“CHINA RISK”
None of these questions were much in the air that night, on the very eve of the new century, at least in terms of energy. Indeed, at that moment, the prospects for the IPOs of the three state-owned companies looked, at best, quite problematic, and even somewhat dubious.
The IPO for PetroChina, the new subsidiary of China National Petroleum Corporation (CNPC), the largest of the companies, would be the first one successfully out of the gate. But getting ready for the IPO was proving harder than might have been imagined. Financial accounts that could satisfy the requirements of the U.S. Securities and Exchange Commission had to be carved out and formulated from the undigested, confusing, and poorly organized data of a vast Chinese state organization that had never had to pay attention to any such metrics—and certainly never had any reason to heed to the U.S. agency that regulated the New York Stock Exchange. Management knew that a whole new set of values and norms had to be inculcated into the organization. Add to this the fact that some of the company’s overseas investments were generating protests, and the picture became exceedingly unclear. It took a long prospectus—384 pages—to spell out all the risks.1
For their part, the international investors in the United States and Britain, and even those closer to China, in Singapore and Hong Kong, were skeptical. They worried about the China risk—uncertainty about the political stability and economic growth of the country. Also, this was an oil company at a time when the new economy—the Internet and Internet stocks—was booming. By contrast, the oil business was seen as quintessential old economy—stagnant, uninteresting, and stuck in what was thought to be the doldrums of permanent overcapacity and low prices.
As 2000 began, the appetite of global investors appeared tepid. The IPO was scaled back, substantially. But, finally, in April 2000 it went forward, though just barely, and PetroChina was launched as a public entity, partly owned by international investors but still majority owned by CNPC.
Over the next year, it was followed by the IPOs of the other two companies also cut from the once-monolithic ministries—Sinopec (the China Petroleum and Chemical Company) and CNOOC (China National Offshore Oil Corporation). They received the same tepid welcome. But as the years went on, the skepticism among investors disappeared, and with good reason. A decade after its IPO, PetroChina’s market capitalization had increased almost seventy times over. Its market value by that point was greater than that of Royal Dutch Shell, which is a century older, greater than Walmart’s, and was second only to ExxonMobil.
That increase in value calibrates the growing importance of the People’s Republic of China (PRC) in the balances of world energy and the rise of China itself. Since reforms began in 1979, more than 600 million Chinese people have been lifted out of gripping poverty, with as many as 300 million people in the middle-income level. Over that same time, China’s economy has grown more than fifteenfold. By 2010 it had overtaken Japan’s to become the second-largest economy in the world.2
“THE BUILD-OUT OF CHINA”
This great economic expansion has changed China’s oil position. Two decades ago China was not only self-sufficient in oil but an actual exporter of petroleum. Today it imports about half of its oil, and that share will go up as demand increases. The People’s Republic of China is now the second-largest oil consumer in the world, behind only the United States. Between 2000 and 2010, its petroleum consumption more than doubled. All this reflects what happens when the economy of a nation of 1.3 billion expands at 9 or 10 or 11 percent a year—year after year after year.
As China continues to grow, so will its oil demand. Sometime around 2020 it could pull ahead of the United States as the world’s largest oil consumer. It is an almost inevitable result of what can be described as the “great build-out of China”—urbanization at a speed and scale the world has never seen, massive investment in new infrastructure, and mass construction of buildings, power plants, roads, and high-speed rail lines—all of it reshaping China’s economy and society.
This build-out of China over the next two or three decades will be one of the defining forces not just for China but for the world economy. It is certainly one of the main explanations for a long-lasting boom in commodities. China’s urban population is growing very fast. In 1978 the country was only 18 percent urbanized. Today it is almost 50 percent urbanized, with more than 170 cities over a million people, and a number of megacities with populations exceeding 10 million. Every year another 20 million or so Chinese move from the countryside looking for work and housing and a higher standard of living. Asked by George W. Bush what worry kept him up at night, President Hu Jintao said that his biggest concern was “creating 25 million new jobs a year.” That was the basic requirement for both development and social stability.3
As a result of this build-out, the country has become a vast construction site for homes and factories and offices and public services, requiring not only more energy but also more commodities of all kinds—a seemingly endless demand for concrete, steel, and copper wiring. An expansion on this scale will likely mean real estate booms and bubbles and busts. It is only when it is largely finished and China, mainly urbanized, sometime in the 2030s and 2040s, that the tempo of demand will slow.
All this growth, all this new construction, all these new factories, all these new apartments and their new appliances, and all the transportation that comes with this—all of it depends upon energy. This is on top of the huge energy requirements of all the factories that make China the world’s leading manufacturing country and supplier of goods to the global economy. It all adds up—more coal, more oil, more natural gas, more nuclear power, more renewables. Today coal remains the backbone of China’s energy. But in terms of the relationship with international markets and the world economy, the dominating factor is oil.
GROWTH AND ANXIETY
China’s rapid growth in oil demand generates great anxiety, both for China and for the rest of the world. For Chinese oil companies, and the government, assuring sufficient oil supplies is a national imperative. It is crucial to Beijing’s vision of energy security—guaranteeing that shortages of energy do not constrain the economic growth that is required to reduce poverty and tamp down the social and political turbulence that could otherwise ensue in such a fast-changing society. At the same time, a sharp awareness has developed that rising energy demand must be balanced with greater environmental protections.
In other countries, some fear that the Chinese companies, in their quest for oil, could preempt future supplies around the world—and deny access to other countries. Some also worry that the inevitable growth in Chinese demand, along with that of other fast-growing emerging markets, will put unbearable and unsustainable pressure on world oil supplies—leading to global shortage.
These anxieties suddenly burst into view in 2004—the year of the global demand shock, when world oil consumption grew in a single year by what normally would have been the growth over two and a half years. The surge in Chinese consumption was one of the central elements in the jump in demand.
The demand shock forced perceptions to catch up with a fundamental reality. Until then, many had seen China mainly as a low-cost competitor, a manufacturer of cheap goods, a challenge to wages in industrial countries, and the supplier for the shelves in Walmart and Target and other discount stores around the world. China, with its low costs, had become the Great Inflation Lid, giving central bankers the comfort to allow faster economic growth than they otherwise would feel safe doing.
But now one also had to look at China as a market of decisive importance, with the heft to significantly affect the supply and demand—and, therefore, the price—of oil, along with other commodities and all sorts of other goods. Until 2004 it would never have occurred to motorists in the United States or Europe that the prices they paid at the pump could be so strongly influenced by bottlenecks in coal supplies and shortages of electricity in China that would force a sudden switch to oil. And it certainly would never have occurred to the management o
f General Motors, the prototypical American car company, that within just a few years it would be selling more new cars in China than the United States. But such is the new reality of today’s global economy. This is also true for trade in general. China is the biggest export market for countries like Brazil and Chile—not necessarily surprising for countries that export commodities. For countries like Germany, China is now also a key export market.
For the oil market, there is only one meaningful analogy for China’s rapidly growing importance. It was the massive growth in petroleum demand—and imports—in Europe and Japan in the 1950s and 1960s that resulted from the rapid economic growth during the years of their economic miracles. That growth in demand certainly had a transformative impact on the world energy scene and on global politics.
But there is a risk around this change in the balance in the world oil market: that commercial competition could turn into a national rivalry that gets cast in terms of “threats” and “security,” disrupting the working relationships that the world economy requires. As always in international relations, the danger is that miscalculation and miscommunication can in turn escalate security “risks” into something more serious—confrontation and conflict.
This emphasizes the importance of not recasting commercial competition into petro-rivalry and a contest of nation-states. After all, change is inevitable as a result of China’s rapidly growing economy and from the new balance that will inevitably result. Moreover, the global oil and gas markets do not exist in a vacuum. They are part of a much larger and ever more dense network of economic linkages and connections, including huge trade and financial and investment flows—and, indeed, flows of people. These connections, of course, generate their own tensions, particularly around trade and currencies. Yet overall, the mutual benefits and common interests much outweigh the points of conflict.
Whatever the tensions today, this degree of integration and collaboration would have been inconceivable in the earlier era of confrontation, when Mao proclaimed that “the east is red” and the Bamboo Curtain closed off China from the rest of the world.
“POOR IN OIL”
On a Sunday night, from the top floor of the China World Hotel, one looks down at an endless stream of headlights, gliding in multiple streams, from the four lanes in each direction of Chang’an Avenue, Beijing’s most important road, onto the elevated Third Ring Road expressway, which is constantly at capacity. This is the new China. Satisfying these streams of demand is part of China’s preoccupation when it comes to oil.
There was no way that Zhou Qingzu, the venerable chief economist of China National Petroleum Company, could have imagined the panorama he was watching, twenty floors down, when he joined the oil industry as a geologist in 1952. At that time, China’s entire production was less than 3,500 barrels a day. As his first assignment, he was sent to China’s far west to join an early exploration effort. He was one of just a small handful of geologists going into an industry whose prospects were hardly promising. Decades earlier, after World War I, a Stanford University professor had delivered what had been taken as the definitive verdict: “China will never produce large quantities of oil.” The meager experience of the succeeding decades seemed to bear out that conclusion.
Yet after the Second World War, no one could doubt that oil was essential for a modern economy—and for military might and political power. But China had virtually no oil of its own and had to depend on imports to meet its needs. Following the victory of Mao Tse-tung’s communist revolution in 1949, the United States sought to limit Western oil exports to China and then, after the outbreak of the Korean War, to cut them off altogether, which constrained Chinese military operations during the war. “Self-reliance” became an urgent imperative, and Mao’s five-year plans made the development of the oil industry a very high priority. Despite disappointing results from exploration, the Chinese leadership simply refused to accept that China was “poor in oil.”
The Chinese Revolution did have one asset on which to draw in the search for oil—its fraternal relations with its communist brethren, the Soviet Union, which was a large oil producer. “We were just getting started,” recalled Zhou. “Our major teachers were the Russians. We called the Russians ‘our big brothers.’ ” The Soviets sent experts, equipment, technology, and financial aid to China, and a whole generation of young Chinese went off in the other direction, to Moscow, to be trained in petroleum.4
Some new fields were developed in the remote west, with Soviet help, but the overall results, as Zhou found from personal experience, were almost negligible. Pessimism was so rife that some Chinese experts thought the country should turn to synthetic oil, making petroleum from its abundant coal resources, as the Germans had done during the Second World War.
DAQING : THE “GREAT CELEBRATION”
But then, unexpectedly, in the grasslands of the northeast, in Manchuria, a vast new oil field was found. It was called Daqing—which means “Great Celebration.”
The development of the field, arduous as it was, became even more difficult when the “brotherhood” with the Soviet Union splintered and the two countries became bitter rivals for leadership of the communist world. Moscow abruptly pulled out its people and equipment, and demanded repayment of debts. Mao repaid the Soviets in vituperation, denouncing them as “renegades and scabs . . . slaves and accomplices of imperialism, false friends and double-dealers.”
The Chinese were now on their own for Daqing. No modern technology. No nearby urban areas. No housing. Thousands and thousands of oil field workers were hastily dispatched like troops in a military campaign. Despite the harsh cold, they slept in tents or huts or holes in the ground or just out in the open; they used candles and bonfires for light and heat; they scrounged the countryside for wild vegetables. Operations were headquartered in cattle sheds. And they worked terribly hard. To make matters worse, the Soviets reduced their oil exports to China. “Once imports are cut off, airplanes could be forced to stop flying,” warned one senior official, “certain combat vehicles could be forced to stop operating.” He added, “We should not rely on imports again.” From then on, self-sufficiency and the determination represented by the “Spirit of Daqing” became the guiding principles of China’s oil development.5
“IRON MAN” WANG
The embodiment of the Spirit of Daqing became a driller named Wang Jinxi. He achieved fame across China as the “Iron Man of Daqing oilfield” and was celebrated as the “national model worker.” According to legend, when Wang had once visited Beijing , he had seen buses with large units on top that burned coal to make gas to power the vehicles. To Wang , this clear evidence of China’s shortage of oil was an outrage. “I simply want to now open the earth with my fist,” he declared, “to let the black oil gush out and dump our backwardness in petroleum into the Pacific.”
Wang’s team drilled at a furious rate. Wang himself would not be stayed. After one injury, it is said, he crept out of the hospital and went back to the drilling site, where he directed operations from his crutches. In his most famous exploit, in order to prevent a blowout that would have destroyed the drilling rig , he ordered bags of cement to be poured into a pit. Since there was no mixer, Wang jumped in and mixed the cement with his legs, forestalling the blowout and further injuring himself. Following the success of Daqing, Premier Zhou En Lai welcomed Iron Man Wang and his fellow Daqing workers to Beijing as national heroes. Mao himself declared that Chinese industry should “learn from the Daqing oil field.”
Many other fields followed, the pace pushed by a famous oil minister and later vice premier, Kang Shien. China succeeded in becoming self-sufficient in petroleum, which, the People’s Daily announced, had “blown the theory of oil scarcity in China sky high.” Another publication declared that, “The so-called theory that China is poor in oil only serves the U.S. imperialist policy of aggression and plunder.” The United States was not the only antagonist. The victory in the oil campaign was also hailed as a fusillade against “the S
oviet revisionist renegade clique.”6
RED GUARDS
In the mid-1960s, Mao recognized that he was being pushed aside because of the dismal failure of his disastrous economic policy, the Great Leap Forward, which had caused an estimated 30 million people to die from starvation. In 1966 he counterattacked and declared war on the Communist Party itself, charging that it had been captured by renegades with “bourgeois mentality.” To carry out his “Cultural Revolution,” Mao mobilized youthful zealots, the Red Guards, who waged a vicious battle against all the institutions of society, whether enterprises, government bureaus, universities, or the party itself. Prominent figures were humiliated, paraded around with donkey heads, beaten up, sent to do manual labor, or killed. Universities closed, and young people were dispatched to factories or the countryside to toil with the masses. The nation was in turmoil.7
But because of the oil industry’s importance to national security, Premier Zhou En Lai took it under his personal protection, using the army to insulate the industry and ensure that it kept working. This led to notable incongruities. “During the day, I organized production as usual,” recalled Zhou Qingzu, the chief economist at CNPC. “At night, I would sit in front of the students and workers and say I was wrong and apologize and write out my errors and apologies. I would listen very attentively to their criticism and write notes. During the day, I was a boss. At night, I was a nobody.”8
Eventually the Cultural Revolution went too far even for Mao, in terms of the chaos it had created, and he used the army to throttle back the Red Guards.
“EXPORT AS MUCH OIL AS WE CAN”
Henry Kissinger, President Nixon’s special assistant for national security, fell ill during a dinner in his honor in Pakistan in July 1971. Pakistan’s president, the dinner’s host, strenuously suggested that Kissinger, in order to escape the heat and thus speed his recovery, should recuperate in an estate up in the much cooler hills. This was very definitely a diplomatic illness. The supposed trip to the hills was a ruse, to provide cover for Kissinger’s real purpose. Meanwhile, Kissinger himself—now code-named “Principal Traveller”—was given a hat and sunglasses to disguise himself at the airport prior to taking off for his actual destination, although the disguise might have seemed a little excessive since it was 4 a.m. in the morning.9
The Quest: Energy, Security, and the Remaking of the Modern World Page 23