To the countries of black gold… (Part 3): The Chinese oil industry, a power at the heart of power

By Raphaël Rossignol, Doctor of Political and Economic Sciences at EHESS

Essential to the way of life of our current societies, oil is at the heart of global geostrategic challenges. A valuable source of income and a decisive lever of influence for producer countries, it is, on the contrary, a vital resource to be secured for importing countries. A decoupling of supply and demand that explains the often frictional nature of the relationships governing the nations concerned.

In a series of articles focusing on three of the world’s greatest powers – the United States (the world’s largest producer of black gold), Russia (the world’s second largest exporter) and China (the world’s largest importer) – Resources discusses in detail the specificities of each and the associated geopolitical consequences, particularly for the African continent.

Traditionally a stepping stone to the world’s largest quarries, the Chinese oil industry remains one of the centres of Chinese power. Both an extension of Chinese diplomacy and an incubator for senior leaders, this industry has a strong influence on the foreign policy orientations of the Middle Kingdom, whether in the China Sea, the Middle East, Latin America or Africa. It is on the latter continent that this development is most noticeable, with the deployment of the Chinese Navy and the deployment of the first Chinese soldiers under UN mandate. With the growth of China’s demand for oil, security of supply issues will determine China’s ever-increasing military engagement.

A very political industry

The Chinese oil industry occupies an ambiguous position within the apparatus of the State Party. Both powerful and under control, it enjoys a special status that places it above a large number of administrations. Its leaders enjoy the rank of ministers, which has important implications in China; indeed, in the Communist State Party, it is not the function, but the rank, that determines political precedence and power. And it is no coincidence that the oil industry has managed to acquire this special place. Founded by Mao in the 1950s, its primary purpose was to provide an abundant source of energy for the rapid industrialization of the newly created People’s Republic of China (PRC). The Sino-Soviet break-up accelerated this movement, as Mao became aware of the need to achieve real energy self-sufficiency by taking advantage of the large reserves available to the PRC at the time. The oil industry was founded in 1952 by a division of the People’s Army, which occasionally became the 1st Petroleum Division, while a Ministry of Petroleum was established. 

The Cultural Revolution (1966-1976) and the decade of opening (1978-1997) relegated the oil sector to the back stage of Chinese politics for a time. But since the 1990s, the oil industry has once again become an important springboard for many political careers, and incidentally, thanks to the openness and knowledge of international energy markets, a source of strategic advice for the Party in its international relations. This transition has accelerated as a result of the continued decline in Chinese production, as China began to become a net importer in 20091. China’s dependence on imports, which is constantly increasing, now stands at around 70% of its oil consumption. As a result, the oil sector has become one of the driving forces behind the PRC’s international relations. 

1https://www.iea.org/statistics/?country=CHINA&year=2016&category=Imports/exports&indicator=CrudeImportsExports&mode=chart&dataTable=OIL

International strategic aspects

The PRC has three oil companies under the direct control of the State, CNPC (China National Petroleum Corporation), Sinopec (China Petrochemical Corporation) and CNOOC. At the beginning, each of them had a specific speciality, with the CNPC dealing with upstream, Sinopec with downstream, and the CNOOC (China National Offshore Oil Corporation) with offshore fields. With the need to increase the number of sources of supply, these companies have had to expand their skills and are now competing in foreign markets. This competition, which can lead to a price war to the detriment of the Chinese oil industry as a whole, is nevertheless flexibly regulated by the State Party, which on the one hand appoints company directors and on the other hand supports them financially and politically in their search for contracts. 

With the support of the State, Chinese companies have been able to integrate into China’s global infrastructure for resources offers all over the world. To take the often studied case of the African continent, the model initially proposed was the « Angolan model », whereby Angola took out a loan from China EximBank, the amount of which was paid directly to public works companies for the construction of roads or other infrastructure, and repaid on the sale of oil resources granted to another Chinese company. Thus, the « infrastructure for oil » scheme has served as a gateway for Chinese companies to enter already highly competitive markets. 

Another way to make their place in the sun has been through formal or tacit strategic partnerships with some of their foreign counterparts. There was strong solidarity between the CNPC and Total in Southern Sudan, as American pressure to return to the country after independence intensified. The reason for this convergence of interests is in China itself, where Total (which has been operating there since 1987) is developing liquefied natural gas activities, and needs local partners and the support of the Chinese government to do so. In this case too, the close collaboration between the State Party and the management of oil companies allows them to navigate the sometimes turbulent waters of international operations. 

What is the long-term strategy of the Chinese oil sector? 

With China’s ever-increasing demand for oil, the three state-owned companies are forced to import ever-increasing quantities of oil. As such, the multiplication of concessions in direct exploitation is only advantageous if the oil produced by them abroad can either be exported to China or sold and exchanged for easily transportable cargoes. The control of maritime corridors and straits has become a strategic priority issue for the PRC. In the event of a conflict or crisis, the Chinese Navy will have a key role to play in maintaining supply routes to China, since the largest suppliers of Chinese oil are, in order of importance, Russia, Nigeria (12.4% of Chinese imports) and Saudi Arabia (10.4%).

Conclusion: a resource at the heart of Chinese military and economic diplomacy

The African continent has become one of the pillars of the New Silk Roads initiative (一带一路, One Belt One Road), the umbrella for the majority of industrial cooperation projects between China and the rest of the world. It is not insignificant that the first Chinese soldiers participating in UN peacekeeping operations were sent to Sudan and Mali. After the collapse of Chinese oil operations in Libya following the war, with the emergency evacuation of 36,000 Chinese workers (mainly linked to oil companies), and pirate attacks on Chinese oil tankers in the Gulf of Aden, the Middle Kingdom became aware of the need to combine more intensively and visibly its military projection force and its overseas oil interests. It has thus increased its participation in anti-piracy operations, until it obtained authorization to build a base in Djibouti in 2017, completing the system of supply ports linking China to East Africa, the famous « pearl necklace » that should enable the Chinese Navy to protect the maritime part of the New Silk Roads in the future. 

With ever-increasing consumption (+3.5% in 2018), and as the security challenges associated with it increase, the strategic importance of the oil sector is intended to guide to a large extent the PRC’s military projection abroad.