Beijing juggles its energy supplies

China is to set up a strategic energy reserve

By Francis Markus BBC Shanghai correspondent

As the prospect grows of a US-led attack on Iraq, among the countries weighing up the impact of a conflict in the Middle East on their energy situation is China.

Although the country's chief source of energy is coal, it has grown from being a net exporter of oil to an importer.

About half its imports come from the Middle East.

This is causing considerable anxiety among Chinese energy officials and China recently announced plans to set up a strategic energy reserve.

Concerns

At a petrol station in Shanghai - one of a growing number servicing the city's upwards of a million cars - the demand for petrol is steadily growing.

Natural gas currently accounts for only 2% or 3% of our energy use but we hope it will reach about 8% in the year 2010

Professor Huang Zhen, Shanghai's Jiaotong University

For the past few years China has been importing fuel to meet its needs and with the latest threat of conflict in the Middle East, Beijing is once again anxious about its energy supplies.

Sam Dale, from Petroleum Intelligence Weekly, said the extent to which China and its Asian neighbours could be affected by any conflict is far from clear, with two main possible outcomes.

"The first scenario being that an attack on Iraq goes very badly for everybody involved and all oil out of the Middle East, at least to Asia, is shut off - that's a horrendous worst case scenario.

"The other scenario is that an attack on Iraq goes swiftly and that large OPEC producers such as Saudi Arabia steps in and covers that gap for any lost output of Iraqi crude. "

Strategic importance

Middle Eastern crude makes up a smaller proportion of China's imports than those of its neighbours Japan and South Korea, and imported oil itself still only accounts for one-third of the country's needs.

But Chinese Middle East specialist Pan Guang said Beijing was keen to reduce its vulnerability by diversifying away from traditional suppliers.

"Basically speaking for China's overseas energy development strategy there are five main directions - Latin America, Southeast Asia, West Africa, like Nigeria, Middle East and Central Asia.

"Of these only Central Asia is by land. All the others are sea routes so that's the reason why Central Asia and Siberia are so strategically important."

Diversifying

Following the example of several other countries including Japan, China is now drawing up plans to build up a strategic energy reserve.

But Sam Dale said the cost could be a problem.

"Simply buying the crude oil and the cost of holding that crude oil is enormous."

China is already embarked on a process of trying to modernise its patterns of energy use, away from oil and in the longer term towards gas.

It is building a massive pipeline right across the country to transport gas.

Professor Huang Zhen, an energy specialist at Shanghai's Jiaotong University, said natural gas currently accounted for only 2-3% of China's energy but may reach about 8% in 2010.

Professor Zhen said another way the country is hoping to reduce its need for oil is the development of alternative fuels like dimethyl ether or methanol to fuel cars.

As yet such fuels remain marginal.

But the growing demand for oil in China coupled with an uncertain Middle East means that energy security is likely to become an ever more pressing issue on Beijing's agenda.