The Quest: Energy, Security, and the Remaking of the Modern World

by Daniel Yergin

  Only a week later did the sensational news break. From Pakistan, Kissinger had flown secretly over the Himalayas to Beijing, creating an opening in the Bamboo Curtain that had surrounded China since the communist victory in 1949. Half a year later, President Richard Nixon went through that opening. In the course of his historic visit to Beijing , Nixon supped with Mao, clinked glasses with Zhou En Lai, and dramatically reset the table of international relations.

  For both sides it was a matter of realpolitik. The United States, looking for a way out of the stalemated Vietnam War, wanted to create a balance against the Soviet Union. For China, this was a means to strengthen its strategic position against the Soviet Union and reduce the risk of a “two-front war” with the Soviet Union and the United States. This was no mere theoretical matter, for Russian and Chinese military forces had already clashed on the border along the Amur and Ussuri rivers.

  The Chinese had a second set of reasons as well. The most virulent phase of the Cultural Revolution was over. Vice Premier Deng Xiaoping and others were trying to get the country working again. They knew that self-reliance could not work. China needed access to international technology and equipment to modernize the economy and restore economic growth. But a very big obstacle stood in the way: How to pay for such imports?

  “Petroleum export–led growth”—that was Deng’s answer. “To import, we must export,” he said in 1975. “The first to my mind is oil.” The country must “export as much oil as we can. We may obtain in return many good things.”

  By this time, Deng was already becoming the manager-in-chief of the new strategy of opening toward the world. A stalwart communist since his student and worker days in France after World War I, he had emerged as one of the top leaders after the communists came to power. He then became one of the foremost targets of the Cultural Revolution and of his leftist rivals. His family had suffered much; his son had been pushed out of an upper-floor window and left paralyzed. Deng himself had spent those years variously working in a tractor repair shop and by himself, in solitary confinement. He had spent many hours pacing his courtyard, asking himself what had gone so wrong under Mao and how China’s economy could be restored. In some ways, he had always been a pragmatist. (Even while organizing underground communist activities in France after World War I, he had also started and run a successful Chinese restaurant.) The traumas of the Cultural Revolution—national and personal—only reinforced his pragmatism and realism. His fundamental mottos were about being practical—“crossing the river by touching the stones”—and the most famous maxim of all: that he didn’t care whether a cat was black or white so long as it caught mice.10

  Following Mao’s death and after a brief struggle with the radical “Gang of Four,” Deng secured his position as paramount leader. He could now initiate the great transformation that would lead to China’s integration with the global economy—which the 11th Congress of the Communist Party, in 1978, would proclaim as the historic policy of “reform and opening.”

  The oil industry was central to the opening. By that time, China—no longer “poor in oil”—was producing petroleum in excess of its own needs and could start exporting it. There was a waiting market nearby—Japan—which wanted to reduce its reliance on the Middle East and, at the same time, develop export markets in China for its own manufactures. Buying Chinese oil would help on both counts.

  As the door began to open to the outside world, the Chinese oil industry discovered, to its shock, how wide was the technology gap that separated it from the international industry. But now, bolstered by its oil-export earnings, it could buy from abroad the drilling rigs, seismic capabilities, and other equipment that would lift its technical abilities.

  While Mao’s death and Deng’s ascension were critical to the opening of China, those events did not put an end to the turmoil. Inflation, corruption, and inequality emboldened opponents of reform. So did the bloody 1989 confrontation with students in Tiananmen Square. In the aftermath, amid the indecision of the leadership, the efforts to continue market reform stagnated. Seeking to jump-start the faltering reforms, Deng, in January 1992, launched his last great campaign—the nanxun, or “southern journey.” This trip showcased the booming Special Economic Zone of Shenzhen, which was becoming a manufacturing center for exports, and sought, fundamentally, to erase the stigma from making money. His message was that “the only thing that mattered is developing the economy.” It was during this tour that Deng also made a stunning revelation—he had never actually read the bible of communism, Karl Marx’s Das Kapital. He never had the time, he said. He had been too busy.11

  WORKSHOP OF THE WORLD

  In the years after Deng’s “southern journey,” China consolidated its course of reform and moved toward integration with the global economy. The 1990s was a decade of a new, much more interconnected economy. On January 1, 1995, the World Trade Organization was established to bring down barriers and facilitate global trade and investment. World trade was growing much faster than the global economy itself. American and European companies were setting up supply chains that gathered components from different parts of the world, assembled them in still other parts, and then packed the finished goods into containers and shipped them across oceans to customers anywhere in the world. Although China did not formally join the WTO until 2001, it had by then already become the linchpin in this new system of global supply chains.

  As factories went up all along the coastal region, the inscription “Made in China” became ubiquitous on all sorts of products shipped all over the world. China had now become what was said of Britain two centuries earlier—“the workshop of the world.” In due course, these new trade and investment linkages would have much greater impact on world energy than anyone might have imagined. For any workshop needs energy on which to run, and this new workshop of the world would run on fossil fuels.

  THE END OF SELF-SUFFICIENCY

  Already, however, a few years earlier, China had crossed a great divide in terms of energy. By 1993 petroleum production could no longer keep up with the rising domestic demand of the rapidly growing economy. As a result, China went from being an oil exporter to an oil importer. Though not at first noticed by the rest of the world, it was for China an immediate shock. “The government thought it was a disaster,” remembered one Chinese oil expert. “It was very negatively received. From an industry point of view, we felt very shamed. It was a loss of face. We couldn’t supply our own economy. But some scholars and experts told us, ‘You can’t be self-sufficient in everything. You import some things, and export others.’ ”12

  This added greatly to the urgency to further modernize the structure of the oil industry—to move from the all-encompassing ministries of the petroleum and chemical industries, based on rigid central planning, to a system based on companies and rooted in the marketplace. The foundation for this shift had already been laid in the 1980s. The three state-owned companies had emerged from the ministries: the China National Petroleum Company, CNPC; Sinopec, the China Petrochemical Corporation; and CNOOC, the China National Offshore Oil Company. The next move, beginning in the late 1990s, was to dramatically restructure the three companies into more modern, technologically advanced companies—and more independent enterprises. “They would need to earn a living,” said Zhou Qingzu. It was at this point that they would go through IPOs, opening partial ownership to shareholders around the world. CNPC’s subsidiary was given a new name—PetroChina—while Sinopec and CNOOC used their existing names for their listed subsidiaries. There was also an enormous cultural change. “Now you’d have to be competitive,” said Zhou. “You never had to be competitive before.”13

  THE “GO OUT” STRATEGY: USING TWO LEGS TO WALK

  China has become a growing presence in the global oil and natural gas industry. This new role goes by the name of the “go out” strategy. It was enunciated as policy around 2000, though the policy’s roots extend back to the original reforms of Deng Xiaoping.

  The first ste
ps abroad were very small ones, beginning in Canada, then Thailand, Papua–New Guinea, and Indonesia. In the mid-1990s, CNPC acquired a virtually abandoned oil field in Peru. By applying the kind of intense recovery techniques it had honed to coax more oil out of complex older oil fields in China, it took the field from 600 barrels a day to 7,000. But these projects were small and did not get much attention. It took time and experience for the confidence to build for significant international activities. “We knew that, from its beginning in the mid-nineteenth century, the oil industry was always an international industry,” said Zhou Jiping, the president of PetroChina. “If you wanted to become an international oil company in the real sense, you had to go out.” By the beginning of the new century, a policy consensus had formed around the idea of international expansion, along with confidence in the capabilities of the Chinese companies to implement it.14

  In general, the “go out” phase meant the internationalization of Chinese firms—that they should become competitive international companies with access both to the raw materials required by the rapidly growing economy and to the markets into which to sell their manufactures. For energy companies more specifically, it meant that the partly state-owned, partly privatized oil companies should own, develop, control, or invest in foreign sources of oil and natural gas. For the oil industry, this was complemented by another slogan—“using two legs to walk”—one, to further development of the domestic industry; the other, for international expansion.

  Today the impact of the “go out” strategy is evident worldwide. Chinese oil companies are active throughout Africa and Latin America (as are Chinese companies from other sectors). Closer to home they have acquired significant petroleum assets in neighboring Kazakhstan and have achieved some positions in Russia after repeated tries. They are developing natural gas in Turkmenistan. As latecomers into the international industry, the Chinese come equipped not only with oil field skills but a willingness and the financial resources to pay a premium to get into the game. Also, particularly in Africa, they make themselves partners of choice with very significant “value added.” That is, they bring government-funded development packages—helping to build railroads, harbors, and roads—something that is not in the tool kit of traditional Western companies. This has engendered controversy. Critics charge that China is colonizing Africa and using Chinese rather than local labor. Chinese reply that they are doing much to create markets for African commodity exports, and that export earnings are better than foreign aid and do more to stimulate lasting economic growth. (Some of these packages have fallen apart.) Chinese banks, in coordination with the Chinese oil companies, have also made multibillion-dollar loans to a number of countries that will be paid back in the form of oil or gas over a number of years. (One such deal took fifteen years to work out. )15

  The energy security strategy is also taking an obvious route—building pipelines to diversify, reduce dependence on sea-lanes, and strengthen connections with supplier countries. A new set of pipelines, built in record time, brings oil and gas from Turkmenistan and Kazakhstan to China. Russia’s $22 billion East Siberia–Pacific Ocean Pipeline will, in addition to supplying oil to the Pacific (Japan and Korea primarily), also deliver Russian oil to China—guaranteed by a $25 billion loan that China advanced to Russia. In September 2010 Chinese president Hu Jintao and Russian president Dmitry Medvedev jointly pushed the button to start the flow of oil over the Russian-Chinese border. The potential for a large trade in natural gas was also hailed. At the ceremony, Hu proclaimed a “new start” in Chinese-Russian relations. A relationship that was once based upon Marx and Lenin was now rooted in oil and possibly gas. 16

  “LIKE THROWING A MATCH”

  But the greatest controversy over the “go out” strategy came not in Africa but in the United States. In 2005 Chevron and CNOOC—Chinese National Offshore Oil Corporation—were locked in a battle royal to acquire the large U.S. independent company Unocal, which had significant oil and gas production in Thailand and Indonesia but also had some in the Gulf of Mexico. The competition between the two companies was very tough, with sharp arguments about the financial terms and the role of Chinese financial institutions, as well as the timing of the respective offers. For some in Beijing, a global takeover battle was not only unfamiliar but disconcerting. The price that CNOOC put on the table was greater than the entire cost of the huge Three Gorges Dam project, which had taken decades to build. After months of battle, Chevron emerged victorious with a $17.3 billion bid.

  But in the course of takeover battle, a fiery political controversy erupted in Washington that was out of scale compared with the issues. After all, Unocal’s entire production in the United States amounted to just 1 percent of the total U.S. output. Much of it was in the Gulf of Mexico, in joint ventures with other companies, and the only market for that output was the United States. Yet when the contest got to Washington, as one of the American participants said, it was “like throwing a match into a room filled with gasoline.” For it became the focus of a firestorm of anti-Chinese sentiment on Capitol Hill that was already supercharged by the contentious hot-button issues of trade, currencies, and jobs. The heated rhetoric showed the intensity, at least in some quarters, of suspicions of China’s motives and methods. One critic told a congressional committee that CNOOC’s bid fit “into a pattern” of “activity around the globe” that is “ominous in its implication.” Another charged that CNOOC’s bid was part of China’s strategy for “domination of energy markets and of the Western Pacific.” Whatever the specifics of the takeover battle, the takeaway for the Chinese at the end of the political battle was that the United States itself was less hospitable to the openness toward foreign investment that it preached to others and that the Chinese companies should redouble their investment effort—but elsewhere. “The world was shocked that a Chinese company could make this kind of bid,” said Fu Chengyu, at the time the CEO of CNOOC. “The West was saying that China is changing in terms of such things as building highways. But it was not paying attention to China itself and how China had changed.”

  In the years that followed, the changes became much more evident. China’s president made highly visible state visits to a number of oil and commodityexporting countries in the Middle East and Africa, beginning with Saudi Arabia. And when China convened a summit of African presidents to discuss economic cooperation, 48 of the presidents made the trip. “China should buy from Africa and Africa should buy from China,” said Ghana’s president. “I’m talking about the win-win.”

  The world moves on. In 2010, five years after the fiery battle over Unocal, Chevron and CNOOC announced that they were teaming up to explore for oil not in the Gulf of Mexico but in the waters off China. “We welcome the opportunity to partner with CNOOC,” said a senior Chevron executive. 17

  “INOCs”

  In the decade-plus since the shaky days of the original IPOs, the Chinese companies have become highly visible players in the world oil market.

  Their international roles have instigated a vigorous debate outside China as to what drives them. One agenda is established by the government (which remains the majority shareholder) and the party, both of which maintain oversight. They are to meet national objectives in terms of energy, economic development, and foreign policy. The CEOs of the major companies also hold vice ministerial government rank—and many also hold senior party rank.

  At the same time, the companies are driven by strong commercial, competitive objectives that are similar to those of other international oil companies, and, increasingly, their commercial identities define them. They are indeed benchmarked against the world economy and other international oil companies by the investors in their listed subsidiaries, and they have to be responsive to their investors’ interests. In addition, they are subject to international regulation and international governance standards. And they manage large and complex businesses that, increasingly, are operating on a global scale.

  As Zhou Jiping put it, “As a nati
onal oil company, we have to meet the responsibilities of guaranteeing oil and gas supply to the domestic market. As a public company listed in New York, Hong Kong, and Shanghai, we must be responsible to our shareholders and strive to maximize shareholder value. And, of course, we have a responsibility to the 1.6 million employees of our company.”

  In short, Chinese oil companies are hybrids, somewhere between the familiar “international oil companies,” IOCs, and the state-owned national oil companies, NOCs. They have become a prime example of a new category called INOCs—the international national oil companies. “There has been a great change in people’s overall psychology and philosophy since the IPO,” said the CEO of one of the companies. “We used to focus on how much we produced. Now it’s the value of what we do.”

  Today walk into the headquarters of some of the companies in Beijing and what one sees are not exhorting slogans but the epitome of the international benchmarking—flashing displays of the stock price in New York, Hong Kong , and Shanghai. Yet in the lobby of CNPC, one is also greeted by a very strong reminder of how the industry was built—a massive statue of Iron Man Wang.