Middle East: China’s Source of Energy and Investment

In addition to the African continent, China has focused on enhancing its relationship with the Middle East in recent years. In 1996, almost two decades after China’s economic miracle had begun to take shape, China’s then-President Jiang Zemin visited the Arab League, and the China-Arab States Cooperation Forum was established in 2004. In the most recent years, China has put a lot of effort into making its presence felt in the Middle East. China has developed a railroad link through western China into the Central Asian countries to reach Iran. That land access, however, has limitations. The amount of Chinese goods that are going into the Middle East is well beyond what the railroads can handle.

According to Sanam Vakil, a visiting fellow at the U.S-based Hoover Institution’s Working Group on Islamism and the International Order and a senior consulting fellow at Chatham House’s Middle East and North Africa Program, China’s historical foray into the Middle East is captured by the old adage that “everything happens in threes”. According to Vakil, China’s push to the Middle East has taken three drives. The first took place during the Tang Dynasty (618-907) when the infamous Silk Road linked the commerce of East and West. The second occurred during the Ming Dynasty (1368-1644) when Zheng He, an admiral and court eunuch, commanded an armada that brought him as far as Persia and Egypt. After the establishment of the People’s Republic of China in 1949, the Mao government, as a second- world power, tried to lure many of the third world countries of the region out of the warm embrace of the United States, albeit unsuccessfully.

President Xi Jingping’s 2013 announcement of the One Belt One Road (OBOR) initiative designed to expand links between Asia, the Middle East, Africa, and Europe by recreating the ancient Silk Road trade routes by land (the Belt) and sea (the Road) is the third such initiative. The OBOR vision is designed to invest $4 trillion in infrastructure development linking 70 global countries through the creation of new ports, roads, railways, and pipelines. Such connectivity will enable Chinese companies to reap the gains from construction contracts and from long-term export opportunities into these markets. Investment comes in the form of loans allocated by the Asian Investment Infrastructure Bank (AIIB), the Silk Road Fund and the New Development Bank. (China & Middle East: Regional Rebalancing: Sanam Vakil: The Hoover Institute: Oct 4, 2018)

In the coming decades, China will become even more dependent on Saudi Arabia’s petroleum. Saudi oil exports to China exceeded those to the United States for the first time in 2009, and the kingdom’s exports to five Asian countries (China, Japan, South Korea, India, and Singapore) amount to more than three times that of Europe and North America combined. By 2030, the Chinese National Petroleum Corp. estimates that Chinese demand for oil will reach 13.8 million barrels per day, while U.S. oil imports are expected to continue to dwindle in the era of fracking. In shifting its oil export focus, Saudi Arabia is joining the world’s major Muslim powers (including Nigeria, Iran, Malaysia, Pakistan, Turkey, and others) that have deepened their economic ties with China over the past decade. (China rewrites the rules on how to rise in influence in the Middle East: Daniel Wagner: South China Morning Post: Feb 01 2018: SCMP)

However, China is not looking at the Middle East as only a source to meet its energy demand. It is also seizing the opportunity provided by the Middle Eastern nations to diversify their economies. Saudi Arabia and Jordan are both in discussions with Beijing to harmonize their development plans with the Belt and Road Initiative. In the case of Saudi Arabia, this alignment of strategic visions has translated into a strong commercial signing package signed during King Salman’s March 2017 state visit to Beijing, totaling $65 billion in bilateral agreements in the oil, space, and renewable energy sectors. Further, Egyptian collaboration with China on a new Suez Canal cooperation zone is underway. In Duqm, Oman, Chinese capital inflows transformed a backwater fishing village into a $10.7 billion “Sino-Oman Industrial City” featuring an oil refinery capable of processing 235,000 barrels per day. (China Smells Opportunity in the Middle East’s Crisis: Daniel Kliman, Abigail Grace: Foreign Policy: June 14 2018)

It is also important to note that by keeping its relations with the Middle Eastern nations explicitly commercial, China has so far succeeded in enhancing its relations with the Arab states and, at the same time, growing its ties with Israel and Iran.

China’s Plans to Protect the Indian Ocean Trade Route

Given its growing relations with the African nations, in general, and the Middle East, China is bound to make sure that the trade routes to these two areas of great importance remain secured. It is likely that China’s growth in the Middle East, which had long been under the US geopolitical dominance, could evoke provoke geopolitical tensions with the United States. Besides its massive presence in the Persian Gulf waters, the United States has a wide-ranging presence in the Indian Ocean. For instance, the US 5^th Fleet, based in Bahrain, whose area of operations encompasses the southern coast of the Middle East, Pakistan, and the Horn of Africa, is a fully Indian Ocean fleet.

In addition to its presence in Djibouti on the Gulf of Aden, with an access to an airhead and port facilities, the United States has a very strong naval presence in Diego Garcia. This atoll in the heart of the Indian Ocean is a British territory on a long-term lease to the United States. The United States has used the base during the US-waged Gulf War of 1990-1991 and the anti-terrorist war in Afghanistan and Iraq. “For this purpose, 16 separate units were located on Diego Garcia, including a naval support base and a strategic bomber airfield base, the point locations for guided missile submarines and a nuclear weapons storage. The base was important both for maintaining tight control of the oil streams from the Gulf into South Asia, Southeast Asia, and North Asia, and for curbing China’s military rise and the presence of the Chinese submarines in the Indian Ocean.” (American Military Base on Diego Garcia: What’s Next? Nina Lebedeva: New Eastern Outlook:  Dec 1 2016)

The Land-Bridge Hedge

As China grew, Beijing realized that the prime necessity to sustain such growth is to make sure not to remain too dependent on the overcrowded and narrow Malacca Strait for its access to the Indian Ocean. Blocking the Chinese vessels by closing off the Strait at a time of conflict could take a very serious toll on China’s overall economy within a very short period of time. In 2003, then-President Hu Jintao identified the need to mitigate what he termed China’s “Malacca Dilemma.”

Subsequently, China has taken a few steps to alleviate the problem. As part of its Belt and Road initiative, China is developing several major new routes that are likely to reduce China’s dependency on the Malacca Strait as a conduit for all its oil imports. One route is China’s trans-Myanmar oil and gas pipelines. As part of its Belt and Road initiative, China is developing several major new routes that are likely to reduce China’s dependency on the Malacca Strait as a conduit for oil imports. One route is China’s trans-Myanmar oil and gas pipelines. A gas pipeline was already opened in 2013. A 771-km oil pipeline connecting Made Island in Myanmar’s Rakhine State to Kunming, capital of China’s Yunnan Province, was inaugurated on May 2, 2017. It is estimated that some 22 billion tons of crude oil and 13 billion cubic feet of natural gas will pass through the pipelines annually.

China is also planning to develop two other land-bridges - including an oil pipeline and a railway - linking ports on the west and east coasts of the Malay Peninsula. However, the proposed railway is now on hold. Since these land-bridges would be able to meet only a small percentage of China’s annual demand, in 2015, Chinese and Thai officials had reportedly signed a memorandum of understanding (MoU) for the a canal project proposed to be built through the Kra Isthmus in Thailand. A pipedream for centuries, the recent resurgence of proposals for the Kra Isthmus Canal is largely a result of China’s Maritime Silk Road Initiative and cooperation from a section of Thailand’s business community. In 2013, the Kra Canal was officially integrated into the One Belt and One Road (OBOR) initiative. China would be one of the biggest beneficiaries if the proposed deep canal capable of transporting the world’s biggest oil tankers, container ships and bulk tankers (directly from Thailand port to its final destination overseas bypassing transit through any third country) becomes a reality.

The Kra Canal project envisages two important deliverables - it is seen as a substitute to the Malacca Strait and aims to establish a Special Economic Zone (SEZ). (Thailand’s Kra Canal project: Prospects and Challenges: Shelly Mahajan: South Asia Program at Hudson Institute: May 14, 2018) It is only expected that following the construction of the canal, should it ever actually materialize, China will be a major partner in ensuring its security.

Kyaukphyu

Kyaukphyu, a coastal town on the Bay of Bengal in Myanmar’s western-most state of Rakhine, is the site of another strategic effort by Beijing to reduce its reliance on oil and gas imports through the Strait of Malacca. In 2016, subsidiaries of China’s CITIC Group Corporation, including China Harbor Engineering Company, won contracts for two major projects in the town - the dredging of a deep-sea port, and the creation of an industrial area in an accompanying special economic zone (SEZ). The port project was valued at the time at $7.3 billion. However, Myanmar’s National League for Democracy (NLD), the ruling party, has pared down Chinese involvement in that project. When a fresh agreement was signed in August in 2018, the Myanmar government reduced the value of the deep-seaport project to $1.3 billion. Media reports indicate this reduction was over concerns that the project may turn out to become a debt trap.

Significantly, it should be noted that Myanmar did not just hand over the project to China. U Kan Zaw, who served as chairman of the Kyaukphyu SEZ project tender selection committee, told The Irrawaddy in an exclusive interview: “We invited tenders from international developers. Frankly speaking, we didn’t want China to come, but Hong Kong developers submitted tenders. We expected US and EU developers to come, but they didn’t”. (Kyaukphyu SEZ Project Awarded to China for Lack of Options, Ex-Minister Says: Htet Naing Zaw: The Irrawaddy:  Aug 6 2018)

China remains committed to the Kyaukphyu projects primarily because the town is the terminus of a $1.5 billion oil pipeline and a parallel natural gas pipeline running to Kunming, capital of southwestern China’s Yunnan Province. Unlike the other port and industrial zone projects related to Kyaukphyu, construction on the pipelines moved forward despite significant local opposition. They were built between 2010 and early 2015 by China National Petroleum Corporation and Myanmar Oil and Gas Enterprise - both state-owned firms - with the former the majority stakeholder. The gas pipeline went into operation in 2013 and can send 12 billion cubic meters of gas to China annually. After a two-year delay, the oil pipeline finally began operating in April 2017. It can reportedly carry some 22 million barrels of oil per year, which amounts to about 6 percent of China’s 2016 oil imports. The pipeline project is part of a strategic effort by Beijing to reduce its reliance on oil and gas imports through the Strait of Malacca.

Building a deep-sea port at Kyaukphyu makes immense economic and strategic sense for China in its drive to develop its inland provinces. Shipping goods from Europe, the Middle East, Africa, and India to Kyaukphyu and then overland to Yunnan could save thousands of miles. It would be far more efficient than sailing all the way through the Strait of Malacca and the South China Sea to ports along China’s southern and eastern coasts, and then traveling overland to China’s western provinces. Not surprisingly, in December 2017 State Councilor Aung San Suu Kyi and President Xi Jinping agreed during a meeting in Beijing to establish a new China-Myanmar Economic Corridor connecting Kyaukphyu and Kunming. (Kyaukphyu: Connecting China to Indian Ocean: Gregory: Asia Maritime Transparency Initiative: April 4, 2018)

(To be concluded …)