While we fixate on sexy headlines about Chinese military threats in the South China Sea, for instance, we miss the bigger picture. China’s relentless resource quest has the greatest impact on trading prices, which may not make for headline news, but is a very important reality.
Michael Levi, David M. Rubenstein Senior Fellow for Energy and the Environment and Director of the Maurice R. Greenberg Center for Geoeconomic Studies and author of By All Means Necessary takes us through China’s resource quest and how it will change the world.
Your new book takes us through China’s resource quest and how it will change the world. What is the key takeaway message from this work?
To me there are two very large takeaways. The first is, while we fixate on the sexy headlines about how Chinese workers in Africa are changing society there or on how Chinese behavior in the South and East China Sea is creating military risks, by far the biggest consequence of China’s resource quest so far has been through its simple impact on trading prices. That’s had consequences for producers and consumers all over the world regardless of whether they have direct interactions with China. We often skip over that, but it’s enormous.
The second big takeaway to me is that while China’s changing the world, China’s engagement with the world is changing China in big ways as well. You see that in the behavior of Chinese companies on the ground in the countries where they invest. You see it in the way that China thinks about military deployments, about cooperation in securing sea lanes.
You see that in the way that China is addressing its own demand and its own production opportunities, as it responds by itself to the high prices that it’s played a critical part in creating. Its impact on China itself, as China’s resource quest evolves, I think is something that’s been under-appreciated but that over the long run will be very consequential.
In terms of impacting climate change, how does China compare globally and what can we expect over the next 5-10 years?
What we do see is an interaction between China’s efforts to deal with its local environmental problems, its efforts to provide security of supply for its energy sources, and the climate outcomes that develop. To the extent that China feels more confident, for example, in securing natural gas from a variety of sources – domestic, LNG, Russia, Turkmenistan – it becomes more willing to use natural gas to replace coal as a way of cutting local air pollution. That, in turn, has benefits for global climate change.
I think that’s how you think about the impact of China’s resource quest on climate change. It’s the sort of second order effect. I would’ve said a few years ago that extreme Chinese concerns about the security of natural gas supplies means that there won’t be a substantial shift from coal in that direction, which itself has timing implications, but this changing level of confidence, together with much greater concerns about local air pollution, starts to tilt things in a different direction.
BP recently signed a 20-year deal to supply China National Offshore Oil Corp. with LNG. What is so significant about the deal, and what does it mean for the LNG market?
There’s a general belief even among a lot of people who watch the LNG markets closely that China has no involvement in exports of US natural gas. It’s certainly true that no Chinese company has signed a contract with an operator of a US LNG terminal.
But, I was struck during a visit to China last month to hear people describe what they thought as upcoming exports of US natural gas to China. What they identified were situations where traders who had contracts with US LNG exporters had, in turn, other contracts to sell their gas on to CNOOC. The indicator in these situations was that the contracts they signed, first with BG and now with BP, have prices for delivered gas that are partially indexed to natural gas rather than to oil.
Without seeing the contracts, no one knows whether this is linked to physical flows as well. But at a minimum, it means that the emergence of the United States as an LNG exporter has created an opportunity for buyers, including buyers in China, to diversify some of their price risks that are traditionally being associated with LNG imports.
How is China’s resource hunger changing the face of competition globally for oil and gas plays in frontier venues in Africa and the Middle East?
Still, I think you need to distinguish between two different kinds of frontier venues. Chinese companies appear to have considerably more appetite for politically risky places. You’ve seen that in Sudan, for example. That’s a place where they have a peculiar kind of competitive advantage over Western firms.
Where I think the competitive advantage has been overstated, at least by casual observers, is in frontier places that are frontier because of their technical difficulties. The Chinese companies still are not on the cutting edge. They still need to partner, at a minimum, with Western companies, and that constrains their ability to directly out-compete Western multinationals, because in so many cases they need the Western multinationals.
You saw that, for example, in the more technically complicated parts of the Iranian natural gas sector. When Western companies pulled out because of sanctions, there was a fear that Chinese companies would fill in and undermine the impact of sanctions. It turned out that in a lot of cases, the Chinese companies weren’t capable of operating the projects, or needed equipment from Europe or the United States that they simply couldn’t get.
Previously you discussed “outsized disruptions” of the oil market focusing tightly on the Middle East. Over the past couple of months, nothing could be truer. With the Islamic State now in control of a large swath of land bridging Syria and Iraq, fighting for control of a key Iraqi refinery for domestic consumption and arguably in control of all of Syria’s relevant oilfields, how outsized do you expect the disruptions to be in the coming weeks and months, keeping in mind that so far the crisis has not begun to affect Iraqi oil exports?
To understand impacts in the coming weeks, you want to talk to an expert on Iraq and on Kurdistan. I think the big question looming over all this is the long-run impact.
Most forecasts that foresee US$100-ish oil prices definitely assume that a significant part of delivering that comes from Iraq, and if the political and security situations aren’t conducive to substantially more investments that part isn’t there. That’s why you’re seeing the more distant oil prices perk up by more than near term ones, because people are concerned about this long-term ability to deliver.
Who has been benefiting the most from Iraqi oil?
Look, the big oil consumers benefit from Iraqi oil regardless of whether they actually import oil from Iraq.
I think one of the big fallacies in people’s thinking about the Iraqi oil sector has been the focus on who’s making money producing the oil. The bigger impact is on consumers. It’s not clear to me that the Chinese make money producing Iraqi oil, at least as producers; but as consumers – to the extent that Iraqi oil production holds world prices down – the Chinese, the United States and also some other countries benefit.
On a numbers basis it wouldn’t surprise me if Jordan benefits enormously, not because of their economic relationship, but because Jordan spends so much money on oil imports. Anything that keeps production up and holds prices down is good for Jordan. I mean that’s the way you think about it, not just in terms of who’s getting the chance to make US$2 a barrel producing the stuff.
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an edited version of an interview conducted by James Stafford, editor of energy industry website Oilprice.com. Republished with permission.