and
CNPC in Saudi-Arabia and Kazakhstan, and to what extent do they contribute to the energy supply security of China?
On the basis of previous literature as well as the framework of geopolitical economy, this research has the following expectations concerning the answer to the research question:
H1: China is considered as an authoritarian state in which the state has full control over the market. Therefore, the NOC's in China are tools of the state-class to enhance the domestic energy supply security. These companies are pushed by the state to maximize access to overseas resources in countries such as Saudi-Arabia and Kazakhstan. Therefore, it is to be expected that Sinopec and CNPC are both heavy traders and investors in these resource-rich countries. On top of that, due to its large energy reserves and export towards China, Saudi-Arabia is a big contributor to the energy supply security of China. In the case of Kazakhstan, the efforts of the PRC to reduce its overdependence on Middle-Eastern resources and
diversify supply routes enable Kazakhstan to play an active role in the energy supply security of China. Therefore, it is to be expected that the trade and investments of Sinopec and CNPC in both cases are highly beneficial for the energy supply security of China.
To assess the viability of this hypothesis, this thesis takes the state-market-society complex as its unitary actor. China is an authoritarian state, which means that the state-class has full control over both the market and society. A large share of all big companies in China are SOE's, including all companies within vital sectors like the energy sector.
Since the NOC's are owned and controlled by the state-class in China, the activities of the NOC's can be seen as a general strategy of the Chinese state-class towards a country. These economic activities are generally categorized under trade, investments & finance. To
analyze these activities, this thesis will first use data on the trade relations between China and Saudi-Arabia & Kazakhstan. It will also look at the investments of both CNPC and Sinopec in these countries. Finally, it will look at the support that these NOC's receive from the Chinese state-class. It is also necessary to understand the policies of the Chinese-state class towards the cases. To do so, this thesis will analyze policy documents of China, as well as diplomatic agreements and visits. Combined, the policies of the Chinese state-class and the activities of the CNPC, which is primarily controlled by the state-class, determine the geopolitical and geo-economic power and thereby the power projection of the Chinese state-class in these countries.
The Chinese state-class, arguably, use this power projection as a strategy to get access to the energy resources in these countries and thereby enhance their own energy supply security. The first term that will be used is that of energy supply security. A secure supply of energy implies the steady availability of affordable energy in every form (Cao & Bluth, 2013).
To analyze how the availability of energy resources can be disrupted by different forms of scarcity, Animeh & Guang (2014) have introduced a resource scarcity model.
According to them, there are three different forms of scarcity that can negatively influence the access to the resources. The first is demand-induced scarcity. As a result of increasing energy demand, there is no longer enough supply to satisfy demand. This increasing demand is caused by a process of industrialization. As a consequence of industrialization, countries rely more and more on fossil fuels to keep their economy running. The second form of scarcity is supply-induced scarcity. Here, the domestic production of energy supply can no longer satisfy demand because of a lack of supply. The domestic production can no longer increase because of the limited reserves available in a country or other technological problems that make production impossible. When domestic production can no longer satisfy demand, countries are forced to look at resource-rich countries for their energy supply security. The reliance on these resource-rich countries gives them another option to induce scarcity. This is called structural-induced scarcity, which refers to the ability of third parties to block the supply of energy to a country. Structural scarcity is often used as a political tool to influence the actions of energy importing countries.
Empirically, this resource scarcity model shows that we can look at the energy supply security by analyzing first, the domestic energy demand and domestic energy production. By comparing these numbers, we can extract the import dependency of a country. A large import dependency means that a country is forced to look at resource-rich countries for their energy
supplies. Thereafter, for assessing the energy supply security, it is necessary to include the possibility of structural scarcity. A risk-assessment of possible energy disruptions are
paramount in evaluating the energy supply security. In the case of China, one clear weak point is the strait of Malacca, through which three-quarters of all China's energy imports run and which is easily blocked in case of conflict.
1.6 Methodology
This research aims at providing a description of the energy relationship between China and Saudi-Arabia & Kazakhstan, and the role of the Chinese NOC`s in this relationship. To do so, it will conduct a single-case study. According to Yin, a single-case study is “an empirical enquiry that investigates a contemporary phenomenon in depth and within its real-life context, especially when the boundaries between phenomenon and context are not clearly evident” (Yin, 2009, p. 18). The phenomenon that will be studied in this research is the influence of the Chinese energy relationship with Saudi-Arabia & Kazakhstan on the energy supply security of China.
In order to do so and answer the research question and related sub-questions, this research will be conducted using a mixed-methods approach. This method is a combination of both quantitative analysis and qualitative research. Qualitative research will be used to
analyze the relationship between the Chinese government and the National Oil Companies in China, as well as the state-market complex in China. On top of that, it will also be used to investigate the impact, importance and consequences of the new 'Belt and Road' initiative for China's energy supply security. This qualitative research will be done through an analysis of a large number of resources. This includes academic work such as books and peer-reviewed articles, primary sources as policy reports, diplomatic meetings and annual reports of NOC's. Finally, it will also use secondary sources, such as media reports.
Quantitative research will be conducted to first give an overview of the energy situation in China and second, to analyze the activities of the NOC’s in Kazakhstan and Saudi-Arabia. These are the activities that are related to trade, finance & investment. In order to do so, it is necessary to collect and process the required data. Data on energy production, consumption and export will be drawn from both the 'International Energy Agency' (IEA), as well as the 'Energy Information Administration' (EIA). Furthermore, data on the (energy) trade between China and Saudi-Arabia & Kazakhstan is available through the 'Observatory for Economic Complexity' (OEC). Finally, data on the trade, investments and finance of these
NOC's will be mostly drawn from a combination of the 'American Enterprise Institute' (AEI) China Global Investment Tracker and the annual reports of both Sinopec and CNPC.
1.7 Structure of the thesis
After this introductory chapter, this thesis will consist of five more chapters to fully comprehend the activities of CNCP and Sinopec in Saudi-Arabia and Kazakhstan. First, chapter 2 will introduce the problem of China's energy supply security. It will analyze the growing energy demand in the PRC and explain which institutions and policies are being used to resolve this problem. Arguably a significant role in the external energy policies of China is reserved for the BRI program that was established in 2013. The problem of energy supply security that is analyzed in chapter 2 provides the foundation for explaining the strategic relationship between China and Saudi-Arabia & Kazakhstan.
Chapter 3 will introduce these cases by first looking at the political economy and the energy sectors in both Saudi-Arabia and Kazakhstan. After that, it will investigate the
relationship between China and these resource-rich countries in the areas of trade, investment & finance with a special focus on the energy relations. It will also look at the role of these two cases within the BRI.
This provides the background for chapter 4, in which this thesis will focus specifically on the activities of Sinopec and CNPC in Saudi-Arabia and Kazakhstan. The first part will analyze the investments of these NOC's in these cases and the general trends that can be found in these investments. After that, chapter 4 will go more in-depth about the origin,
development and role of specific projects of Sinopec and CNPC within Saudi-Arabia and Kazakhstan. For Arabia, this thesis will look at the 'YASREF' oil refinery in Saudi-Arabia, which is a joint venture between Sinopec and Saudi Aramco. In the case of
Kazakhstan, it will investigate the involvement of CNPC in the Kashagan oil and gas field, as well as the construction of the Kazakhstan-China crude oil pipeline. These projects will provide a clear image of the type of activities in which the Chinese NOC's are investing.
While chapter 4 has analyzed the specific activities of CNPC and Sinopec in Saudi-Arabia and Kazakhstan, chapter 5 will investigate the political environment in which these activities take place. As state-owned enterprises, these Chinese NOC's are subjected to broader geopolitical dynamics in the region. To demonstrate how this affects the energy relations between China and Saudi-Arabia and Kazakhstan, chapter 5 will first look at some domestic challenges within the two cases that could influence its energy relationship with China. After that, it will describe the geopolitical and geo-economic activities of major
powers in the Middle-East and Central-Asia that also have an effect on the energy relationship and the activities of the Chinese NOC's in Saudi-Arabia and Kazakhstan. Finally, chapter 6 will highlight the main arguments of this thesis and provide an answer to the main research question.
Chapter II
The People`s Republic of China: Energy Situation, Policy and National Oil Companies
2.1 Introduction
The aim of this chapter is to provide an overview of the historical development of China's energy supply security in the past 20 years, as well as, to analyze the energy policies of the Chinese state class with a focus on energy supply security. In doing so, it will answer the following sub-questions: How has the energy situation in China developed over the past 20
years, and what is the role of the NOC's in China's energy supply security policy? And How has the 'Belt and Road' initiative improved China's external energy security policy?
To answer these sub-questions, this chapter will consist of four parts. The first part will analyze how China's energy import dependence has risen over the past 20 years. To be able to give an overview of the energy situation in China for the past 20 years, this thesis will use a number of indicators. These indicators can be derived from the resource scarcity model from Amineh & Yang (2014) and are domestic production, domestic consumption, energy imports & energy exports. The second part will look at the development of China's national energy policies in the past 20 years. These policies governed and guided China's energy sector as the country transformed from an energy-exporting country to the largest importer in the world. After that, the third part will look at the role of the NOC's, and in particular Sinopec and CNPC, in the energy policy of China. It will look at the complex relationship between the Chinese state-class and the NOC's and discuss how the NOC's manifest themselves in the global energy market. Finally, in the fourth part, the place of the 'Belt and Road' initiative in China's energy policy will be discussed. It will be argued that the BRI initiated an upgrade in the external energy policy of China towards a more aggressive and assertive strategy.
2.2 China's rising import dependence
In the last 50 years, China has witnessed a process of rapid industrialization and subsequent economic development. Since 1960, the GDP in China has risen from $60 billion USD to $13.6 trillion USD last year (Worldbank, 2019). Thereby, China is currently the 2nd largest economy in the world, behind the USA. This process of industrialization was initiated by the government and has changed the Chinese society and economy from an agrarian-based economy to an industrial-based economy in less than 50 years. They are now the largest manufacturer and exporter of goods in the world, which has given them the nickname of 'factory of the world' (Xiangguo, 2007).
One consequence of the industrialization that is present in all industrialized countries is the increasing reliance on fossil fuels. In an industrial society, the presence of energy resources is indispensable for sustainable economic development. While China has been a large energy-exporting country since the 1970s, the industrialization has led to a rise in
domestic energy consumption. This means that China nowadays has to import large quantities of energy resources. The PRC became a net importer of oil in 1993, natural gas in 2007 and coal in 2009 (IEA, 2016). Figure 2.1 shows the overall production and consumption of energy from 1990 to 2017.
Figure 2.1: China`s total energy consumption and production
Note: Figure created by author
Source: Energy Information Administration. (2020). China. total energy. Available from: https://www.eia.gov/international/data/country/CHN
That this rapidly increasing energy consumption is the result of a process of
industrialization becomes clear when analyzing the total energy consumption per sector, as is provided in figure 2.2. This shows the development of energy consumption for the different sectors from 1990 until 2015. While the energy consumption for the industrial sector was only 235.396 Ktoe in 1990, this number had risen to 1.020.003 Ktoe in 2015. This means that the share of the total energy consumption for the industrial sector has also increased from 36% in 1990 to 52% in 2015. 0 20 40 60 80 100 120 140 160 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 En ergy (Qu ad Btu ) Year
Total Energy
Figure 2.2: China`s total energy consumption by sector
Note: Figure created by author
Source: International Energy Administration. (2019). China. Key Energy Statistics. Available from: https://www.iea.org/countries/china
The reason that production in China is somewhat able to keep up with consumption is the abundance of coal reserves in China, as well as the reliance on coal for energy
consumption (Leung, 2011, p. 1331). Figure 2.3 shows China's total primary energy supply from 1990 to 2010. Here, it is clear that China's economy is mostly reliant on coal. In 2017, coal accounted for 64% of all energy consumption, while this is only 6% for natural gas and 19% for oil (IEA, 2019). Although environmental challenges have forced China to produce and consume more green energy, these numbers are even lower for renewables. Only 3% of all energy consumption came from hydro energy, 2% from solar and wind, 4% from biofuels & 2% from nuclear energy (IEA, 2019). This shows that, while China has ambitions to move towards a greener energy mix, they are still heavily reliant on traditional fossil fuels for their energy consumption.
Even though China has abundant coal reserves, the sheer size of consumption has made the PRC a net importer of coal in 2009. These abundant resources do not, however, apply to the oil & natural gas reserves. China's domestic oil & natural gas reserves and production are not big enough to satisfy demand. Therefore, China has to import large quantities of both these resources from resource-rich countries. While the Chinese state-class is planning to increase the amount of natural gas in the energy mix, natural gas is still only a minor contribution to the total energy consumption. As figure 2.3 shows, oil, on the other hand, already increasingly plays a large role in the energy consumption of China. Since China
0 200000 400000 600000 800000 1000000 1200000
Industry Transport Residential Commerical & Public services
Agriculture Non-specified Non-energy use
To ta l energy con su m p tio n (Kto e) Sector 1990 1995 2000 2005 2010 2015
has only minor oil reserves, most of this is imported. In 2004, China imported only 2.6 million b/d. However, in 2017, this number rose to 8.4 million b/d, which makes China the largest oil importer in the World (EIA, 2017).
Figure 2.3: China`s total primary energy supply per energy resource
Note: Figure created by author
Source: International Energy Administration. (2019). China. Key Energy Statistics. Available from: https://www.iea.org/countries/china
These imports mostly originate from two regions with the largest proven oil and natural gas reserves, which are the Persian Gulf and the Caspian Sea. Almost 50% of all proven oil reserves in the world are located in 5 countries around the Persian Gulf; Saudi-Arabia, Iraq, UAE, Kuwait and Iran. Similarly, almost 70% of proven gas reserves are located in countries around the Persian Gulf and the Caspian Sea. The rising energy demands in China, in combination with the scarcity of fossil fuels, have increased the strategic importance of these resource-rich countries. This also applies to China, which imports large quantities of these resources from these regions. Figure 2.4 shows the countries from which China was importing most oil in 2017. Most of these countries are located around the Middle-East.
0 500000 1000000 1500000 2000000 2500000 3000000 1990 1995 2000 2005 2010 Prim ar y E n ergy Su p p ly (kt o e) Year
Total Primary Energy Supply
Coal (ktoe) Natural Gas (ktoe) Oil (ktoe) Hydro (ktoe) Wind & Solar (ktoe Biofuel (ktoe) Nuclear (ktoe)
Figure 2.4: Origin of oil imports in 2017
Note: Figure created by author
Source: Observatory for Economic Complexity. (2017). Were does China import Crude
Petroleum from. Available from: https://oec.world/en/visualize/tree_map/hs92/import/
chn/show/2709/2017/
In sum, the process of state-led industrialization and subsequent economic development in China has led to rapidly rising energy demands and consumption. While domestic production was not large enough to satisfy this demand, China was forced to start importing these energy resources. The rising energy consumption and import dependence have also led to a number of challenges for the Chinese state-class. The next section will identify these challenges and analyze the institutions and policies used by the Chinese state-class to resolve these problems and increase the energy supply security of the PRC.
2.3 China's power structure and energy policies
Power structure
To understand the manner in which the Chinese companies operate, first it is necessary to analyze the configuration between state and market forces in China. In liberal societies, as can be found in much of Europe and the US, market forces operate autonomously from the state. The companies within these countries have their own interest, are independent and control their own actions. However, in more authoritarian societies, the market forces are not independent and regulated by the state. The state exercises control over the market. This
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Others Russia Saudi Arabia Angola Iraq Oman Iran Brazil Kuwait Venezuela UAE USA UK
means that the companies are not autonomous and that their interest is aligned with the interest of the country. Similarly to Amineh & Yang (2014), this thesis will argue that China can be categorized as an authoritarian state.
Within the People's Republic of China (PRC), the highest political institution is the National People's Congress (NPC) (O'brien, 2008). This institution is responsible for all legislation and is, with almost 3000 members, the largest parliament in the world. Since they only convene once a year, most power is delegated to the National People's Congress
Standing Committee (NPCSC) (O'brien, 2008). Besides the formation of new legislation, this committee is also in charge of electing the president & vice-president of the PRC. Although the NPC is formally the most powerful organ in China, in practice, this is not the case. Within the PRC, most power resides with the Communist Party of China (CPC). The CPC has its presence in all parts of government institutions and is even integrated into the Chinese constitution (Guo, 2018). It is impossible to become a high-ranking government official without being a member of the CPC. Officially, the people that are responsible for overseeing the CPC are the 25 members of the Politburo. In practice, power is even further centralized to the Politburo Standing Committee (PSC). The PSC is comprised of the top leaders of the CPC and generally known as the 'supreme decision-making body in China'. The most important and powerful person within the PSC is the general secretary, who is, at the same time, president of China. This position is since 2013 held by Xi Jinping. Figure 2.5 gives an overview of the hierarchical structure of the state-class in China.
Energy institutions
The energy institutions that are currently responsible for the energy policies in China are the result of big reforms that started in 2003. At that time, China was facing an energy crisis. As previously discussed, due to industrialization and high energy intensity, there was a massive increase in demand, while supply remained relatively the same. Therefore, China was faced with an energy shortage that resulted in numerous power blackouts (Cheng, 2008). The highly fragmented energy sector in China was assigned as one of the factors for the non-existence of efficient energy policies (Andrews-speed, 2009). As a result, the Chinese state-class started to reform the energy institutions with the aim of regaining control over the energy sector as well as establishing a more coherent energy strategy (Andrews-speed, 2010).
Figure 2.5: Hierarchical structure state-class China
Note: Figure created by author
Source: Andrews-spAndrews-Speed, P. (2010). The Institutions of energy governance in
China. Institut français des relations internationales. Available online:
https://www.ifri.org/sites/default/files /atoms/files/noteandrewsspeedenergychina_1.pdfeed (2010)
The final results of these reforms are visible in figure 2.6. This figure shows all government institutions that play a role in the formation of new energy policies. The most important institutions are the state council (i.e., state-class), the National Development and Reform Commission (NDRC), and the National Energy Administration (NEA). The NEA is charged with the day to day regulation of the energy sector. It is, for example, responsible for the enhancement of international cooperation in the energy sector, as well as reviewing and approving large overseas investments of the NOC` s (IEA, 2016). The NDRC is responsible for the macro-economic development of China. They are in charge of new economic reforms with the aim of increasing economic growth and rising living standards (Kong, 2011; Zhou, Levin & Price, 2010). Although less influential, different ministries are also involved in the establishment of energy policies, but only to the extent that is provided to them by the state council (IEA, 2016). The state council oversights all these institutions and makes sure that the policies of these institutions are in accordance with the general strategy of the PRC. Overall, the Chinese state-class uses these institutions as tools to establish new energy policies with the aim of enhancing its energy supply security.
Figure 2.6: Energy institutions in China
Source:International Energy Agency (IEA). (2016). China’s Engagement in Global Energy
Governance, IEA Publications
Policies
Energy security has not been a large issue in Chinese policies before the 2000s. Before that, domestic production was large enough to roughly satisfy domestic consumption in China. Until then, only oil was imported on a small scale. However, in the early 2000s, the consumption of energy started to outpace the supply. This has led to a number of power shortages in 2004 and 2005. These shortages placed the problem of energy security high on the Chinese agenda. New policies were implemented with the aim of increasing the energy supply security. These policies can be split up in domestic policies and external policies that tried to secure the reliable import of sufficient energy sources.
Domestically, before the power shortages, the main priority of the PRC was to
increase energy production as much as possible (Andrews-speed & Dannreuther, 2011). After 2004, domestic policies started to encompass different aspects of energy security. For
example, to maintain economic growth while decreasing energy consumption, one major priority of the PRC was to reduce the energy intensity (Andrews-speed & Dannreuther, 2011). These changes are also noticeable in the increasing attention of energy security in the 'Five Year Plans' (FYP) of China. These plans show the large strategy of the PRC in the next five years in their economy, society, political system and international relations. The term energy security was first introduced in the 10th FYP (2001-2005) (Wu, 2014). To increase their energy security, China wanted to follow the example of Japan and a couple of Western countries and build a 'strategic petroleum reserve' (SPR), that could supply China with energy
