China talks deals, not sanctions

Beijing invests billions in Iran while trying to reach consensus with its South China Sea neighbours.

China will likely be the world's largest shipyard by 2020 [AFP]

Iran is reportedly China’s third-largest oil supplier, behind Saudi Arabia and Angola. Two-way trade will go beyond $50bn by 2015. In June, China imported around 524,000 barrels of oil a day from Iran – almost 40 per cent more than in April.  

Now let’s see how China applies “sanctions” against Iran.

Iran’s Oil Minister Rostam Qasemi announced that China will invest $20bn – for starters – in developing two of the country’s top oil fields: Azadegan (one of the world’s biggest, with an estimated 42 billion barrels of reserves), and Yadavaran (in Khuzestan, near the Iraqi border). This is a windfall for Beijing, in the long run, an extra 700,000 barrels of oil a day.

Meanwhile, Pakistan has awarded contracts – reportedly without bidding – to Russia’s Gazprom for the IP (Iran-Pakistan) gas pipeline, a project formerly known as the Iran-Pakistan-India (IPI) pipeline before India pulled out. This means that Moscow will help Islamabad build the Pakistani stretch of the pipeline (the Iranian side is completed).

And guess who may eventually join the project? China – who else? In this case, IPC would likely be extended from the port of Gwadar, on the Arabian Sea, all along the Karakoram highway towards Xinjiang, in China’s Far West.

We want our sea, and we want it now

 China and the Philippines in tense standoff

In the ever-shifting tectonic plates of Pipelineistan, these are only two of the latest developments starring China. And they are both land-based. Things get really thorny when we start considering the maritime front.

China has no fewer than 14 land neighbours. Most border disputes have been reasonably settled, apart from two minor skirmishes involving Bhutan and India.

In parallel, China has no fewer than 14,500 kilometres of maritime borders. In total, Beijing demands total or partial sovereignty over no less than 4 million square kilometres of seawater. No wonder that potential – and real – crises rule. And we’re not even talking about Taiwan.

China is pitted against Japan over the Diaoyu islands (Senkaku, in Japanese), which happen to be near Okinawa, where the US keeps a key Asian base. Predictably, this also has a Pipelineistan angle: a gas field that could possibly have reserves of 200 billion cubic metres.

China is also pitted against Taiwan, Vietnam, the Philippines, Malaysia, Brunei and Indonesia over the Spratly Islands (Nansha, in Mandarin) and the Pratas archipelago (Dongsha, in Mandarin). There’s also the dispute with Vietnam and Taiwan over the Paracel archipelago (Xisha, in Mandarin).  

Envoys from 26 Asia-Pacific nations and the European Union (EU) have been meeting in Phnom Penh, Cambodia, to discuss regional security. But even before the start, Beijing asked everyone not to address the maritime mess; the official Chinese position is to negotiate a joint development of energy resources in all these disputed waters, according to spokesman Zhang Jianmin.

The Philippines and Vietnam – both ASEAN members – definitely don’t agree with Chinese mapping. They want to coalesce an ASEAN position and then negotiate with China as a bloc. That makes sense, considering that virtually half of ASEAN holds claims in the South China Sea.

To give an idea of what’s at stake, the whole area may hold as much as 30 billion metric tonnes of oil and 16 trillion cubic metres of gas. That would account for at least one-third of China’s oil and gas resources, according to Xinhua.

Complex overlapping is already on. For instance, PetroVietnam wants China’s CNOOC to cancel an invitation for foreign companies to explore blocks that overlap with areas awarded to ExxonMobil, Russia’s OAO Gazprom and India’s Oil & Natural Gas Co.

And anyway, ASEAN already reached a very important agreement before the Phnom Penh meeting on what would be a binding, enforceable, regional code of conduct in the South China Sea, according to Philippines Foreign Affairs Secretary Albert del Rosario.

In fact, ASEAN and China have had a non-binding agreement for ten years now. What they have to do is sit down and ink it for good. Any exploitation of energy resources should then be conducted “step-by-step, and based on consensus”. That explains why Beijing is not exactly intimidated by US Secretary of State Hillary Clinton’s warnings of impeding doom in the South China Sea.

One step over the line

Way beyond who exploits the oil and gas in the South China Sea, what Beijing seriously worries about is the access of its navy to the high seas. No wonder: 90 per cent of China’s massive foreign trade depends on sea lanes.

Beijing wants to be the uncontested ruling power to the west of a “green line” that runs from Japan to Malaysia through Taiwan and the Philippines. The problem here is that the Chinese are in direct competition with the Japanese navy.  

The next step for Beijing will be to jump from the shallow waters of the South China Sea to the blue waters of a second huge zone, running from Japan to Indonesia through Guam – which happens to hold the key US air-naval base in the Western Pacific.

And that’s when the going really gets tough – because this is where Taiwan comes in. Taiwan is the US-protected wall blocking a projection of Chinese power between the “green line” and the “blue line”.

The parallel game for Beijing is equally important, to secure its naval energy supply corridors in south-east Asia.

The first corridor is the Strait of Malacca – connecting oil tankers weighing less than 100,000 tonnes coming from Africa and the Middle East to the South China Sea. The second corridor for supertankers goes through the Sunda and Gaspar Straits.

The third, for oil coming from South America, especially Venezuela, is though Filipino waters. And the fourth is a back-up route, between the straits of Lombok and Makassar, and then along the Philippines.

I have shown before how the extremely sophisticated Chinese energy strategy revolves around bypassing what Beijing considers the nightmare bottlenecks – the straits of Hormuz and Malacca. No less than 80 per cent of Chinese oil imports still transit through Malacca.

No wonder Beijing is multiplying its investments on alternatives. China is building a New Silk Road-style railway linking most of ASEAN and a Sino-Myanmar pipeline linking Sittwe to Kunming, in Yunnan province; is boosting offshore natural gas production in Thailand but especially in Myanmar, via 60 Chinese oil companies; and is building a channel through the isthmus of Kra, in southern Thailand.

 Spat with China drives tourists from Boracay

So for the Beijing collective leadership there are few more important things in the universe than these four corridors. They must be kept safe – or they must be bypassed the Chinese way. Chinese planners have gamed all sorts of nightmare naval scenarios unleashed by the US, Japan, India or all of the above.

One of the consequences of this state of affairs has been the set-up of what Washington strategists call the “string of pearls” – permanent Chinese bases all along the Indian Ocean: Marao in the Maldives, Gwadar in Pakistan, the Coco islands in Myanmar, Chittagong in Bangladesh. Add to the list Port Sudan in East Africa.  

This naval frenzy inevitably boosted a Chinese shipbuilding frenzy, from the Yellow Sea to the South China Sea. Via two corporate monsters, the China State Shipbuilding Corporation (CSSC) and the China Shipbuilding Industry Corporation (CSIC), the Middle Kingdom will be the world’s largest shipyard by 2020.

Needless to say, as a consequence, the Pentagon’s annual reports on Chinese military power are becoming increasingly alarmist.

It’s a gas, gas, gas

Beijing is, of course, extremely worried about the eurozone crisis. The Central Bank has just cut interest rates. There will be yet another stimulus package – worth at least $320bn – to increase internal consumption. The country may grow “only” 7.5 per cent in 2012.

Yet the expansion never stops. Premier Wen Jiabao has just proposed a free trade agreement between China and the Mercosur, the South American common market. A torrent of energy from all over – Siberia, Central Asia, Iran, the Middle East, Africa, South America – is needed to keep the mercantilist dragon going.

So investing billions in Iran and promoting joint energy exploitation in the South China Sea are just natural developments for Beijing. This can be no time for sanctions or war drums – but for one deal at a time, all the time.

Pepe Escobar is the roving correspondent for Asia Times. His latest book is named Obama Does Globalistan (Nimble Books, 2009).