Source: Straits Times

   'Security dilemma' is a concept that describes how one country's efforts to improve its own security can reduce that of other countries. Its grim logic describes nicely how China's measures to improve its own energy security are causing concerns among other oil-consuming nations, especially the United States and Japan.

   Tokyo and Beijing are already engaged in a fierce competition for access to oil supplies from the Middle East to Russia. One of the loudest complaints being lodged by Washington against Beijing now is that China is trying to 'lock up' energy supplies through equity investments.

   China's demand for energy has risen at an explosive pace. Between 1980 and 2004, the size of the Chinese economy increased seven times; but thanks to more efficient use of energy, its total energy consumption merely doubled.

   Still, with China poised to quadruple its gross domestic product by 2020, the country's consumption of energy is expected to at least double again, assuming further efficiency gains in energy use.

   And that poses three immense challenges: ensuring adequate supply, coping with the environmental impact and ensuring secure access.

   Fortunately, China has huge reserves of coal, which provide 65 per pent of energy today. It is not likely to run out of coal for another two decades at least. Unfortunately, if China burns 2.5 trillion tonnes of coal by 2020 (compared with about two trillion tonnes per year now), the impact on the environment would be severe.

   To lessen the environmental damage, China has announced plans to diversify its sources of energy. For example, Beijing intends to build more nuclear power plants, and has recently signed an agreement with Australia to gain access to that country's uranium supplies.

   Natural gas, a cleaner form of energy, is expected to account for 8 per cent of China's primary energy supplies in 15 years' time, up from 2 per cent today.

   However, even after factoring in alternative fuels, coal will probably still remain the most important source of energy in 2020, accounting for about 60 per cent of China's total usage.

   Unless China develops or obtains new technologies that can drastically reduce the greenhouse gases emitted from coal-burning, the current diversification strategy will reduce environmental damage only very modestly.

   What worries Chinese leaders most is the third challenge - ensuring secure access to oil. Domestic oil production is peaking and will soon decline. Oil imports, now supplying 45 per cent of domestic oil needs (6.5 million barrels a day), will probably account for 70 per cent of China's needs in 2020.

   Thus, it is the secure access to huge amounts of foreign oil that keeps Beijing's economic planners - and strategic thinkers - awake at night these days.

   China's oil security can be compromised in three ways.

   Firstly, but least importantly, price volatility on the spot market is a source of economic instability Beijing loathes.

   Secondly, since most of the new oil supplies will come from the Middle East, regional conflict will cause supply disruptions.

   Thirdly, lacking a blue-water navy and overseas bases, China has no military capability to protect its oil supply routes. Its potential geopolitical rivals, ranging from the US to Japan to India, can easily choke off China's oil supplies.

   Beijing's strategy for improving its energy security can be summarised in one word - diversity. It is building nuclear power plants and encouraging the use of alternatives, and also aggressively seeking supplies in Africa, Russia, Central Asia and North America.

   To be sure, diversification in itself is not controversial; all countries do it. What is problematic, especially through US eyes, is how China is doing it: Beijing's favourite method appears to be getting direct equity stakes in oil fields.

   Washington sees this form of investment as reflecting a lack of faith in the market and a sinister ploy to 'lock up' oil supplies at source.

   Some politicians and analysts have publicly suggested that China's aim is to remove these new supplies from the global market once the fields are developed.

   To make matters worse, China's state-owned oil giants, tasked by Beijing to ensure secure supplies, have bid sky-high prices for such equity investments, elbowing out Western oil firms and prompting charges that the Chinese are using government subsidies to gain valuable oil assets.

   Finally, because of sanctions imposed by Western governments, countries such as Myanmar, Sudan and Zimbabwe are off-limits to Western oil companies. But Chinese oil companies are not constrained from doing business in these so-called 'problem states'.

   This has become an especially contentious issue between Beijing and Washington, not simply because China appears to be profiting economically at the expense of the West, but also because Beijing's investments in these 'problem states' have undermined whatever effect Western sanctions might have had.

   Of the criticisms levelled at Beijing, the charge that China attempts to 'lock up' energy supplies is by far the silliest. Most of the oil fields that China has invested in are relatively small; their contributions to capacity will be modest even when they are fully developed. In most cases, China's oil companies have only minority stakes in these fields.

   Ironically, the biggest loser of 'locking up' energy supplies would most likely be the Chinese government because the global oil market is so integrated that it really matters little whether one has physical control of the actual barrels of oil when prices shoot through the roof. China, like any other net importing nation, must pay the spot prices.

   The real beneficiary of China's current strategy is, no surprise, its state-owned oil companies.

   Given a blank cheque to improve China's energy security, the three giant state-owned oil giants - China Petroleum and Chemical, China National Petroleum and China National Offshore Oil - now have practically unlimited financial resources to make overseas acquisitions, regardless of economic viability or geopolitical risks.

   If their deals go bad, Beijing will foot the bill. The companies will not be blamed, either, because they are simply implementing the government's energy security strategy. But if they strike 'black gold', the companies reap the economic benefits.

   It is a no-lose proposition for China's state-owned oil companies, but a high-risk plan for the Chinese government - in particular if the West perceives, understandably but erroneously, that China's gains in energy security will reduce future supplies to the West.

   To dispel these concerns, the Chinese government must re-think its strategy, which contributes modestly to China's energy security but is causing disquiet in Washington. As oil-importing nations, China and the US share identical interests: dependable supplies at affordable prices. They should cooperate, not compete.

   When President Hu Jintao goes to Washington next week, he must persuade his American hosts that China's oil strategy is not driven by 'old thinking', but by a new and cooperative vision.
 
The writer is the director of the China Programme at the Carnegie Endowment for International Peace in Washington.