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What Role Will China Play in a New Energy Era?

Key Questions for the United States, Japan, and Global Markets



Workshop Report

May 2015


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What Role Will China Play in a New Energy Era?

China's emerging position as a major world power and its growing weight in international energy markets raise questions regarding whether the country will play a greater leadership role in international organizations and what this might mean for the Asia-Pacific's energy outlook. These questions encompass issues such as China's potential for greater leadership on environmental challenges, its role as a security provider capable of ensuring reliable flows of Persian Gulf oil to world markets, and its interest in working with neighboring countries on developing new supply sources. As a result, when examining how the United States and Japan might promote greater regional energy security, the potential for these two countries to engage with China—and integrate Chinese perspectives into broader energy dialogues—is an increasingly critical issue for both the Asia-Pacific and global energy markets.

With this in mind, the National Bureau of Asian Research (NBR) and the China Institutes of Contemporary International Relations (CICIR) convened a full-day workshop in Beijing with the support of the Sasakawa Peace Foundation. Participants were asked to assess China's evolving role in world markets, with special attention to its engagement in the Middle East; describe the outlook for a stronger strategic partnership between the United States, China, and Japan; and recommend more collaborative strategies for fostering regional energy security. This report outlines the major points of this discussion.

China's Impact on World Energy Markets

Over the past few decades, China has witnessed incredible transformations in its domestic standards of living and overall economic outlook. This trend has spurred increasing demand for energy supplies and in turn fueled both further economic growth and new market and policy challenges. Although China has significant realized and potential resources available—including coal, nuclear energy, hydroelectric potential, and even shale supplies—its specific demands for oil have long since outstripped domestically available sources. [1] Meanwhile, efforts to reshape the country's overarching energy sector by switching from coal to natural gas have spurred newfound interest in gas markets, with similar potential for exponential growth in Chinese demand, according to Mikkal Herberg (NBR) and other workshop participants. Together, these trends are both driving Chinese interests into markets beyond the country's own borders and causing Chinese demand to outstrip that of its neighbors. China has thus emerged as the world's single largest energy consumer and a potential buyer whose needs and interests exert growing weight in shaping market responses. [2]

Such changes have specific implications for how China, Japan, and other states in Asia view their energy relationships in the Middle East, a region that remains the linchpin of global energy security despite the emergence of other supply sources. While Asia is home to a range of energy producers that play a critical role in both regional and global oil and gas markets—including Australia, Russia, and Indonesia—rising Asian energy demand has led a number of countries in the region to increasingly rely on supplies from Saudi Arabia, Qatar, and the United Arab Emirates. In 2013, for instance, China and South Korea obtained 52% and 87%, respectively, of their crude oil imports from the Middle East. In 2014, Japan imported 84% of its crude from the region. [3] Meanwhile, one of the Middle East's traditionally largest consumers—the United States—is seeing a rapid decline in its demand for energy imports as the shale revolution provides newly viable sources of oil and gas.

The Energy-Security Nexus and Engagement in the Middle East: What Role for China?

Given the traditional intersection of energy and security issues in the Middle East, the shift in interregional energy ties ultimately raises the issue of whether similar shifts will occur in strategic relationships between the Middle East, Asia, and North America. More specifically, workshop participants noted that this potential shift in strategic ties raises two critical questions: What role might China seek to play in the Middle East as a security provider to ensure the reliable flow of regional energy supplies, and how can the United States, Japan, and other nations effectively engage China in burden-sharing arrangements?

As participants agreed throughout the day, the United States, Japan, and others hold varied and sometimes conflicting views on what they expect (and want) China to contribute to Middle East security. For example, several attendees noted that although China's increased engagement would be welcomed by some in the United States if it could augment existing resources, so-called China hawks and others may view a greater Chinese presence in the region as a potential source of concern given lingering strategic mistrust. This latter concern is perhaps even more relevant to Japan and other regional players that have historical disputes with China, including in the maritime sphere, and whose populations have at times expressed more uniform concern over China's potential rise.

Further complicating the matter, some participants argued that China is not a passive actor and that it has a fundamentally different perspective from the United States on what makes for a successful model of engagement with the Middle East on regional stability. China's engagement has prioritized economic and trade partnerships rather than being conducted through security operations. For instance, China has invested billions of dollars in the development of infrastructure in the Middle East and expanded trade ties in areas that include energy, household goods, and raw materials. [4] Additionally, even when Beijing weighs in on specific international conflicts, participants argued that, in contrast with U.S. foreign policy in the Middle East, it often takes a "more subtle approach" that employs diplomatic resources rather than troops on the ground. Beijing believes that such a strategy can be more successful in the long run.

Finally, other participants challenged the premise that evolving Middle East security arrangements change the power balance among stakeholders in the Asia-Pacific. As Eric Thompson (CNA Corporation) stated, "Asia is not an exporter of security to the Middle East yet. The United States is." Numerous delegates argued that the United States, despite current rhetoric, will actually maintain a strong presence in the Persian Gulf for quite some time due to newly emerging security concerns with the Islamic State of Iraq and Syria (ISIS) and other actors. Additionally, while Japan is actively reviewing options for its potential engagements, it remains limited by very real constitutional constraints. Thus, several participants suggested a scenario in which the status quo of a U.S.-led security system persists in the Middle East and limits incentives for China to step into a security guarantor role. In a similar vein, speakers throughout the day affirmed earlier studies by Mikkal Herberg and Roy Kamphausen (NBR), which suggested that the United States remains deeply invested in the health and stability of global energy markets. Even if it becomes seemingly "self-sufficient" in its energy supply, the United States is unlikely to allow situations in the Middle East to deteriorate so long as these supplies remain critical to the stability of global energy markets. [5]

Prospects for International Cooperation

Despite these differences in approaches and perspectives, participants throughout the workshop noted that the United States and Japan have already begun building a foundation for greater engagement with China on strategic and market challenges for energy security—in both the Middle East and beyond. Participants specifically highlighted significant collaborative efforts underway in the realm of unconventional maritime security. Over the years, piracy has plagued the Gulf of Aden, Strait of Hormuz, Malacca Strait, and South China Sea, through which millions of barrels of crude oil and petroleum products travel each day. In 2013, for example, there were 17 incidents of piracy reported in the Malacca Strait, 6 incidents reported in the Arabian Sea, and 142 incidents reported in the South China Sea. [6] Counterpiracy is an important avenue for deeper cooperation between the United States and Asian countries, which share a common interest in protecting all commercial shipping vessels that cross these seas.

Malaysia, Indonesia, and Singapore, for instance, have helped lead this effort by closely collaborating in the security of the Malacca Strait. In addition, the Japanese Maritime Self-Defense Force (JMSDF) has made an enormous contribution to the protection of foreign cargo vessels traversing these waters, particularly vessels from China. Akio Takahara (University of Tokyo) stated that as of 2014 the JMSDF protected nearly three thousand ships operated by foreign shipping firms, with over four hundred of those ships coming from Chinese companies—a larger share than any other single foreign source. In response, a senior Chinese maritime specialist highlighted the fact that China has also made an effort to provide sea-lane protection for foreign vessels. Of the ships that the Chinese navy escorts or protects in these waters, half are foreign.

Building on this discussion, Thompson argued that sea-lane protection should be a patchwork of approaches involving numerous actors. Maritime security in the Gulf of Aden, Strait of Hormuz, and Malacca Strait need not be a "one-size-fits-all approach." As part of this patchwork, delegates discussed working with the Combined Task Force (CTF) 151, a counterpiracy force established in 2009 in accordance with UN Security Council resolutions. Under the architecture of CTF 151, each regional state brings its own task force—regardless of capabilities and approaches—in a collaborative effort to protect against piracy attacks. Instead of a "coalition of the willing," the CTF-151 would give multiple state and nonstate actors the ability to cooperate on maritime security.

Further beyond traditional security measures, numerous participants from China, Japan, and the United States agreed that important energy security cooperation can be forged through these stakeholders' efforts to strengthen regional trade. As a Chinese participant stated, one of Beijing's main interests in the Middle East is ensuring that China has reliable sources of energy supply, which in turn could be understood as a broader interest in ensuring the stability of global markets for oil and gas. This finding puts China's interests in close alignment with those of Japan and South Korea and suggests a potential opportunity if Sino-U.S. ties can be strengthened. Because China is the third-largest liquefied natural gas (LNG) importer in the world and the United States is a growing supplier of LNG, diversifying suppliers to include the United States could reduce China's dependence on Middle Eastern LNG and improve its overall energy security. [7] Participants Kei Shimogori and Yu Nagatomi (Institute of Energy Economics, Japan) pointed out that access to U.S. LNG will benefit Japan as well, and that if China, Japan, and other Asian countries can lessen their reliance on Middle Eastern energy and instead diversify their energy sources to include the United States' growing supply, the Asia-Pacific's overall energy scenario would become more secure.

Conclusion

The world has entered a new energy era. While this situation presents incredible opportunities for new supplies to lessen energy insecurities, it will still require collaborative action from the United States, China, Japan, and other countries in the Asia-Pacific to respond to concerns and mitigate emerging needs. As the workshop's participants stressed, there must be close discussion between top policy and industry leaders in order to foster mutual understanding and build a framework for action. Whether through increased military cooperation in the Middle East, heightened economic and political engagement, more collaborative efforts to protect shipping vessels transiting through the region, or more open trade of LNG from the United States to Asia, stakeholders must pursue cooperative measures in order to effectively adapt to today's rapidly changing environment. 


Endnotes

[1] For further discussion, see Mikkal Herberg's and Zha Daojiong's essays in Mikkal Herberg et al., "Oil and Gas for Asia: Geopolitical Implications of Asia's Rising Demand," NBR, NBR Special Report, September 2012.

[2] "China LNG Import Grows by 25% Annually, Set to Be among the World's Largest," Reuters, April 2, 2014, http://blog.financial.thomsonreuters.com/china-lng-import-grows-25-annually-set-among-worlds-largest.

[3] For more data on these nations' crude imports, see the country analysis reports on China, Japan, and South Korea released by the U.S. Energy Information Administration (EIA), available at http://www.eia.gov/countries/.

[4] Abbas Varij Kazemi and Xiangming Chen, "China and the Middle East: More Than Oil," World Financial Review, November 26, 2014, http://www.worldfinancialreview.com/?p=3177#!prettyPhoto.

[5] See Mikkal Herberg's and Roy Kamphausen's essays in Mikkal Herberg et al., "Adapting to a New Energy Era: Maximizing Potential Benefits for the Asia-Pacific," NBR, NBR Special Report, September 2014. .

[6] For more on regional piracy, see the Annex 2 of the “2013 Annual Report on Acts of Piracy and Armed Robbery against Ships,” International Maritime Organization, March 1, 2013, http://www.imo.org/OurWork/Security/SecDocs/Documents/PiracyReports/208_Annual_2013.pdf.

[7] According to the EIA, the United States is expected to become a net exporter of LNG by 2016. See the section on natural gas from the EIA’s “Annual Energy Outlook 2014 Early Release Overview,” available at http://www.eia.gov/forecasts/aeo/er/pdf/0383er(2014).pdf.


This report was prepared by Andy Nguyen, an Intern at NBR, and Clara Gillispie, Director of Trade, Economic, and Energy Affairs at NBR.


Through a range of activities—including field research, commissioned papers, workshops, and dialogues with key stakeholders—the project “Adapting to a New Energy Era” aims to provide in-depth and academically rigorous research into how the United States, Japan, South Korea, China, and other countries can craft stronger diplomatic, strategic, and economic tools to support common energy security interests. Learn more.



A 2014 report for the initiative, titled "Adapting to a New Energy Era: Maximizing the Potential Benefits for the Asia-Pacific," features analyses from Tom Cutler (Cutler International, LLC), Mikkal Herberg (NBR; University of California, San Diego), Roy Kamphausen (NBR), and Tsutomu Toichi (Institute of Energy Economics Japan). Learn more.