China oils its options

China is hoping to expand its stocks of oil wells, such as this one in the city of Daqing, some 200 kms northwest of Harbin

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HONG KONG, China -- Diversification is the name of the game for China's oil strategy, which has been elevated to the level of national security.

Firstly, Beijing hopes to lessen its dependence on the Middle East, imports from which account for almost half of the country's annual consumption.

Secondly, China, which has traditionally been dependent on coal and oil, is fast developing alternative fuel sources, including gas and liquefied natural gas (LNG).

About one third of the more than 200 million tones of oil that China uses every year is imported.

This is despite the fact the country used to export oil in abundance until the early 1990s.

Around 46 percent of the imports are from the Middle East, and 19 percent each from the Asia-Pacific region and from Africa.

Before September 11, 2001, Beijing had looked to Central Asia as a viable source of supply.

It has bought oil fields in Kazakhstan and invested in expensive pipelines to secure oil from the resource-rich Caspian Sea area.

However, national security advisers to President Jiang Zemin and other leaders have raised alarms when the U.S. started stationing troops in countries including Afghanistan, Uzbekistan and Tajikistan.

In response, Beijing has been talking with countries including Indonesia, Russia and the U.K. for alternative supplies.

Within China, state petroleum companies have also speeded up prospecting in areas including the Bohai Sea, Xinjiang, and Tibet, even though exploitation and transportation costs will be significantly higher for these areas compared to the more accessible Daqing Oilfield in the northeast.

At the same time, Beijing has boosted its exploitation of gas and LNG within the country, as well as importing these fuels from countries including Australia, Indonesia, Brunei and Russia.

Costs remain a difficult impediment to diversification. For example, Beijing is, with the help of Hong Kong and Western investors, laying a U$5.2 billion pipeline to transport gas from Xinjiang to the eastern provinces.

Yet gas from this far-off source is at least 35 percent more expensive than prevailing market prices.

Seven days backup

Beijing's immediate concern, particularly in view of the imminent conflict in Iraq, is to boost its strategic reserves of oil.

As of last year, the country's oil stockpile could only last for seven days, while the U.S. and Japan have capacity to cope for 90 to 100 days.

However, the government has recently decided to spend upward of US$1.6 billion to build up reserves of about 50 million barrels, roughly equal to 25 days' needs.

Experts do not see a solution in the near future as oil consumption is tipped to increase at an annual rate of at least 6 percent through this decade.

With the country fast becoming a factory for the world, energy use by mushrooming manufacturers along the eastern coast will continue to soar.

Moreover, with the car industry regarded as a key locomotive for economic expansion, conservative measures will be difficult to implement.

Foreign oil consultancies believe Chinese imports of crude oil could, by the late 2020's, equal those of the U.S. today.

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