CHAPTER-4

Sudan's Oil Engagement with Asia

The expansion of Sudan's oil sector coincides with rising Asian interest in the oil fields

of Africa that is located in the extended supply zone of the present world oil regime.

Asian powers have over the years acquired extensive knowledge and experience in

. domestic oil production; yet that failed to meet their constantly rising energy demands

triggered by economic globalsiation. The increasing external dependence pushed these

countries to enter into transnational oil ventures. The 9/11 terrorist attack has further

propelled the oil-seeking countries to diversify their supply lines by drifting away from

West Asia and getting closer to Africa Asian quest for African equity oil has

consequently concretised the Afro-Asian interdependence that has evolved in the post

cold war economic world order in terms of trade and investment partnership. As an

extension of such economic complemtarity, the current regime in Sudan has diversified

the pattern of its transnational production linkage through consolidation of mUltiple Asian

participations in its oil sector. The shift that Sudan's foreign oil policy behavior has

undergone is due to the withdrawal of major Western oil firms, which have initiated the

exploration and production activity in its oil field. The underlying rationale for such

approach, therefore, lies in the intents to ensure that Sudan's oil production remains less

dependent on the partnership with West, and at the same time to avoid a situation where

any single Asian player does monopolise its oil sector. As a result, Asian orientation has

become the hallmark of the transnational partnership that Sudan is currently forging for

its oil production.

This chapter begins with energy supply-demand outlook in Asia that constitutes the

extended demand zone of the world energy regime. Then, the chapter looks at Sudan's

partnership with China on the oil sector in the wider context of Chinese interest in

African oil. It subsequently examines Sudan's oil engagement with another Asian partner

that is Malaysia. Then, it looks at Sudan's partnership with India in the broader

perspective of Indian interest in African oil. The chapter also tries to describe the Sino­

Indian engagement in the Sudanese oil sector.

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4.i. Energy Supply-Demand Outlook in Asia: Asia is set to play an increasingly

important role in global economic and energy matters, because of booming economic

growth. The world primary energy consumption is projected to expand at an average

annual growth rate of 2.1 per cent by 2020. About 70 per cent of the increase would be

accounted for by non - Organisation for Economic Cooperation and Development

(OECD) member economies, two thirds of which are from the Asian region. The increase

in demand for oil in Asia is going to amplify the dependency on shipments from other

regions. The countries and regions of Asia have -achieved an overall high rate of

economic growth due to the fast-paced expansion of trade and foreign direct investment

(FDI), close mutual economies, and industrialisation. There is anticipation for continued

strong economic growth at a rate of 5.4 per cent in Asia excluding Japan, owing to the

presence of economies with enormous markets such as China, the Association of South

East Asian Nations (ASEAN), and India, as well as the reinforcement of mutual

interdependence in the region and swift technological progress. In the process, they have

made the region into the growth centre for the entire world economy. Due to its economic

advances, the region has also become a market with tremendous impact on global energy

supply and demand. The medium to long term outlook for global energy supply and

demand envisions continued strong economic growth in Asia and a rapid rise in its

energy demand. I

On the population front, Asia is going to have a growing trend, albeit at lower rates. It is

estimated that the countries of China and India are going to have respective populations

of 1.4 and 1.3 billion, and that Asia as a whole is going to account for 53 per cent of the

world population in 2020. Along with population increase and economic growth, the

share of the world energy consumption accounted for by Asian countries is on increase.

Primary energy consumption in Asia is forecast to grow at an average annual rate of 3.2

per cent and reach 4.6 billion oil-equivalent tones in 2020, with a 1.39-fold increase from

the corresponding total of 2.4 billion in 2000. Stronger growth is anticipated in countries

I Kokichi Ito, Li Zhidong and Kyoichi Komiyama (3 September 2005), "Asian Energy Outlook upto 2020", Economic and Political Weekly, 40 (33), p.3953.

122

achieving fast paced economIC growth, such as China, India, Vietnam, Thailand,

Malaysia and Indonesia. About 50 per cent of the consumption increase over the period

in question should derive from expanded consumption in China, followed by India at

about 20 per cent, Indonesia and South Korea at about 5 per cent each, and Thailand,

Malaysia, and the Philippines at about 3 per cent each. Japan's share of the increase is

expected to hold at about 2 per cent, or around the same level as that of Vietnam, which

is anticipated to achieve rapid economic growth. The share of primary energy

consumption in Asia including China is forecast to expand from 38 per cent in 2000 to 45

per cent in 2020. The outlook also envisions a corresponding expansion from 13 to 15 per

cent for India, 4 to 5 per cent for Indonesia, and 2 to 3 per cent for Thailand. In contrast,

the share occupied by Japan is predicted to decline from 22 per cent in 2000 to 12 per

cent in 2020 owing to factors such as economic maturation and population decrease,

thereby ranking the country third in this connection, behind China and India?

The fossil fuels3 in Asia are expected to continue to have a vital place as sources of

energy, and are going to account for about 90 per cent of the increase in primary energy

consumption over the forecast period, in the world as a whole. Among the fossil fuels, oil

is anticipated to have the largest share of the increase at 36 per cent, followed by coal at

35 per cent and natural gas at 17 per cent. Consumption of natural gas is forecast to

undergo a 2.5-fold increase, from 263 billion cubic meters in 2000 to 664 billion cubic

meters in 2020, with growth at the highest rate of all fossil fuels having an annual

average of 4.7 per cent. It is estimated that about 50 per cent of the consumption increase

will derive from input as fuel in the power sector, and about 20 per cent from the

expanded demand in the residential/commercial sector along with the spread of

urbanisation accompanying economic growth. The natural gas share of Asian primary

energy consumption is predicted to rise from 10 per cent in 2000 to 13 per cent in 2020,

but the natural gas shift should be slower than in North America and Europe.4

2 Ibid, p. 3954. 3 Fossil fuels here imply coal, oil and natural gas. 4 Kokichi Ito, op.cit, pp. 56-57.

123

The consumption of coal is forecast to rise from the order of 1.049 billion oil-equivalent

tones in 2000 to 1.811 billion tonnes in 2020, for an average annual increase rate of 2.8

per cent. It is estimated that China will account for about 70 per cent of the increase, and

India, about 20 per cent. By sector, about 90 per cent of the increase should derive from

power generation, and the remaining 10 per cent from industry. While its share of the

primary energy consumption is forecast to slip from 43 per cent in 2000 to 40 per cent in

2020, coal should retain the single-largest share ofthe primary energy supply in Asia.5

The consumption of oil that was in the order of 19 million barrels per day in 2000 is

anticipated to increase by an average annual rate of 3.1 per cent and hit 35 million barrels

per day in 2020. By region, it is estimated that China will account for about 50 per cent of

the increase, and India, about 20 per cent. By sector, about 60 per cent should derive from

transportation, with the residential/ commercial and industrial sectors accounting for

about 20 per cent respectively. The oil share of primary energy consumption should stay

at roughly the same level; it is expected to dip from 39 per cent in 2000 to 38 per cent in

2020.6 Nevertheless, the rising demand for energy materials make Asian companies look

for transnational oil ventures. In pursuit of equity oil, they continue to expand their

upstream portfolios in Africa,7 and Chinese oil firms remain at forefront.

4.2. Sudan's Partnership with China: The increasing economic collaboration between

Sudan and China in terms of trade, development of the oil industry, infrastructure

projects, and financial assistance is one of the most significant factors to consider when

analysing the oil industry in Sudan. China appears to have become one of Khartoum's

greatest allies. It is very much a reciprocal relationship between two countries. While

China is in desperate need of a secure source of oil over a long period, Sudan needs the

external credit, investment and market for its oil. During the National Islamic Front's

(NIF) tenure, Sudan Government brokered 'forward oil deals' with China whereby it

would be repaid for its substantial investment in the oil industry in the form of

subsequent oil deliveries. The terms of those agreements were spelled out in public

5 Ibid. 6 Ibid. 7 Tom Nicholls (February 2007), "Asia's Africa scramble continues", Petroleum Economist, 74 (2), p.19.

124

disclosure documents. The Sudanese People's Liberation Army (SPLA) had meanwhile

refused to hononr those forward oil deals or repay back debts incurred by the

Government in Khartoum if it were to gain political control over Southern SUdan.8

The oil has, however, bolstered the Sudan-China relations. The State owned oil company

China National Petroleum Company (CNPC), which is China's arm in securing oil

overseas, was granted its first concession in Block 6 in 1995, but only started operating in

Sudan in 1997 as a member of the Greater Nile Pt::troleum Operating Company

(GNPOC). Since then the CNPC expanded its operations and acquired more concessions

in Sudan. It holds a 40 per cent interest in the GNPOC, which owns the rights in Blocks

1, 2 and 4 in the Heglig and Unity fields, 95 per cent interest in Block 6, 41 percent

interest in Petrodar Operating Company (PDOC) which owns the rights of Blocks 3 and

7, and has a 35 per cent interest in Block 15. The Chinese company provided the

Sudanese oil industry with the required investment to build the oil pipeline and

consequently converted Sudan to an oil exporting country in 1999. Among the countries

in which CNPC operates, Sudan is the most important.9 Even though Sudan's share of

China's imports for 2004 was 4.7 per cent,1O the importance of Sudan is in its share of the

total oil imports from the wells owned by CNPC. Sudan accounted for 16 million of the

30.1 million tons of overseas oil the firm pumped during 2004. 11

Minister of Energy and Mining of Sudan Dr. Awad Ahmed al-Jaz, while addressing the

10th session of Xi amen Investment and Trade Forum in September 2006, said that the

successful cooperation between the two countries, especially in the oil sector has become

an attractive model for the African, Arabian and other countries to cooperate with China.

Chinese investment in oil sector in Sudan opened a wide door to China in African and

8Cleophas Lado, The Political Economy of Oil Discovery and Mining in the Sudan: Constraints and Prospects on Development, http://www.dur.ac.ukljustin.willis/lado.htm. accessed on 12 May 2008. 9 Ismail S.H. Ziada, Oil in Sudan: Facts and Impact on Sudanese Domestic and International Relations, Universidad Autonoma de Madrid, p. 18, http://www.ecosonline.o~glbacklpdf reportsl2007/0ilJOil industry in Sudan.pdf , accessed on II May 2007. 10 David Zweig and Bi Jahni (2005), "China's Global Hunt for Energy", Foreign Affairs, 84 (5), p.5. II UK Government (March 2005), The Economist Intelegence Unit, Country Report Sudan, p. 24.

125

Arabian countries, he said, by adding that from 1996 and the following years Sudan's oil

sector experienced a rapid development in which CNPC was a pioneer. 12

Minster mentioned that CNPC was the first concessionaire of Block 6 in central western

part of Sudan. The CNPC later entered into the GNPOC consortium that concluded the

two frame work agreements - Exploration and Production Sharing Agreement (EPSA)

and the Crude Oil Pipeline Agreement- of Block 1,2,4. The development projects in that

concession amounted to $ 3.5 billion covering exploration and development in the fields

as well as the construction of 1600 kilometers 28' pipeline from the oil fields to the

export terminal on the Red Sea. The projects of Block 1, 2, 4 were completed and

commissioned in August 1999 and the first shipment of the Sudanese oil was exported on

August 30, 1999. That date was marked as the oil day in Sudan Ministry of Energy &

Mining (MEM) calendar. The landmark in the cooperation between China and Sudan was

that China undertook the finance and construction of Khartoum Refinery with the

capacity of 5500 Bowman-Birk type proteinase Inhibitor (BBI) per day at a cost of $ 640

million. The refinery was commissioned in June 2000, ending a year of the country's

suffering in getting its needs of fuels, and paved the way towards development of other

industrial sectors, whose failures in the past was blamed on fuel scarcity.13

Following the successful completion of the two mentioned major projects, said the

Minister, the CNPC exclusively undertook the development projects of Block 6 covering

the field development, building of a 715 kilometers pipeline from the field to Khartoum

Refinery and a second train in the refinery, which constituted Khartoum Refinery

Expansion Project. The package total cost amounted to $ 1.35 billion. The phase -2 of the

project was completed and inaugurated in July 2006. Blocks 3 and 7 also started

production with capacity of 160,000 barrels per day. 14

12 Speech of Minister of Energy and Mines Sudan Dr. Awad Ahmed al-Jaz, (8 September 2006), http://www.chinafair.org.cn/chinafair2004fwebsite/English/NewslNewsDetail.aspx?ID= 18254, accessed on 7 August 2007. I3Ibid. 14Ibid.

126

In the fields of electric power generation and transmission, mentioned the Minister, the

Chinese financial, manufacturing and construction firms joined hands in achieving gas

turbine power stations and thermal stations. The Chinese corporation investment in the

electricity industry amounted to $ 750 million, stimulated by the development that

proceeded in the oil industry. I 5

On the other hand, Sudan covers some of China needs of oil and the Sudan oil projects

enrich experience to Chinese companies and giv~ them chance to work in Africa, stated

Awad Ahmed. According to Sudan Government, investment stimulators include a

package of tax exemptions and other incentives in a country bestowed with vast stretches

of fertile land above aU friendly sociable human being and availability of all forms of

energy. The enormous economic and commercial developments that situated China as the

first commercial partner with the Republic of the Sudan, as the volume trade between the

two countries reach the level of $ 3.9 billion. The Minister wrapped up his speech by

saying that bilateral cooperation in the domain of oil industry had witnessed major

development, due to contributions of the Chinese oil companies ·led by CNPC beside the

others such as China Petrochemical Corporation (Sinopec), China National Chemical

Industry Import-Export Corporation (Sinochem), China National Offshore Oil

Corporation China National Offshore Oil Corporation (CNOOC) and China National

Chemical Engineering Corporation (CNCEC), signifying the potential for further

cooperation in the oil sector. 16

Sudan supplies China with 7 per cent of its oil needs and is its fourth-largest overseas oil

supplier after Saudi Arabia, Iran and Oman. Sudan is a long-term play for China,

especially since the highly prospective southern region remains virtually unexplored, and

Chinese oil firms start gaining in petroleum exploration and development operating

experience in the country. Sudan's proven oil reserves are located in the Muglad and

Melut Basins in mostly northern Sudan, both discovered by Chevron in its pioneering

exploration work in the 1970/&Os. In the southern region, high potential f.or finding future

15lbid. 16 Ibid.

127

oil reserves exists in the 'Sudd' (barrier for its dense aquatic vegetation) swamp. The

Sudd is a massive day-soiled bowl-type basin where the White Nile yearly overflows its

tributaries as it flows north through Sudan and Egypt. Energy professionals believe that

the aggregate reserves of Muglad, Melut and Sudd will be sufficient to maintain

production for nearly 60 years, implying Sudan would be a major oil supplier for China

for decades. 17

The extent to which China needs oil resource goes a long way towards explaining its

strong ties with the Khartoum Government and its desire for Sudan's promising oil

reserves. The significance of CNPC's operations in Sudan is that it is the largest oilfield

construction project China 4as undertaken overseas, as well as one of the largest co­

operative oil projects in the world. China's operation in Sudan has helped it to improve its

expertise in drilling oil inland. The Greater Nile Oil Project (GNOP) is important to

China not necessarily for the value of the oil being produced, but for the Heglig and

Unity oil fields representing a stable source of oil necessary in China's modernization

drive. IS

As valuable as the oil project is for China, China's involvement is equally beneficial to

Sudan. Just as Canada brought to the GNPOC its expertise and oil technology, China has

brought extensive knowledge and experience in pipeline and oil refinery construction.

China is able to provide its own labour for the construction of major pipelines in Sudan.

Approximately 7,000 Chinese labourers were initially engaged in the Sudan oil protect,

many laying pipeline in what some described as the most hostile conditions known to

man. Reports surfaced that at least 2,000 of the Chinese labourers were prisoners who

were promised a reduction of their sentences in exchange for their labour. It was also

reported that 20,000 Chinese labourers, with probable military training, were planned to

be used to protect China's investment in the oil project. The efficiency with which China

17 Yitzhak Shichor (13 October 2005), "Sudan: China's Outpost in Africa", Jamestown Foundation,S (21), www.jamestown.orgJpublications_ details.php?volume _id=408&issue _ id= 3491 &article _ id=23 70720 - 33k , accessed on 2 November 2007. 18 Cleophas, op.cit.

128

completed the oil pipeline on schedule was appreciated by the NIF regime and confirmed

commitment to the oil industry in Sudan. 19

China has invested heavily in Sudan. It initiated $ 20 billion worth of development and

infrastructure projects involving dams, hydroelectric power stations, textile mills and

agricultural schemes. China had promised to contribute $ 750 million in the construction

of the new Khartoum International Airport, and another $ 750 million for a new dam on

the Nile near in the Northern province. Approximately $ 100 million was spent by the

Chinese on textile plant~ and $ 500 million for the construction of an oil refinery. China

had also provided Sudan with over $12 million in soft loans to fund a fishing project in

the Red Sea.20

The arms transfers between Beijing and Khartoum is, however, an important segment of

their bilateral ties. China has supplied the Khartoum Government with arms since 1985,

with transfers between 1985 and 1989 totaling $50 million. China became one of the

Sudan Government's principal arms suppliers in 1994. China is a preferred supplier in

that it attaches no conditions to its arms sales other than monetary ones and oil .

concessions, and its weapons are relatively cheap. China sold Sudan SCUD missiles in

1996 in a deal underwritten by a $ 200 million Malaysian Government loan against future

oil extraction. In 1990, Sudan Government signed a deal worth $ 400 million whereby

China would supply arms to Sudan and receive cotton in return. It was not unusual for

Beijing to offer the NIF regime soft loans for arms purchases, and one such loan was

payable as late as 2005. A high ranking Eritrean military official reportedly criticised

those arms transfers in discussions with Chinese officials, who subsequently defended

their right to make such sales.21

China has used its position on the United Nations (UN) Security Council and on UN

committees to block action against Sudan Government. As a permanent member of the

UN Security Council, China has rejected the imposition of sanctions against Sudan, and

19 Ibid. 20 Ibid. 21 Ibid.

129

has also stressed that China is opposed to any intervention in the internal affairs of Sudan

under the pretext of human rights violations. China also used its position on the Non

Governmental Organisation (NGO) decertification committee at the UN to discredit an

NGO which had publicly embarrassed the Government in Khartoum by exposing the

alleged practice of Government supported slavery. Being largely influential in the

committee alongside Yemen and Ethiopia, China aggressively lobbied against the NGO

Christian Solidarity International (CSI). The committee subsequently recommended that

CSI be deprived. of membership at the _Human Rights Commission in Geneva. That

recommendation was based on the fact that CSI had invited SPLA leader John Garang to

address the UN Human Rights Commission. China's defence for Sudan at the foreign

policy level is indicative of the significance it attaches to the oil reserves which are its

main strategic interest in that country. 22

The increasing oil production in Sudan and the expanding exploration and development

operations by the CNPC in unexplored areas has made China the main trade partner of

Sudan. In 2003, China was the destination of 24 per cent of the Sudanese exports and the

source of 19.2 per cent of the Sudanese imports.23 China has also expanded its economic

activity in the country through banking, light and heavy industry, agriculture, fisheries

and pharmaceuticals?4 The military cooperation between the two countries goes back

to 1985, and has been further stimulated by the increasing Chinese interests in Sudan.

The Chinese role in developing the oil industry in Sudan has been substantial. It is

argued by some commentators that without the Chinese investments, Sudan would have

remained unable to exploit its oil resources. Chinese involvement in Sudan was

instrumental in the partial failure of the US sanction regime towards Sudan. Chinese

involvement also led to a change in the US approach towards Sudan. Through Chinese

involvement it was proved that the Sudanese oil reserves were much more substantial

22 Ibid . . 23 The Economist, op.cit, p.5.

24Luke A. Patey (2006), "A Complex Reality: The Strategic Behaviuor of Multinational Oil Corporations and the New Wars in Sudan", Research Paper, Danish Institute for International Studies, p. 33, http://www.diis.dklsw21249.asp .• accessed on 16 September 2001.

130

than was expected. This subsequently made the American oil companies blame the US

policies for depriving them of a lucrative oil market, and consequently put pressure on

the American Administration to change its policies so also US companies could operate

in the country. The Chinese increasing interests in Sudan and its control of the majority

of the oil fields was perceived as a strategic threat to the American interests in the region

which also played a key role in the changing US approach towards Sudan. One of the

main aspects of the US approach was to put the vast undiscovered areas of the south

under its indirect control thereby preventing China from controlling more areas in the oil

rich south?5

The Chinese interests in Sudan were reflected clearly in the political support it provided

to Sudan in the UN. The Chinese interests were the main factor in preventing the US

from obtaining international resolutions that would have imposed economic sanctions,

including arms and oil embargos on Sudan. The Chinese role in obstructing such

resolutions was manifested in 1996 when the US was pushing for the adoption of a

Security Council resolution that would have imposed economic sanctions, including an

arms embargo. Due to the Chinese opposition the resolution eventually imposed

diplomatic sanctions only, which China did not implement. China also supported Sudan

during the Darfur crisis and prevented the adoption of resolutions that would have

included any economic sanctions. In 2004, there was an attempt by the US to obtain such

a resolution against Sudan which was vetoed by China.26

China encouraged the Sudan Government to reach peace agreements as brokered by the

US with the south as well as in Darfur which evidently is not in the interest of Sudan as

these threaten its unity. China has also participated in the UN Mission in Sudan, which

was established in 2005 as a peace keeping force to support the implementation of the

peace agreement in the south. China is thereby attempting to create good relations with

25 Ismail Ziada, op.cit, pp.18-19. 26 Ibid.

131

the south which is very important to China in order to protect its oil interests in the south . f . 27 In case 0 separatIon.

4.2.1. Chinese Interest in African Oil: China in its attempt to diversify the source of oil

procurement has launched all of its State-owned oil companies into the African upstream

arena. They are CNPC, CNOOC and Sinopec. Chinese oil majors are most active in

Sudan, Angola, Nigeria, Algeria and Gabon, with pre-investment talks ongoing in Chad,

Libya, and the Central African Republic (CAR). Among Asian oil firms in Africa, the

Chinese are the most dominant in terms of the number of companies investing and actual

production brought on-stream. China is the second major importer of African oil after the

US, relying on Africa for 25 per cent of its oil. The fact that one-quarter of its oil comes

from Africa says a great deal about the importance Beijing attaches to the continent and

its energy development. The CNPC's oil investments in Sudan are its largest global oil

operations.28

China has been undergoing a process of industrialization and is one of the fastest growing

economies in the world. With real gross domestic product (GDP) growing at a rate of 8-

10 per cent a year, China's need for energy is projected to increase by 150 per cent by

2020. To sustain its growth, China requires increasing amounts of oil. Its oil consumption

grows by 7.5 per cent per year, seven times faster than the U.S.' Growth in Chinese oil

consumption has accelerated mainly because of a large-scale transition away from

bicycles and mass transit toward private automobiles, more affordable since China's

admission to the World Trade Organisation (WTO). Consequently, by year 2010 China is

expected to have 90 times more cars than in 1990. With automobile numbers growing at

19 per cent a year, projections show that China could surpass the total number of cars in

the US by 2030. Another contributor to the sharp increase in automobile sales was the

very low price of gasoline in China. Chinese gasoline prices ranked among the lowest in

27 Ibid. 28 Yitzhak Shichor, op.cit.

132

the world for oil-importing countries, and were a third of retail prices in Europe and

Japan, where steep taxes are imposed to discourage gasoline use.29

China's ability to provide for its own needs is limited by the fact that its proven oil

reserves are small in relation to its consumption. At current production rates they are

likely to last for less than two decades. Though during the 1970s and 1980s China was a

net oil exporter, it became a net oil importer in 1993 and is growingly dependent on

foreign oiL China currently imports 32 per cent of its oil and is expected to double its

need for imported oil between now and 20 10. A report by the International Energy

Agency (lEA) predicted that by 2030, Chinese oil imports would equal imports by the

u.s. today. China's expectation of growing future dependence on oil imports has brought

it to acquire interests in exploration and production in places like Kazakhstan, Russia,

Venezuela, Sudan, West Africa, Iran, Saudi Arabia and Canada.3o

The quiet shift to net oil importer status in 1993 marked a forced departure from China's

three-decade experiment in self-sufficiency and a realisation that it became as vulnerable

as other industrial countries to unexpected events affecting global oil markets. The

concerns about oil security have increasingly influenced China's diplomatic and strategic

calculus. A second-tier power whose foreign concerns beyond nuclear issues were mainly

about defending its borders has become a global player with interests extending through

Eurasia to the West Asia and to North and West Africa. The quest for oil has taken

Beijing as far afield as Latin America. It has also affected its attitudes towards US foreign

policy.3J

The ever shrinking global oil supply, complicated energy politics and vulnerable supply

lanes, according to a noted scholar Swaran Singh, have 'securitised' energy for China.32

Meanwhile, debates on the ever 'widening' and 'deepening' of the understanding of

29 Gal Luft (10 July 2006), "Sudan's Khartoum refinery expanded sees gasoline exports, Fueling the dragon: China's race into the oil market", fA GS, http://www.iags.org/china.htm~. accessed on 15 June 2007. 30 Ibid. 31 Amy Myers Jaffe and Lewis Steven (Spring 2002), "Beijing's Oil Diplomacy", Sun'ivai, 44 (I), p.115. 32 Swaran Singh (June 2006), Impact of China's Energy Security, Seminar, Issue-S62, pp. 31-37, http://www.india-seminaLcornlsemsearch.htm .• accessed on 22 July 2007.

133

'security' in international relations have since evolved a new thesis where energy has

come to be increasingly securitised and energy flashpoints projected as the focus of

international politics.33 It is in this context that China's rise and its expanding energy

deficit have resulted in Beijing resorting to more aggressive procurement strategies and

tactics.34

As per China's Tenth Five Year Plan 2001-2005, by the year 2020, the country is

estimated to import about 500 million tons of oil and 100 billion cubic meter of gas to

cater to its growing domestic demand. Thus, the share of China's imports in its domestic

consumption of oil and gas will rise to 72 per cent and 50 per cent respectively of its total

consumption at that time. More conservative western estimates project China's energy

imports for 2020 at 30 per cent for gas and 60 per cent for oil. Especially in case of oil,

where the total world production by 2020 is likely to reach 4 billion tons per day and the

total share of available oil for exports will be 1.5 billion tons, China would have to

procure the bulk of international oil exports to cater to its domestic needs. Meanwhile,

global energy consumption is expected to rise by about 60 per cent by 2020. With an

expanding energy deficit, China will increasingly be drawn into fiercer global

competition for energy resources. It was following rapid economic development during

the 1980s and 1990s that China developed stakes in the global energy market. A first

indication of this new thinking was a major reorganisation of China's energy sector

during 1988.35

33 For details on issues of securitisation, Swaran Singh suggested to consult Barry Buzan and Ole Waever (2004), Regions and Powers: 17ze Structure of International Security, (Cambridge: Cambridge University Press); Barry Buzan (1991), People, State and Fear, (Boulder, Colorado: L ynee Rienner Publishers); Barry Buzan, Ole Waever and Jaap de Wielde (1998), Security: A New Frameworkfor Analysis, (London: Lynne Rienner Publishers). 34 Zha Daojiong (Spring 2006), "China's Energy Security: Domestic and International Issues", Survival, 48 (I), p. 179; Lyle Goldstein and Vitaly Kozyrev (Spring 2006), "China, Japan and the Scramble for Siberia", Survival, 48(1), p. 164; Joe Barnes and Amy Myers Jaffe (Spring 2006), "The Persian Gulf and the Geopolitics of Oil", Survival (IISS, London), 48(1), p. 155 .. 35 In 1988 China reorganised most of its state owned oil and gas assets into two vertically integrated firms -the CNPC and Sinopec. Both were regionally focused and while CNPC controlled much of north and west, Sinopec controlled much of south. Similarly, while CNPC controlled much of crude oil production Sinopec controlled much of refining. Much of the offshore production- which has become the new focus - came under the CNOOC. Later, China National Star Petroleum was created in 1997 and State Energy Administration was created in 2003 and it is responsible for all the regulatory oversight.

134

This reorientation of the energy sector was further hastened following China becoming a

net importer of oil from 1993. This was further exacerbated when China's domestic

production failed to keep pace with the qualitative change in its rising domestic

consumption.36 As a result, in addition to its domestic sector, China's energy security

strategy focused on its offshore energy assets, even promising joint development of

energy in its disputed maritime areas like the South China Sea. Since then, China became

an overdrive for leasing foreign gas and oilfields and acquiring stakes in foreign energy

establishments and joint ventures for ensuring energy supplies. It has also reoriented its -"

procurement to more reliable sources rather than depending on volatile and US-controlled

West Asian supplies through precarious Indian Ocean sea-lanes and Malacca Straits

choke points. As a result, the energy sector has emerged as an integral part of China's

overall maritime thinking and its naval assets form part of China's holistic vision on . 37 energy secunty.

China's conventional energy security strategies had focused on self-sufficiency in terms

of exploiting only domestic resources, emphasis on conservation and efficient use of

energy sources, and diversification of both the sources and sectors of energy to maintain

a reliable balance. By comparison, China's energy strategy focus from the early 1990s

has shifted towards 'cooperation' and 'engagement', inc1udingjoint development, foreign

direct investment (FDI) and technology transfers as well as other innovative approaches

towards alternative and renewable energy sources. Further, China has also experimented

with privatisation of its best performing firms in the energy sector. These were first

opened up for collaborations with major players in the field as also for stake holding with

the initial public offerings (IPOs) respectively during 2000 and 2002.38 This has since

36 Amy Jaffe and Steven Lewis, op.cit, p. 117; China's oil consumption doubled from 2.1 million barrel per day to 4.6 million barrel per day between 1990 and 2000; The future projections of China's oil demands for 202(} range from 6.4 million barrel per day to 10.1 million barrel per day. 37 Swaran Singh (February 1998), "China's Changing Maritime Strategy: Implications for the Indian Ocean Region", Journal of Indian Ocean Society, p.34 38 CNPC's high performing subsidiary- Petro China - had carried out IPO during early 2000 through both Hong Kong and New York stock exchanges and successfully raised over $3 billion with British Petroleum holding 20% of these. Since then several foreign players have been involved in China's oil and gas fields. Amongst those involved in Bohai and Pearl River Mouth offshore fields (which have implications for Indian Ocean) include Chevron Texaco from 1999, Philips Petroleum from 2000, Shell and Husky Oil from 2001 while Shell and Exxon Mobile have also been involved in pipelines projects.

135

become routine in China's energy sector. Indeed, signed after 12-years of negotiations in

year 2000, a $4.35 billion petrochemical deal between CNOOC and the Shell for

Huizhou (in Guangdong) remains China's single largest joint-venture and the world's

leading petrochemical project so far. 39

These collaborations are later criticised for having made China (i) increasingly dependent

on foreign suppliers, and on resources which are exhaustible, (ii) engage in serious

competition with other major oil and gas importing powers, a!}d (iii) be more concerned

with ensuring safety of supply lines, thereby multiplying its stakes in global stability,

security and order.4o China tried to engage with other major players in the global energy

market. In particular, China has focused on both inward as well as outward investments.

China's oil diplomacy has been marked by a new cooperative approach towards acquiring·

stakes in companies and oil fields overseas.41 China is believed to have even evolved or

accessed military facilities in some of oil rich States. Among the main 'target' of China's

military engagement includes countries like Myanmar, Bangladesh, Sri Lanka, Pakistan,

the Maldives, Iran, Tonga, South Africa, Tanzania and Sudan.

The Energy Information Administration (EIA) of the US Department of Energy, in the

country analysis report on China published in July 2004, mentioned that China was the

world's second largest consumer of petroleum products in 2003. The country moved into

39 'Shell Launches a Major Investment Project in China', The People's Daily, 7 August 2002. Also for regular official details on this see China's Petroleum Industry at http://www.vitrade.comlchinal chinanews_brieing_oil~industry.htm. CNOOC was set up in 1982 and currently has developed 19 offshore gas and oil fields. Its current subordinate companies include Bohai Sea Petroleum Corporation, the South China Sea Petroleum Corporation, the West Petroleum Corporation, the East China Sea Petroleum Corporation, over a dozen professional contract companies, and manufacturing entities and research centers and institutions. 40 Projections for 2020 amongst others are from conservative ones like Shixian Gao (2000), "China" in Paul B. Stares (ed.) Rethinking Energy Security in East Asia (Tokyo: Japan Center for International Exchange), pp. 43-58 or PRC State Council, China Energy Strategy Study 2000-2050, (Beijing, 2000) to highest projections, for example, from International Energy Agency (2000), China's Worldwide Quest for Energy Security, (Paris: OECD); And for figures for 1990-2000 see Petroleum Intelligence Weekly (July 30, 2001), "Asian Demand Flat, and May Get Worse", Petroleum Intelligence Weekly, 40 (31), p. 2. 41 Zhang Yirong (September 1997), "China Quickens its Pace of Overseas Operations", China Oil & Gas, 4 (3), p. 174; David B. Ottaway and Dan Morgan (26 December 1997), "China Pursues Ambitious Role in Oil Market", Washington Post, p. I; East European Energy Report (24 June 1997), "China Takes Control of Kazakhstan's Aktyubinsk", East European Energy Report, No. {)9, p. 16; Ahmed Rashid and Trish Saywell (26 February 1998), "Beijing Gusher, China Pays Hugely to Bag Energy Supplies Abroad", Far Eastern Economic Review, p.48.

136

second place -- overtaking Japan for the first time -- behind the US, with total demand of

5.56 million barrels per day. China's oil demand is projected by the EIA to reach 12.8

million bpd by 2025, with net imports of 9.4 million bpd, which will impact significantly

on world oil trends. As the source of around 40 per cent of global oil demand growth over

the past four years, Chinese demand for crude is already a key factor in world oil

markets.42

Analysts, such as Jakkie Cilliers of the Institute for Security Studies (ISS) in South

Africa, believe China is more likely to grant loans than make donations to African

countries which would push Chinese companies to the forefront in terms of oil sector

participation in Africa in the coming decade. African countries are likely to welcome

Chinese loans given that there are no political conditions attached to them. Cilliers stated

in an interview that his impression of China "is very much that politics follows economic

development" and that current "Chinese political and geo-strategic expansion is following

[China's} absolutely phenomenal economic growth.,,43

The potential for increased FDI in these African States, and the solutions they offer for

China's booming oil demand, makes· closer co-operation between the countries involved

inevitable. Yet, the Western Governments, security analysts and geostrategic energy

policy makers have become more worried about the burgeoning energy links between

Beijing and several African regimes. Trade between Africa and China had increased by

nearly 50 per cent in 2004 compared to 2003, which was significantly greater than the

growth in Chinese trade with any other area in the world over the same period. The

London-based Africa Confidential newsletter published fears that doing business with

China would make African Governments more corrupt. It added that China is paying with

large sums of advanced credit or loans for infrastructure development, making it more

42 US Department of Energy, Energy Information Administration (ElA), Country Analysis Brief, China, Oil, http://www.eia.doe.gov/emeu/cabs/China/Oil.html. accessed on 29 May 2004. 43 Cyril Widdershoven, "Chinese Quest for Crude Increases Focus on Africa", News Base Afroil Monitor, http://www.iags.org/nll15044.htm .• accessed on 5 May 2006.

137

difficult to ensure that oil revenues benefit the people of the countries that produce the

.1 44 01.

The equity ownership of foreign energy resources has become China's preferred method

for securing supplies for its booming domestic market. The political value of energy

security for Beijing - continued buoyant economic growth, job creation, wealth creation

and ultimately, social stability - means Chinese companies are generally prepared to pay

far more for oil and gas assets than Western companies, with their rigid focus on financial

returns. "Western international oil companies (IOCs) have been unable to compete with

the terms offered by some Chinese companies, which are prepared to risk investing in

loss-making propositions", said Thomas Pearmain, an analyst at Global Insight, a

consultancy firm. 45 The CNPC's deal is also closely linked to high-level diplomacy -

another significant advantage that State-owned companies have over their private-sector

counterparts. The phenomenon is evident across Africa.

The recent economic growth, a more sophisticated generation of Chinese leaders, better

scholarship in China on Africa, and a domestic population more confident in China as a

global actor have encouraged Beijing to take a more proactive approach to foreign affairs.

China's growing industries demand new energy and raw mat~rial suppliers; its exporters

want markets; its diplomats require support in international organisations; and its

propaganda still seeks support from allies to advance Chinese interests and, when

necessary, to counter the US. Africa has become central to these strategies. In part,

China's courtship of Africa is a resource grab. Rapid Chinese economic growth coupled

with dwindling domestic Chinese petroleum mineral deposits have encouraged Beijing to

lock abroad for resources. In year 1999, China became the world's second largest

consumer of petroleum products and its imports of natural gas, copper, cobalt, and other

key resources are rising by as much as 20 per cent annually.46

44 Ibid.

45Florence C. Fee (April 24 2006), '~sian Oils in Africa: A Challenge to the International Community (Part 1 of 2)", Middle East Economic SunJey, 49 (17), http://www.mees.comlpostedarticles/opedlv49n17-50DOl.htm., accessed on 25 May 2007. 4610shua Eisenman and 10shuaKurlantzick (May 2006), "China's Africa Strategy", Current History, 105 (691), pp.219-220.

l38

Within the next decade, China's domestic oil production is likely to continue

diminishing, and the country will surpass the US as the largest global consumer of oiL

And China possesses no significant strategic petroleum reserve. The search for resources

takes Chinese officials to commodity rich Africa, home to major oil producers, including

Nigeria, Sudan, Angola, and Gabon, as well as some of the richest deposits of minerals in

the world. China already imports about 28 per cent of its oil and gas from sub-Saharan

Africa, compared with about 15 per cent for the US, and it has made sizable copper

purchases in Zambia, the Democratic Republic of Congo (DRC), and other African

States.47

China's Africa strategy, however, goes beyond resources. As in other parts of the

developing world, Chinese businessmen are looking for new markets for their products.

According to Chinese Government reports, trade between China and Africa jumped over

35 per cent between November 2004 and 2005. China's efforts to win friends across

Africa also are aimed at safeguarding its interests in international forums and institutions,

such as the UN Commission on Human Rights. Africa is one of two parts of the world,

along with Latin America, with sizable numbers of States that still recognize Taiwan.

Taiwan's remaining allies are vital to preventing the island from becoming isolated

diplomatically, and Beijing clearly wants to reduce Taiwan's influence on the continent.48

In January 2000, Beijing released an official China-Africa policy white paper, a

document remarkable for the broad range of issues it covers. The white paper offered

some clues into Beijing's strategy in Africa. First, China has dramatically boosted its aid

and economic support to Africa. While China once focused on large buildings - sports

stadiums in Gambia and Sierra Leone, for example - it has increasingly used aid to

support infrastructure creation that then also helps Chinese companies, and to directly

woo African elites. In 2002, China gave $1.8 billion in development aid to its African

allies. China has also used debt relief to assist African nations, effectively turning loans

47 Ibid. 48 Ibid.

139

into grants. Since 2000, Beijing has taken significant steps to cancel the debt of 31

African countries. In 2000, China wrote off $ 1.2 billion in African debt; in 2003 it

forgave another $750 million. Debt relief has been an excellent public relations tool for

Beijing because it not only garners popular support but also allows for two positive pres

events: the first to provide the loan, the second to relieve the debt. 49

China's outreach also includes efforts to boost its soft power in Africa. This is evident in

a growing focus on promoting Chinese cultural and language studies on the continent and

on facilitating the studies of African students in China. On the trade front, Beijing has

enacted policies to encourage greater Chinese investment in Africa. As Chinese

investment in the continent has grown, some 80,000 migrant workers of China have

moved to Africa, creating· a new diaspora unlikely to return home; Many African

businesspeople believe that Chinese goods are unfairly undercutting them, and fear the

diaspora is remitting nearly all of its money back to China rather than reinvesting it into

local economies. so

Beijing has increasingly viewed Africa as a center for military cooperation and a market

for China's growing arms industry. Chinese firms rank among the top suppliers of

conventional arms in Africa. Between 1996 and 2003, Chinse arms sales to Amca were

second only to Russia's. In particular, China has developed very close military ties with

Zimbabwe, Sudan and Ethiopia, three of Africa's most strategically important States.

China has also gained access to sizable resources across the continent. It has been offered

exploration rights to important Nigerian oil fields. Beijing already; dominates Sudan's oil

industry and has the inside tr&ck to Angola's and Algeria's oil industries. More Chinese

companies, too, are proving successful in mining African markets. It is alleged that

Chinese firms, many of them owned by the Chinese State, submit bids below cost in an

effort to break into a market. 5 I

49 Ibid, p. 221. 50 Ibid, p. 221. 51 Ibid, pp. 222-224.

140

China is pursuing a decidedly bilateral approach to energy security, courting on its own

behalf major oil producers such as Saudi Arabia, Iraq, Iran and the Sudan. Beijing

already has proof of the benefits of defying US sanctions policies. China's oil industry is

reaping the spoils in Sudan, has planted its flag in Iraq and Iran, and is considering

overtures to Libya. It is also courting other potentially unstable oil-producing countries in

North and West Africa. Beijing's oil-diplomacy agenda also includes stronger ties with

Saudi Arabia, potentially offering the Saudis an expanding alternative market to the US

and Japan. As China develops thee bilateral ties and its dependence on foreign oil grows,

Beijing will become increasingly vulnerable to pressure from these energy producers,

including those seeking sensitive military technology. At a minimum, some oil-producing

Governments will be shopping for light arms for regional conflicts or civil wars.

Throughout the 1970s and 1980s, China had the luxury of neutrality towards dramatic

events in world oil markets. Oil prices inside China were fixed by the State's central

planners and had no relation to world prices. Internal supplies were fairly evenly matched

with domestic requirements. With the Chinese economy sheltered from global oil-price

volatility, the country's leaders could be indifferent to conflicts in the Middle East or

other oil-producing regions. Although model oil exports earned Beijing valuable foreign

exchange for its economic and military modernization programmes in the mid-1970s,

energy-market disruptions neither hurt nor helped China substantially. In line with

remarkable economic progress, China's oil demand has grown faster than its domestic oil

production. In the last decade, oil consumption rose from 2.1 million barrels a day in

1990 to 3.5 million barrels a day in 1997 and about 4.6 million barrels a day in 2001.52

China's now ranks third in the world for oil-products use, after the US atld Japan. This

growth has transformed China into a major oil importer. In the first six months of 2001,

crude oil imports stood at 1.29 million barrels a day, down slightly from lAI million

barrels a day in 2000. The net refined product imports have averaged around 400, 000

barrels a day, not including an additional 70,000 barrels a day to 100,000 barrels a day of

52 Petroleum Intelligence Weekly (30 July 2001), "Asian Demand Flat, and May Get Worse", Petroleum Intelligence Weekly, p.2.

141

smuggled gas oil, fuel oil and other oil-related products. These imports are expected more

than double over the next 15 years as China's domestic demand rises-particularly for the

economically vibrant but energy-poor southern and eastern costal provinces - and its

domestic oil production has failed to keep pace. Depending on its rate of economic

growth, China's oil use is projected to increase by between 750,000 barrels a day and 3

million barrels a day, totaling between 5.4 million barrels a day to 7.6 million barrels a

day by 2010. By 2020, if strong economic growth continues, China's oil demand could

be s high as 7-12 million barrels a day. 53

Should China's oil production levels remain relatively stagnant, as has been the case for

several years, China's oil import levels would grow to between 2-4 million barrels a day

over the next ten years. If oil use in the transportation sector rises from the current 60-90

per cent of the total, as is more customary in industrialised countries, Chinese oil demand

in 2010 could be even higher at between 6.3-8 million barrels a day, and depending on

GOP growth rates, between 11.4-17.9 million barrels a day in 2020.54

As seen in Table- 4.1, China had met its rapidly growing oil import needs in the 1990s

by shifting from Asian sources to a few West Asian countries-particularly Oman, Yemen

and Iran - and, increasingly, to Africa, Russia and Central Asia.

1992 Oman 61.2 Yemen 8.6 Iran 2.2 UAE 4.6 Saudi Arabia 3.6

Table- 4.1

China: Crude Oil Imports

(Thousands of barrels per day)

1993 1994 1995 1996 81.6 67.2 73.0 113.0 33.0 25.0 49.4 75.2

1.3 1.3 18.6 46.2 11.4 1.3 7.2 N/A 4.2 2.8 6.6 4.6

1997 1998 1999 180.6 115.8 100.4 81.0 80.8 82.6 55.0 72.4 79.0

0.9 10.2 NIL 9.8 36.0 49.8

53 Ronald Soligo and Amy Jaff (April 1999), "China's Growing Energy Dependence: The Costs and Policy Implications of Supply Alternatives", Working Paper, {Houston: Baker Institute for Public Policy, Rice University),http;//www.bakerinstitute.org., accessed on 24 April 2006. 54 Ibid.

142

West Asia 80.6 131.8 98.0 155.2 239.2 335.6 333.2 348.2 Total 36% 42% 40% 45% 53% 47% 61% 48% West Asia (per cent) Africa 10.0 42.6 10.0 36.8 38.6 118.2 43.8· 134.8 Total 4% 14% 4% 11% 9% 17% 8% 18% Africa (per cent) Asia-Pacific 134.2 130.6 136.8 141.6 164.4 188.2 109.4 136.4 Total 59% 42% 55% 41% 36% 27% 20% 19% Asia-Pacific (per cent) Other 2.2 8.2 1.8 8.0 10.2 67.4 60.0 112.8 Other 1% 3% 1% 2% 2% 10% 11% 15% (per cent) Total 227.2 313.4 247.0 341.8 452.4 709.4 546.4 732.2

1992 1993 1994 1995 1996 1997 1998 1999

Source: Derived from Chinese customs data used in Xiaojie Xu, "China and the Middle

East: Cross Investment in the Energy Sector", Middle East Policy, Vol. 7, No.3, June

2000, and converted at 7.3 barrels per tonnes.

One of Beijing's strategies to reduce China's oil-supply insecurity has been is a move to

internationalise the Chinese oil industry. Starting in 1996, the Government unveiled a

plan to attain around a third of its energy needs through international exploration and

acquisition activities. 55 Although oil import levels were still low at that time, -a sudden

surplus of cash within the CNPC budget in 1996 created an impetus to invest promptly -

lest the funds be diverted elsewhere. In line with a new Government directive to acquire

productive acreage abroad, in 1996-1997 CNPC quickly initiated investments in

international oil fields in such locations as the Sudan, Venezuela, Kazakhstan, and Peru,

four places that were offering areas for oil exploration and where CNPC stood a good

chance of winning acreage quickly. CNOOC had used the same strategy in early 2002,

buying the Widuri and Cinta fields in Indonesia from Repsol-YPF for $ 585 million and

55 Petroleum Intelligence Weekly (9 June 1997), "China's Cl'.'PC Leaps on to Global Oil Production Stage", Petroleum Intelligence Weekly, p.3.

143

thereby adding 100,000 barrels a day of light crude oil that could quickly be processed

through China's existing refinery capacity. 56

Chinese oil-industry sources complained that CNPC's legal and financial inexperience

made it difficult to compete with the major international oil comprises to gain oil­

exploration rights in promising areas. Foreign-policy analyst Yishan Xia put it in rather

traditional terms: "Western monopoly capital, with the support and assistance of their

governments, has scrambled and seized the main oil and gas resource markets in all parts

of the world. Almost all good resources markets in the world have been occupied and

possessed by them. There is intense competition among different groups of Western

monopoly capital. All of them will certainly try even harder to impede Chinese

companies from obtaining these oil resources".57

The answer, according to Chinese strategists, was to focus China's international

exploration drive on countries where Western, predominantly US, firms could not so

easily get in the way. Countries under US unilateral oil sanctions therefore became prime

Chinese investment targets. CNPC officials said while the initial focus centered on

purchases and cooperative ventures in some 16 countries, most notably Kazakhstan and

Russia, other initiatives were being considered in Sudan, Libya and West Africa.58 As

well as avoiding US competition, this shift in focus also aimed at acquiring resources of

suitable quality for refining in China's own facilities, without the need for expensive

refinery investments. China entered the oil industry in Sudan, and expanded its activities

elsewhere in Africa, including Nigeria and Chad. CNPC also started looking at acreage in

Niger, Equatorial Guinea, Algeria, Tunisia and Libya.59

China's emergence as a global economic powerhouse has caused the world economy to

become more oil intensive. This rise represents a marked break with the post-1974 years

56Erica Strecker Downs (2000), China's Quest for Energy Securily,(Santa Monica, CA : RAND), p.14; Petroleum Intelligence Weekly (28 January 2002), "Chinese Energy Majors in Long March Upstream", Petroleum Intelligence Week~v, p.3. 57 Yishan Xia (10 August 2001), "My View on China's Energy Situation and Energy Strategy", People's Daily, p.7. 58 Xinhua (31 January 1997), "China Wins Sudan Oil Fields Project Bid", Xinhua. 59 Amy Jaffe, op.cit, p.I27.

144

(through the mid-1990s) when higher energy prices fostered higher energy efficiency,

technological change, and diversification of supply, helping to decouple global economic

growth from fuel consumption. Whether the recent relinking of economic growth to

rising oil intensity is the beginning of a new trend led by China or represents just a

temporary phenomenon is one of the key uncertainties for the global energy markets

going forward. 6O

The energy policy has moved to center stage of the Chinese authorities' policy agenda

and become a key component of China's foreign policy_ China faces enormous

challenges, not least of which is policy setting, where responsibility is split among

various commissions that confront powerfully entrenched industrial and local

government interests. In addition, energy policy is complicated by its overlap with

geopolitical and considerations social, industrial, and local-central Government

relations.61

China's rapid integration into the world economy is beginning to be felt far beyond the

rising market penetration of Chinese exports. As the economics editor of The Economist,

Pam Woodall, noted, "Global wages, prices, profits, interest rates and even house prices

are increasingly 'made in China".62 However, nowhere is China's global influence

greater than in the energy markets. This applies especially to China's insatiable thirst for

crude oil, which has more than doubled since the mid-l 990s. Today, the Chinese

economy is the world's second largest consumer of crude, and with domestic production

stagnating, its rising import demand is widely seen as a key factor behind the recent surge

in global oil prices. The transportation sector accounts for nearly one-third of China's oil

consumption, up from less than 20 per cent just ten years ago and today by far the most

. important demand factor, as illustrated in the Table - 4.2 in the next page.

60 Peter Cornelius and Jonathan Story (Winter 2007), "China and Global Energy Markets", Orbis. 51 (I), p.6. 61 Ibid. 62 Pam Woodall (2006), "From T-Shirts to T-Bonds", Business Economist. 37 (I), p. 7.

145

Transportation

Utilities

Manufacturing

Chemicals

Mining

Agriculture

Construction

Others

Table-4.2

China: Oil Consumption by Sector

(Per cent age)

1995 2000 2003

19 26 29

9 6 6

17 12 11

14 14 13

15 18 18

8 7 7

1 1 2

17 16 . 14

Sources: UBS Economic Research

2004 2005

30 29

7 5

11 11

13 15

19 19

6 6

2 2

12 13

The efforts for exploring and producing new domestic oil reserves are getting redoubled

under Chin's 11th Five-Year Plan (2006-11). This plan builds upon earlier reforms that

started in the late 1990s with the formation of three big oil companies and their

subsequent listing. In sales, the most important is Sinopec, an integrated oil company,

which is geared towards downstream oil and chemicals. Its valuation is sensitive to

refining margins, in contrast to CNOOC, a pure exploration and production company

with no exposure to refining or chemicals. Petro China is an integrated oil company, with

a considerable focus on upstream E&P and sizeable downstream assets. Foreign

participation is encouraged in particularly challenging areas where advanced technologies

can playa critical role.63

While China's near-doubling of oil consumption over the last ten years has no doubt

played a critical role in driving up oil prices, it is by no means the only factor. There are a

number of supply side factors: persisting geopolitical uncertainties in major producing

63 Peter Cornelius, op.cit, p. 9.

146

regions, war in Iraq and repeaied social unrest in key OPEC member countries such as

Venezuela and Nigeria. The most fundamental factor, however, lies in the substantial

underinvestment in the global energy infrastructure and in exploration and production in

recent years. When oil prices declined to the low teens in the late 1990s, energy

companies saw little incentive to expand capacity and instead cut capital expenditure.64

From a global standpoint, the required investments appear manageable. But investment

challenge is much tougher to meet for certain regions. Huge investment needs exist, for

example, in Africa and West Asia, with their estimated requirements being around eight

times higher, as a proportion of GDP, than those in the OECD area. The relatively largest

challenge, however, exists in Russia where investment needs in the energy sector total

around $1 trillion over the next 25 years. Around one-third of this amount is needed in

the oil sector, implying a significant increase in investment just to maintain current

production levels. More than one-third of the world's reserves of oil is entirely closed to

FDI, and access to another 22 per cent is severely limited. As a result, the international

oil companies have found it increasingly challenging to replenish their reserves, and with

some resource-holding countries tightening foreign investment further, the competitive

landscape in the global energy markets is subject to fundamental changes.65

The policy mix in China has been to go slow on domestic energy market reform and to

seem to act tough abroad. Armed with foreign exchange reserves approaching $1 billion,

China has the option of paying whatever it takes to secure the energy resources it needs to

fuel economic growth as a cornerstone for social stability. China has used its growing

financial strength to diversify its energy supplies. Rising shares of China's oil imports

have come from, beside other regions, African countries such as Angola, Sudan, and

Congo.66

China emerged from its civil war in 1949 with ambitions of rapid industrialization and

modernization, but a very low base of oil production. In 1959 China's crude oil

64 Ibid, p.13. 65 Ibid, p. ]4. 66 Ibid, pp.15-] 6.

147

production stood at 3.73 million tones, and it was only in 1963 that it ended a century of

dependence on imported oil and oil products. In that year, the Daqing oil filed in

northeast China produced 4.3 million tones of crude, making up the bulk of the 6.48

million tones of nationally produced oil. 67

The country was self-sufficient in energy from the 1950s to the early 1970s. But its

relations with other States prevented that self-sufficiency from serving the goal of

economic and social development. Soviet-supplied oil and technological assistance for

developing the Chinese oil industry were critical for achieving self-sufficiency. With the

termination of the Soviet aid prgoramme in July 1960, Beijing found itself devoting much

of its energy resources to preparing for war with a major power. In addition, a US-led

embargo lasted from 1950 to the Sino-American rapproachement in 1971. For two

decades, China thus had energy self-sufficiency under strained international

circumstances. By the mid-1970s, the economy was on the verge of collapse. China had

energy self-sufficiency but not energy security.68

The improvements in China's international relations in the early 1970s led to an

expansion of the Chinese economy. China lost self-sufficiency in energy but gained

improvement in energy security. Energy, particularly oil and coal, became a primary

export commodity, in exchange for industrial plant and technology from developed

countries. Indeed, oil and coal served a valuable strategic purpose for Beijing, helping

renew links with the world's industrialised economies. China also took advantage of the

first international oil crisis in 1973 by exporting crude oil to Thailand, the Philippines and

other Asian countries to help cultivate a favourable regional environment for

modernisation.69 From 1973 to 2004, China exported crude oil to Japan, according to

negotiated annual quotas, earning the hard currency needed to import the necessary

equipment and technology to develop an export oriented economy, which in tum proved

critical for developing Chinese society_

67 Zha Daojiong (Spring 2006), "China's Energy Security: Domestic and International Issues", Sun1ival, 48 (1), p. 179. 68 Ibid, p.180. 69 ADoak Barnett, China's Economy in Global Perspective (Washington DC: The Brookings Institution, 1981), p.461.

148

In 1985 China's crude oil exports peaked, reaching 30 million tones, before slower

growth in domestic production and growing domestic demand led to a decline. China

began to import crude oil from Oman in 1983, originally as a temporary measure for

dealing with problems in transporting crude from northern China to refineries along with

problems in transporting crude from northern China to refineries along the upper

stretches of the Yangtze River. In 1988, due to increased demand, Chinese imports of

crude and processed fuels began to rise rapidly. In 1933 China became a net importer of

oil products, and in 1996 it became a net importer of crude. 70

Chinese concern about oil supply security increased in 2000, when oil import figures

almost doubled from 36.6 million to 70.2 million tones. The dramatic rise had several

causes. Domestic crude production was insufficient for consumption. China's refining ,

capacity had significantly improved, making it possible to import more types of oil for

refining. In June 2000, China began to reform its pricing system for processed fuel by

pegging the domestic sale price to the Singapore commodity-futures market, leading to

four separate increases in domestic oil prices within six months, and encouraging Chinese

refineries to increase imports amidst concerns about supply interruptions worldwide.71

Chinese oil companies began 'going abroad', acquiring concession rights in foreign oil

fields, in 1993, when a subsidiary of CNPC bought the Talara Block in Peru for $ 25

million. Since then, Chinese oil companies, principally CNPC, have entered into an array

of oversees oil investments. China's reliance on imported energy has compelled it to

spread its economic and diplomatic presence to whether there is spare supply, raising the

question of how China and the major industrialised countries can coexist in the field of

energy diplomacy. The search for overseas oil supplies has led Beijing to pursue close

diplomatic ties with Iran, Sudan, Uzbekistan and Venezuela - all countries that allegedly

70 Zha Daojiong, op.cit, p.180. 71 Ibid.

149

pursue 'questionable' domestic policies and, in many cases, foreign policies contrary to

American and European interests or preferences.72

There is a high profile business competition between Chinese and international oil

corporations for access to oil fields. The clash of business interests becomes political

when an international oil major seeks political assistance from its home Government. For

instance, CNOOC's competition with Chevron-Texaco for Uno cal was a case that could

have long-term geopolitical ramifications for Sino-American relations.73 CNOOC had to

give up its bidding, while Chevron-Texaco was able to acquire Unocal on business terms

inferior to CNOOC's offer. The results was widely interpreted in China as representing

an America that bends over backwards to deny Chinese access to energy resources, which

might serve as justification for ignoring US attempts at dissuading China from engaging

'rogue States' for energy.74

As part of its attempt to acquire new oil fields, China has worked hard to improve its ties

with Africa,75 with frequent visits by top Chinese leaders, increasing the Chinese profile

in UN peacekeeping operations, launching a cooperation forum, and offering debt

reduction to African States. China's differences with the US in the UN over how to deal

with the atrocities in Darfur led to media speculation that Beijing was 'staking a claim' to

Africa, especially the countries around the oil-rich Gulf of Guinea basin, before America

gained a stronger foothold in the region.76 More broadly, though, the contention reflects

long-running Sino-American differences over the use of economic sanctions as a

diplomatic instrument, China does need to face the challenge of addressing domestic

I·· . S d 77 po lCles III u an.

72 Ibid, pp. 180-182. 73 Bernard Wysocki, Jr and Jacob M. Schlesinger (27 June 2005), "For U.S., China is a Replay of Japan; Washington sees Parallels to '80s Battles with Tokyo, But Oil Changes the Stakes'," Wall Street Journal, p. A.2. 74 Zha Daojiong, op.cit, p.184. 75 Chris Alden (Autumn 2005,), "China in Africa", Survival, 47 ( 3), pp. 147-164. 76 Karby Leggett (29 March 2005), "Staking a Claim: China Flexes Economic Muscle Throughout Burgeoning Africa; Beijing Forges Deep Alliances with War-Tom Nations, Countering U.S. Influence A Dam Gets Built on the Nile;" Wall Street Journal, p. AI. 77 Zha Daojiong, op.cit, p.185~

150

As a consumer country, China does not really have much of a chuice in its sources of

supply. With Chinese oil companies on a learning curve as they interact with

international oil majors in the West Asia, Central Asia and Africa, contention between

Beijing and the US along with its allies over the pursuit of energy supplies can be

expected to last for some time.78

China has over the years established itself as an increasingly influential player across

African continent. Given the impressive scale and scope of its engagement, China's

return to Africa may tum out to be one of the most significant developments for the

region in recent years.79 Although an emerging economic superpower, China continues to

portray itself as a developing nation, at least to African audiences, to underline the quasi­

natural convergence of interests between, in Jiang Zemin's word, China, 'the biggest

developing country and Africa, the continent with the largest number of developing

countries,.80 At the same time Beijing acknowledges its superior international standing

and uses its permanent seat in the UN Security Council to position itself as a mentor of

African countries.

China undertakes a wide range of activities in Africa. The economic transactions infact

provide the most powerful evidence of China's increasing interests in the continent. Of

the 40 bilateral investment agreements China entered into between 1995 and 2{)03, 18

were established with African countries.81

The enhanced Chinese economic interest in Africa is also reflected in the fact that some

700 Chinese enterprises with a total investment of about $1.5 billion are currently

operating in Africa.82 Due first to its large and cheap labour force and second to the acute

poverty in vast parts of Africa, China offers low-price export goods such as textile and

clothing, electronic devices and machines. Chinese imports from Africa have grown even

78 Ibid. 79 Denis M. Tull (2006), "China's engagement in Africa: scope, significance and consequel1ces", Journal of Modem African Studies, 44 (3), p.459. 80 People's Daily, II October 2000. 81 United Nations Conference on Trade and Development (2004). World Investment Repon 2004, (Geneva: UNCTAD), pp. 26- 39. 82Beijing Times.

151

faster. In comparison to the primarily commercial objectives of its export trade with

Africa, the strategic value of China's imports from the continent stands out. It is driven

by Beijing's need to secure natural resources to sustain its economic boom at home.83

Africa's resource-rich countries are in a position to provide an ample per cent age of

China's requirements. There is little doubt that natural resources are at the core of

China's economic interests in Africa - or perhaps even its overall interest in the

continent. In Africa, nine of its ten mo~t imp.9rtant trading partners are resource-rich

countries. Remarkably, the list even includes emerging oil producer Chad, one of the few

African countries to recognise Taiwan. It is probably no coincidence that Beijing's rising

interest in Africa comes at a time when sizeable new discoveries of oil have been made

on the continent, particularly in the Gulf of Guinea. Africa's contribution to China's oil

imports is already significant. In 2004, Africa's share of Chinese overall oil imports

reached 28.7 per cent.84

By offering their African counterparts a mix of political and economic incentives, the

Chinese Government is successfully driving home the message that increased Sino­

African cooperation will inevitably result in a 'win-win situation' for both sides. The

'non-intrusive' China also presents an attractive partner for African Governments. The

wholesale failure of economic refonns like Structural Adjustment Programmes (SAPs) in

certain African countries, in Beijing's view, have but continned its analysis that the

patchy record of western-driven refonn efforts in Africa would inadvertently facilitate

Chinese advances on the continent.

Beijing can count on valuable diplomatic support from African Governments to defend

its interest at the international level, particularly in multilateral organisations with 'one

country - one vote' arrangements. In the UN Commission on Human Rights, for instance,

African countries have frequently played a prominent role in frustrating Western efforts

83 D 'd Z' . aVI welg, Op.Clt.

84 Dow Jones Newswire, I January 2005.

152

to bring about a formal condemnation of China's human rig.l}ts record.85 Diplomatic

backing by African States pertains to the recognition of the principle of 'One China' and

the pursuit of the concept of a multipolar world.86

Chinese companies have adopted their strategies while pursuing African markets. They

appear to be significantly less risk-averse than their Western counterparts, especially in

war-tom States such as Angola, DRC and Sierra Leone. Due to their willingness to take

significant risks, Chinese firms are able to derive huge profit from rates of return on

foreign direct investment, in politically volatile sub-Saharan Africa than in other parts of

the developing world.87 The success of Chinese business in Africa may also relate to their

focus on specific sectors. China has become a major player in the field of infrastructure,

including roads, railways, dams, power plants etc. This has enabled China to gain

political influence, which often opens the doors to commercially or strategically more

attractive businesses in other sectors, e.g. to win tenders for oil and mining concessions.88

China has targeted African States suffering from Western-imposed sanctions. Since

Western States are still by far the most important trading partners of African states,

Western sanctions de/acto tum these countries into 'niche markets'. Having no legal or

political obligation to abide by Western-imposed sanctions, China can position itself as

an alternative partner of 'pariah states'. China has adopted this 'free-riding' strategy in

Zimbabwe and Sudan.89

4.3. Sudan's Partnership with Malaysia: The State owned Malaysian oil major,

Petronas, is a significant player in Sudan's oil industry. It is Malaysia's largest

corporation, conducting both upstream and downstream operation in the oil and gas

industry at home and abroad. Similar to CNPC, Petronas holds extensive interests in

8S International Herald Tribune, 15 May 2002. 86 Denis Tull, op.cit, p. 467. 87 United Nations Office on Drugs and Crime (2005), Why Fighting Crime Can Assist Development in Africa. (Vienna: UNODC), p. 78. 88 For the example of Ethiopia see The Wall Street Journal. 29 March 2005; on Cameroon, see Tribune, 30 May200S. 89 Denis Tull, op.cit, p. 468.

153

Sudan.9o The oil firm originally became involved in the country in 1997 when the Sudan

Government awarded it a 30 per cent stake in the GNPOC. The OGP Technical Services

Sdn Bhd, a 60 per cent subsidiary of Petronas, was awarded the management consultancy

services contract for a major pipeline project under the Crude Oil Pipeline Agreement

(COPA) that was signed with Sudan Government on March 1, 1997.91 Petronas had

meanwhile owned a 28.5 per cent interest of the Lundin Petroleum operated Block SA,

before it purchased the Swedish firm's share in 2003.92

Petronas was also awarded exploration and production rights to Block 5B in 2002,93 and

holds interests in Blocks 3, 7, 8 and 15. Petronas is also in the retail business in Sudan

through acquiring service stations and petroleum deports from Mobil Oil Sudan

Limited.94 Altogether, the company markets petrol, gas oil, fuel oil, Jet A-I, and

lubricants in the country.95 In 2005, the company negotiated with the Sudan Government

to build an additional oil refinery in Sudan.96 Along with its Asian counterparts, Petronas

operates an extensive and growing amount of activities in Sudan.97

The Malaysian oil major's interest partners in Blocks 1, 2 and 4 are CNPC, Oil and

Natural Gas Corporation (ONGC) and Sudapet. The production started in June 1999.

Interest Partners in Block SA are OMV and Sudapet, which undertake exploration and

development. Interest Partners in Block 5B are Lundin Petroleum, OMV and SUdapet

undertaking exploration. Interest Partners in Blocks 3 & 7 are CNPC, Sudapet, Gulf

Petroleum Corporation (GPC) and AI-Thani, which undertake exploration and

development through the joint venture company, Petrodar Operating Company (PDOC).

90 Luke Patey, op.cit, p. 38. 91 Petronas (15 May 1998), Corporate Affairs, Khartoum, "Prime Minister Opens Petronas Office and Launches Petronas Operations in Sudan", http://www.petronas.com.mv/internetlcorp/centralrep2.nsf7frameset news?OpenFrameset., accessed on 2 June 2005. 97 -Petronas (2004), Annual Report, p. 48, http://www.petronas.com. accessed on 2 June 2005.

93 Petronas (2002), Annual Report, p. 46, http://www.petronas.com. accessed on 2 June 2005. 94 Petronas (2003), Annual Report, p.26, http://www.petronas.com. accessed on 2 June 2005. 95 America's Intelligence Wire (30 August 2003), "Petronas enters Sudan retail scene with opening of petrol station". 96Reuters (14 June 2005), "Sudan aims for July deal with Petronas on refinery." 97 Luke Patey, op.cit,

154

Interest Partners in Blocks 8 are Sudapet and Hi-Tech Group, which undertake

exploration through a joint operatorship by Petronas and Sudapet.98

Petronas purchased Lundin Petroleum's 40.375 per cent participating interest in Block SA

in 2003 at the cost of$142.5 million. Its interest in the block consequently increased from

28.5 per cent to 68.875 per cent, while OMV maintained its share of26.125 per cent and

Sudapet, 5 per cent. The block is located within the Thar Jath field, measuring 54 square

kilometres, in the prolific Muglad Basin 900 kilometres south of Khartoum. It is adjacent

to and south east of Blocks 1, 2 and 4. The block contained the estimated oil reserves of

149.1 million barrels.99

The crude oil production was started in June 2006 from the Block 5A, operated by White

Nile Petroleum Operating Company (WINPOC), which is currently a partnership

between Petronas, ONGC and Sudapet. \00 The block's development involves the setting •

up of new infrastructure to store, treat and transport the oil, and linking this infrastructure

to the existing facilities currently owned and operated by GNPOC. To mark the first oil, a

ceremony was organised in Khartoum on 26 June in 2006, which was attended by more

than 500 guests, including Sudan's Minister of Energy and Mining Dr. Awad Ahmed AI­

Jaz, Minister of Transport Eng. Khual Maniang, State Minister of the Presidential Palace

Telary Daeng and Chairman of Energy Committee, Husien Momiot. Other guests

included Malaysian Ambassador to Sudan Dato' Mohd. Zamri Mohd. Kassim and

Chairman of Pet ron as Sudan Encik Hashim Wahir. )01

98 Petronas, http://www.petronas.com.my/intemet/corp/centralrep2.ns£lframeset_corp? Open Frameset., accessed on 2 April 2006. 99 Petronas (28 April 2003), Media Relations & Information Department, "Petronas purchases Lundin Petroleum's interest in Sudan's Block 5A", http://www.petronas.com.my/intemet/corp/centralrep2.ns£lframeset news?OpenFrameset, accessed on 2 April 2006. 100 Petronas has a stake of 68.875 per cent, ONGC of 24.125 per cent and Sudapet of 7 per cent; ONGC has replaced OMV in Block SA. IOlpetronas (June 28 2006), "Petronas Starts Production from Block 5A in Sudan", http://www.petronas.com.mY/intemet/corp/news.ns£l24FOl A9E 1040218948256ABF00275C65/4 74698.2B2 36252AC4825719B003CB6FE?OpenDocument, accessed on 2 April 2006.

155

Petronas was in August 2003 awarded exploration rights over Block 8 with the signing of

the EPSA for the block. The onshore Block 8 covers an area of 65,856 square kilometres

within the Blue Nile Basin, northeast of Sudan's highly prolific Melut Basin. Petronas

has a 77 per cent interest in the block, while the remaining equity is shared between

Sudapet with 15 per cent and Hi- Tech Group with 8 per cent interests. Petronas and

Sudapet jointly operate the block. 102

The Malaysian oil firm was in August 2005 awarded exploration right over Block 15 with

the signing of the EPSA for the block, the first gas EPSA in Sudan. The signing

ceremony, held in Khartoum in conjunction with the sixth anniversary celebrations of

Sudan's Petroleum Day, was officiated by Sudan's Minister of Energy and Mining Dr

Awad Ahmed EI-Jaz. Also present was Petronas President and Chief Executive Officer

Tan Sri Dato Sri Mohd Hassan Marican. Officials from relevant Government departments

and the Malaysian Embassy, as well as Petronas' business partners attended the

ceremony. The EPSA marked Petronas' entry into the offshore operation in the country,

after being active in the onshore exploration since 1997.103

Block 15 covers an area of 28,655 square kilometers within the Red Sea Basin and about

half of the acreage is located in deep waters between 300 to 800 meter water depths.

Petronas has a 35 per cent interest in the block, while the remaining equity was shared

between CNPC with 35 per cent, Sudapet with 15 per cent, Express Petroleum with 10

per cent and Hi- Tech Group with 5 per cent interests. Petronas, CNPC and Sudapet

jointly operate the block. Petronas and its partners are committed to acquire a minimum

of 3,500 line kilometer of 2 dimensional seismic and 500 square kilometer of 3

dimensional seismic and to drill five wildcat wells with total minimum expenditure of $

58 million in three commitment periods over 6 years. Block 15 is known to be gas prone.

With the award of the Block, Sudan aimed at realising its first integrated gas project.

102 Petronas (29 August 2003), Media Relations & Infonnation Department,

http://www.petronas.com.mv/internetlcorp/centralrep2.nsflframeset_news?OpenFrameset, accessed on 2 June 2006.

103 Petronas (30 August 2005), Media Relations Department, "Petronas awarded first offshore block in Sudan", http://www.petronas.com.mylinternetlcorp/centralrep2.nsflframeset news?openframeset, accessed on 2 June 2006.

156

Under that contract, the investors were given the right to sell the discovered gas jointly

with the Government and the opportunity to jointly invest in the potential downstream

gas, power and petrochemical projects. 104

Petronas enhanced and strengthened its presence in Sudan by entering into the

downstream refining business, reinforcing its commitment to provide a mutually

beneficial contribution to the development of Sudan's petroleum industry. The company

on August 29, 2005 concluded its participation in the new Port Sudan Refinery Project,

officially expanding its entry into the downstream business in the country following its

acquisition of the entire retail assets of Mobil Oil Sudan Limited through its wholly

owned subsidiary Petronas Marketing Sudan Limited (PMSL) in March 2003. An

agreement signing ceremony was held in Khartoum in conjunction with the sixth

anniversary celebrations of Sudan's Petroleum Day. The ceremony was officiated by

Sudan's Minister of Energy and Mining Dr Awad Ahmed EI-Jaz and Minister of Finance

and National Economy Mohammed Hassan EI-Zubair. Also present was Petronas

President and Chief Executive Officer (CEO) Tan Sri Dato Sri Mohd Hassan Marican.

Officials from relevant Government Departments and the Malaysian Embassy, as well as

Petronas' business partners attended the ceremony. lOS

The new Port Sudan Refinery project, located at Port Sudan, is the only entry port in the

country. It is a high technology complex refinery with a total capacity of 100,000 barrels

per day. It is an export refinery designed to process high acid crude that would add value

to the Dar Blend from Sudan Melut Basin Blocks 3&7 where Petronas has a 40 per cent

equity interest. The production would meet the growing demand of petroleum products in

Sudan and neighbourillg countries under the Common Market of East and South Africa

(COMESA) after being fully operational by early 2009. This state of the art refinery

would produce high quality petroleum products meeting Euro 4 specifications. Petronas

104 Ibid.

lOS Petronas (30 August 2005), Media Relations Department, "Petronas steps up petroleum investments in Sudan", http://www.petronas.com.my/intemet/corp/centralrep2.nsflframeset news?OpenFrameset, accessed on 2 July 2006.

157

International Corporation Limited, a wholly-owned Petronas subsidiary, has a 50 per cent . .

interest in the refinery project while the remaining 50 per cent equity is held by the

MEM. Both Petronas and the Ministry would jointly invest, develop and operate the

export refinery. Petronas' entry into Sudan's refining business is testimony to the oil

major's long term commitment to the development of the petroleum industry in Sudan.106

As part of its commitment to share its experience and expertise with Sudan, Petronas had

signed an agreement on cooperation and technical assistance with the MEM on May 22,

1997. The agreement covered the cooperation on upstream and downstream studies, the

development of training programmes and the establishment of a training center and

laboratory facilities for the Ministry as well as the enhancement of Sudanese capabilities

in managing its petroleum operations. Petronas' subsidiaries, Petronas Management

Training Sdn Bhd and Petronas Research and Scientific Services Sdn Bhd, were to assist

in these undertakings. 107

The operations of Petronas in Sudan are very much an extension of the Malaysian

Government's foreign and economic policy. The relationship between Sudan and

Malaysia is based on trust that has been developed between the two Governments over

the years. There has been notable economic transaction, and Malaysia has displayed a

willingness to invest in Sudan much the same way China has. It should also be noted that

Sudan's Islamic banks have been heavily involved in Malaysia since the NIF took power.

Malaysia's commitment to the Sudan Government was clearly displayed in 1997 when it

paid $500 million to the International Monetary Fund (lMF) on behalf of Sudan, in order

to cover some of Sudan's debt payments.108

One of Malaysia's greatest ventures in Sudan, apart from the oil project, was the

management the country's transportation system. That became an increasingly important

106 Ibid.

I07Petronas (15 May 1998), Corporate Affairs, Khartoum, "Prime Minister Opens Petronas Office and Launches Petronas Operations in Sudan," http://www.petronas.com.mv/intemetlcorp/centralrep2.nsflframeset news?OpenFrameset, accessed on 2 June 2006. 108 CI h . eop as, Op.Clt.

158

sector with the development of the petroleum industry, as tankers were needed to

transport huge volumes of oil from storage facilities to ports for export. The Malaysian

company Metrobus had committed to supply 1500 buses in several stages to Sudan.

Following the bilateral commercial accords signed between Sudan and Malaysia in 1998,

other projects were initiated such as a Malaysian oil palm plantation project in Sudan and

the setting up of power generation plants. 109

It was alleged that Malaysian involvement in covert arms transfers to Sudan had also won

it favour with the Government in Khartoum. According to Human Rights Watch, official

documents had allegedly surfaced which detailed Malaysia's' co-ordination in concluding

arms deals between the Sudan Government and arms dealers in Southeast Asia.

According to the former Administrative Attache at the embassy of Sudan in Kuala

Lumpur, Abdel Khattab, heavy armaments including aircraft, tanks and mortars were

procured in 1997 from China, Indonesia, and the Russian Mafia. Those items were

allegedly shipped to Sudan under the guise of petroleum exploration equipment in the

names of Pet ron as and the CNPC. 11O

The documents were said to reveal that a Malaysian Government loan of $ 200 million

and foods collected by Islamic charity organisations were used to pay for the arms.

Khattab defected to the opposition and sought political asylum in the Netherlands. The

author of that report was, however, unable to independently confirm the allegations made

by Khattab. If the allegations were credible it would have directly implicated the two

major partners in the GNOP, CNPC and Petronas (together holdings 75 per cent stake), in

arms transfers to the NIF. Being State owned companies, it was hard to hold them

accountable for such actions, particularly when there were no public shareholders to

bring pressure to bear on company executives. I I I

Over and above Malaysia's value to the Sudan Government in terms of potential military

assistance and investment, the Petronas plays an important role in the GNOP, and the

109 Ibid. IloIbid. III Ibid.

159

second largest stakeholder. It also owns a substantial per cent age in the oilfield in South

Sudan. Petronas has extensive experience in oil exploration and the development and

production of oil and gas overseas. The company has been engaged in exploration and

development activities in Vietnam, Syria, the Philippines, Pakistan, Turkmenistan, China

and Iran. 112

Petronas while undertaking a wide array of operations III Sudan has come across

numerous security problems due to the country~s civil war. The oil firm has been

indirectly influenced by violence when the operations of Talisman, the GNPOC operator

at the time, were slowed down by insecurity. 1 \3 Similarly, in Block SA and SB, consistent

security issues have stalled exploration activity. 114 In all concessions, Petronas company

personnel had to be escorted by Army troops due to the proximity of hostile rebels. When

Petronas first entered Sudan several workers were kidnapped by rebel groups and in

another incident, a local driver was killed. I IS However, since Talisman and Lundin exited

there has been little indication of security issues for Petronas, or simply a lack of

reporting. More recently, prospects of peace have propelled Petronas to intensify its

operations as the security situation improves. I 16 Altogether, insecurity has been a factor

considered in the decision-making of Petronas, but has not caused the firm to exit

Sudan. 1 17

Petronas' strategic behaviour can be further explained by the competitive positioning of

firms in the Sudanese oil industry. Several factors demonstrate that Sudan provided an

accessKJle and lucrative investment for the Malaysian oil company.lI8 First, while Sudan

has considerable oil reserves, the physical and political hazards for potential investors,

particularly major Western oil corporations, has meant that only foreign oil firms with the

willingness to take on security threats and the ability to avoid political pressure, from

112 Ibid.

113 Business Times (18 January 2000), "Petronas team to assess Sudan pipeline damage," Malaysia. 114 Ibid.

115 New Straits Times (24 July 2000), "Petronas steps out in national service." 116Business Times (13 January 2005.), "Malaysian fIrms to gain from Sudan peace." 117 Luke Patey, op.cit, p.39. 118 Ibid.

160

human rights complications, have engaged in the African country.119 Petronas has

remained impervious to negative feedback from its operations in Sudan from

international human rights organisations as well as civil society groups due to its State­

owned nature and has been able to steer clear from the backlash from potential US capital

market sanctions because the firm does not raise any funds in the US. 120 Second, Western

oil firms such as Talisman and Lundin influenced the operations of Petronas. Despite the

deterrent to enter Sudan by Western oil majors, Western juniors did operate in the

country and played an essential role in the advancement of the oil industry in the country

due to their specific technical expertise.12I Without such technological capabilities

Petronas and the other less experiences international firms would have taken far longer to

produce oil in Sudan.122

However, while insecurity and the influence of other oil firms altered Petronas' strategic

behaviour in Sudan, it is the policy of the Malaysian Government that is paramount in

explaining the oil company's behaviour. The company has stated that the reasoning for its

expansion in Sudan is part of a larger effort to seek new oil and gas sources. 123 Sudan

represents the largest foreign onshore operation for the oil firm 124 and accounts for a

significant proportion of Malaysia's oil reserves.125 Indeed, Petronas' Malaysian staff

members in Sudan claim they are doing a national service for Malaysia by working in the

difficult and harsh environment of Sudan.126 Thus, the desire of the Malaysian

Government to expand international oil reserves has propelled Petronas to operate in

119 The Economist Intelligence Unit (18 September 2003), "Sudan industry: Petronas in deal to explore oil in Blue Nile Basin," Country Views Wire. 120 The Wall Street Journal (1 March 2000), "U.S. Lawmakers Try to Block IPO of China Oil Firm," Eastern Edition. 121 G. Gagnon and J. Ryle (2001), Report of an Investigation into Oil Development, Conflict and Displacement in Western Upper Nile, Sudan. Canadian Auto Workers Union, Steelworkers Humanity Fund, The Simons Foundation, United Church of Canada, Division of World Outreach, and World Vision Canada. hnp:llwww.ideationconferences.com/sudameport20011 Sudan Report finall0300l.pdf, accessed on 1 June 2005. "'L k P . -- u e atey,op.clt. 123 Bernama (3 May 2001), "Sudan Awards Petronas and Partners Contract in Block 5B," The Malaysian National News Agency. 124 Petronas (2002), Annual Report, p. 24, http://www.petronas.com. accessed on 2 June 2005. 125 Business Times (16 May 1998), "Petronas all set to tap Sudan oil gush," Malaysia. 12~ew Straits Times (24 July 2000), "Petronas steps out in national service," New Straits Times.

161

Sudan and expand its presence in the country. An expansion is made possible due to the

growing relationship between the Governments of Sudan and Malaysia. 127

The Malaysian Government has secured Petronas' prominent position in Sudan through

military and economic relations with the Sudan Government. It is claimed that Islamic

ties between the two countries as well as an increased access to military anus first

prompted the Sudan Government to bring Petronas into the GNPOc. 128 Petron,\s has also

given the Sudan Government the opportunity to develop its own expertise in oil

development through its Sudanisation programme within the GNPOC that ensures the

foreign oil company's staff contains Sudanese employees in order to build Sudan's pool

of skilled workers in the oil industry.129 Malaysia also has invested in power electrical

infrastructure in Sudanl30 and is active in other industries.13) These increased economi<;

relations have solidified Petronas' position in the war tom Sudan.132

4.4. Sudan's Partnership with India: Indian oil major, ONGC, is another Asian player

actively involved in the oil production in Sudan. ONGC is the largest integrated oil and

gas corporation in India, conducting both upstream and downstream activities. In March

2003, the State-owned oil firm acquired Talisman's 25 per cent interest in the GNPOC.

As well, in the same year, ONGC purchased the interests of the Austrian company,

OMV, in Blocks 5A and 58. The oil company has also made steps towards acquiring an

interest in Blocks 3, 6, and 7 in Sudan. J33 Furthermore, ONGC signed a contract with the

Sudan Government to lay an additional oil pipeline from the Khartoum Refinery to Port

Sudan, which was launched in late 2005. 134

127 Luke Patey, op.cit, p.40. 128 Africa Confidential (17 January 1997), 38 (1); Christian Aid (2001), The Scorched Earth: Oil and War in Sudan, http://www.reliefweb.intflibraryJdocuments/200Ilchr aid-sudI4marl.pdf, accessed on 24 May 2006. 129 New Straits Times, "Petronas steps out in national service," July 24,2000. 130 P. Verney, (2000), "Raising the Stakes: Oil and Conflict in Sudan," Sudan Update, pp. 50-5 I, http://www.sudanupdate.org, accessed on 2 June 2005. 131 Human Rights Watch .(2003), "Sudan, Oil and Human Rights," p. 470, www.hrw.org. accessed on 23 May 2005; Bernama (2004) op.cit. 132Luke Patey, op.cit. I330il and Gas Update India (January 2004), "OVL in Sudan," Oil and Gas Update India, Vol.7, No.1, p. 22. 134 Luke Patey, op.cit, pp.35-36.

162

The ONGC acquired Talisman's 25 per cent participating interest in the GNOP on March

12 in 2003. The GNOP is located in the Muglad Basin, around 435 miles southwest of the

capital Khartoum, comprising Blocks 1, 2 and 4. The nearest oil export point from the

field is the Port Sudan on Red Sea, which is around 930 miles from the oil fields. The

project is divided into upstream and downstream segments. The upstream segment is

covered under an EPSA, while the downstream part is covered under the COPA. 135 The

consortium members are CNPC with 40 per cent participating interests, Petronas with 30

per cent, ONGC with 25 per cent and Sudapet with 5 per cent, as illustrated in the Table -

4.3 below.

Table - 4.3

Blocks 1,2 & 4: Consortium Structure

Company Participating Interest ONGC 25 percent Petronas 30 per cent CNPC 40 per cent Sudapet 5 per cent

Source: ONGC Videsh Limited

The project's oil reserves are more than one billion barrels. The plateau oil production is

around 3, 00, 000 barrels per day. The project has 504 kilometers pipeline (28") from the

Heglig fields to Port Sudan. The marine terminal is situated at Port Sudan, with present

storage capacity of 3.2 million barrels. The commercial terms involved are upfront

investment of $ 720 million. The GNPOC, a corporation incorporated under the laws of

Mauritius on June 17, 1997, is the operator of GNOP. The ownership in GNPOC is in

same proportion of consortium parties as in the production sharing and transportation

agreements. The ONGC has 61 secondees in GNOP at middle and senior level positions.

The GNOP has established over a billion barrels of reserves. The productions from 10

fields were about 285,000 barrels of oil per day in the year 2004. The crude from oil

135 Institute for the Analysis of Global Security (21 January 2004), Energy Security, http://www.ongcvidesh.comlop sudan. asp, accessed on 2 August 2006.

163

fields is pumped through a 28" wide and 1504 kilometers long buried pipeline to Port

Sudan Marine Terminal. The oil is shipped from Port Sudan. 136

Following ONGC's entry into Sudan's oil industry, the then Indian President Dr. A. P. J.

Abdul Kalam had visited Sudan in October 2003. For Lt Gen Omar Hassan Ahmed al­

Basheer--{)nce accused of sheltering Osama bin Laden-.-that was a great vote of

confidence. 137 Later~ the Minister of Energy and Mining of Sudan, Dr. A wad Ahmed EI

Jazz, visited India accompanied by a high level delegation in December 2003. Dr. A.P.J.

Abdul Kalam, who recalled his historic visit to Sudan in October 2003, which was a

landmark in the two countries' bilateral relations, received Dr. Awad Ahmed EI Jazz in

audience. The then Indian Minister of Petroleum & Natural Gas, Ram Naik, and Dr.

Awad Ahmed EI Jazz, undertook a review of the progress on an ongoing basis at their

level keeping in view the enormous potential existing in the fields of bilateral cooperation

in the hydrocarbon sector between the two countries . The two Ministers decided to

constitute a Joint Working Group (JWG) to review the co-operation in hydrocarbon

sector between the two countries at official leveL In a joint statement issued, the

Ministers said that the JWG would pursue continued cooperation between the two sides

in order to enhance and consolidate such cooperation. 138

Both the sides observed and expressed their satisfaction over the strategic partnership in

the oil sector. Both the Ministers took note of the good performance of ONGC in the

GNOP. The Sudanese side appreciated the contribution being made by ONGC in

providing credible assistance in the fields of health care, information technology

education and self-reliant modern methods of farming in Sudan. The Indian side apprised

the visiting Minister about the then status of proposed participation in exploration Blocks

5A & 5B and in other exploration blocks in Sudan being pursued by ONGC. Dr. Awad

136 Ibid. I37The Indian Express (21 October 2003), Khartoum, "War-Tom Sudan Warms Up To Prez", http://www.ongcvidesh.comldisplayl.asp?fol name=Media&file name=med18&get pic=in Media&p titl e=News%20::%20In%20Media&curr f-=18&tot file=94, accessed on 2 June 2006. \38 ONGC Videsh Limited (8 December 2003), Press Release,New Delhi, "ONGC Role Appreciated At INDO-SUDAN Ministerial Meet", http://www.ongcvidesh.comldisplayl.asp?fol name=Media&fiIe name=med28&get pic=in=Media&p titl e=News%20::%20In%20Media&curr f-=28&tot file=94, accessed on 2 June 2006.

164

Ahmed El Jazz welcomed the significant investments being made by ONGC In the

hydrocarbon sector in Sudan and assured the fuHestcooperation of the Sudan

Government. The visiting dignitary had extended his invitation to Indian Minister to visit

Sudan for the subsequent ministerial level review meeting. 139

Dr. Awad Ahmed EI Jazz was invited to the First Oil and Gas Assembly in Goa. The

Minister, in his address on December 5 in 2003, urged the Industry experts to participate

in the growing oil and gas sector of Sudan. Some excerpts from his address are:

....... Sudan is the largest country in Africa, full of resources. Of all the resources, oil and gas

resources are the biggest. It a place where we feel that the cost of production is very low and

the rate of success of exploration is very high and the quality of oil is very sweet and free of

sulphur. May be, that gives me a reason to invite everybody to come and share with us the

resources we have. Sudan is having a clean and open society. We don't have any problem to

share with any company, individuals or group, or any nationality. This is an open invitation

to come and see where we are and what we are doing. I invite everyone to come see with

your own eyes and get the information from official and unofficial groups. We are very

happy that we started this kind of co-operation, with our friends from India, and I am looking

forward to broaden the relations. We started the oil industry in Sudan four years ago, and

now we are hitting 280 thousand barrels a day, and by 2005 we target to hit 500 thousand

barrels plus a day. It is a place of action, and I repeat and invite all of you to come and join

us. We started the oil industry four years back, we built the pipeline of 1610 kilometers

length in eleven months, a complex Refinery in 18 months and built a shipyard for crude

export and now we are completing another pipeline of 700 kilometers. We are planning to

upgrade the Refinery from 50,000 barrels a day to 100,000 barrels a day. Also, we are

negotiating with our friends from India to build a product pipeline from Khartoum, Capital

City to seaport for exporting the products. Now we are tendering for another pipeline of 1050

kilometers length, which is supposed to be completed by the end of next year. With all these

activities going on, we have a number of companies around in Sudan and we still have areas

free for concessioning. This is the time for me to invite you all and we hope to have

suggestions and offers from you. We are inviting the experts on purely open competition, and

139 Ibid.

165

whose of you who bring good offers are welcome, and we are ready to build a future for

f 140 mutual benefit to all 0 us ...... .

After ONGC's acquisition of participating interest in GNOP, the first crude entitlement

of 600,000 barrels was brought to the Mangalore Refinery and Petrochemicals Limited

(MRPL) on May 15 in 2003. 141 The then Indian Deputy Prime Minister L. K. Advani and

Petroleum Minister Ram Naik along with 40-odd Parliamentarians of the Petroleum

Ministry's Consultative Committee went to Mangalore to welcome the ship, which had

set sail from Sudan.142 The crude shipments have since been made to Sinochem, Viotal,

Mifsubishi and Trafigura. The ONGC was entitled to around three million tones of crude

from the project. 143

The ONGC also acquired 24.125 per cent and 23.5 per cent participating interests in

Blocks 5A and 5B respectively from Austrian company, OMV, and the deal was signed

on May 12,2004. 144

Table-4.4

Block SA: Consortium Structure

Company Participating Interest ONGC 24.125 per cent Petronas 67.875 per cent Sudapet 7 per cent

Source: ONGC Videsh Limited

140 The Asian Age (8 December 2003), New Delhi, "Sudanese Minister For Energy & Mining Invites Industry' Experts to Participate in Developing Sudan's Petroleum Sector", http://www.ongcvidesh.comldisplay l.asp?fol name=Media&file name=med27 &getyic=in Media&p tid e=News%20::%20In%20Media&curr f=27&tot file=94., accessed on 2 June 2006. 141 MRPL is an oil refinery located on the West Coast ofIndia. 142 The Telegraph (May 8 2003), New Delhi, "Sudan Oil Set to Start Flowing," http://www.ongcvidesh.comldisplay1.asp?fol name=Media&file name=med4&get pic=in Media&p title =News%20::%20In%20Media&curr f=4&tot file=94., accessed on 2 June 2006. ' :430NGC Videsh Limited (30 July 2004), New Delhi, "ONGC Does A Good Job Of Selling Nile Blend Crude ... http://www.ongcvidesh.comldisplav1.asp?fol name=Media&file name=medSS&get pic=in Medi a&p title=News%20::%20In%20Media&curr f=SS&tot file=94, accessed on 2 June 2006. 144 ONGC Videsb, Operations: Sudan (SA & B) http://www.ongcvidesh.comlop sudan2.asp" accessed on 2 June 2006.

166

The WNPOC, which is the operator of the Block, is the joint venture operating company

of Petronas and Sudapet. The Block SA is spread over an area of about 20,000 square

kilometers and consists of discovered reserves and unexplored acreages. Considerable

exploratory drilling has been carried out in the Block by the consortium and two fields

namely, Thar Jath and Mala, have been discovered. The Thar Jath field is being put on

development. In future more areas are expected to come up for development in Block SA

in addition to Thar Jath. Considerable exploration activity, along with the development of

Thar Jath and Mala, also is going on in the Block to discover more fields and delineate

more prospects. 145

Table-4.5

Block 5B: Consortium Structure

Company Participating Interest ONGC 23.S per cent Petronas 41 per cent Lundin Petroleum 24.S per cent Sudapet 11 per cent

Source: ONGC Videsh Limited

The WNPOC is the operator of Block 5B also. The Block 5B is spread over an area of

20120 square kilometers and operations could not be carried out in the block due to

security reasons, until the implementation of the peace agreement. 146

The WNPOC had organised its first oil celebration for Thar Jath Field in Block 5A on

June 26 in 2006. The ceremony was represented by Dr. C M Lamba, Director, ONG BV,

a subsidiary of the OVL. The inauguration ceremony was attended by Minister of Energy

and Mining Dr. Awad Ahmed AI-Jaz, Minister of Transport Eng. Khual Maniang, State

Minister of the Presidential Palace Telary Daeng and Chairman of Energy Committee,

Husien Momiot. The other dignitaries having attended the event were Dato' Mohd. Zamri

Mohd. Kassim, Malaysian Ambassador to Sudan, Dr. Orner Mohd. Kheir, Secretary

General MEM, Awad EI-Karim Mohamed Kheir, Director General, Oil Exploration and

145 Ibid. 146 Ibid.

167

Production Authority (OEPA), and Hashim Wahir, Chairman, Petronas (Sudan), and Hj.

Nusral Danir, Senior General Manager (International Operations), Peremba. 147

The Thar Jath field is located about 900 kilometers south of Khartoum within the prolific

Muglad Basin. The field measures 13.5 by 4 kilometers in size. The first oil celebration

marked another milestone for the oil industry in Sudan. The completion of that project

and the development of the Mala Field were estimated to boost the oil production to

about 50,000 barrels of oil per day by the end of year 2006. Treated crude oil was to be

exported from Thar Jath through a 172 kilometers long and 24" wide export pipeline

which linked the Central Processing Facilities (CPF) to the existing GNPOC Pump

Station No. 1 at Heglig. The first produced oil from Block SA was to reach Port Sudan in

August 2006 for its first commerciallifiing. 148

The ONGC had signed a $194 million contract with the MEM on June 30 in 2004 for

construction of 741 kilometers long and 12" wide multi-product pipeline. That was the

maiden engineering & construction project of the Indian company abroad. The proposal

of the ONGC was approved by the Cabinet Committee of Economic Affairs (CCEA) of

Indian Government on June 24 in 2004. The project envisaged laying of a pipeline

system from Khartoum Refinery to Port Sudan for evacuation of the petro-products from

Khartoum Refinery. The pipeline system was designed for a throughput of 0.826 million

metric tons per annum (MMTPA) in phase I and 2.54 MMTP A in phase II, of MO Gas &

Gas Oil. The pipeline was to be laid in the existing ROW (Right of Way). The project

was planned to be undertaken with the Design, Engineering and Project management

support ofONGC's Engineering Services, Mumbai, having an experience of construction

and maintenance of its own existing onshore as well as offshore pipeline network of over

10,000 kilometers at home. 149

147 ONGC Videsh Limited (4 July 2006), New Delhi, First Oil from Thar Jath field in OVL concession block 5A, http://www.ongcvidesh.comldisplayl.asp?fol name=news&file name=news 12{)&get pic=headlines&p tit le=OVL %20Headline, accessed on 2 July 2007. 148 Ibid. 149 ONGC Videsh Limited (2 July 2004), New DeIhi,Pipeline Contract Signed With Sudan Government: Maiden Overseas E&C Venture Of ONGC Group,

168

As a State-owned enterprise, the strategic behaviour of ONGC is largely directed by the

influence of the Indian Government. While external factors in Sudan and the international

environment, such as insecurity and the world price of oil may leave the company with

little choice in its actions, internally, the Indian Government is in control. A key policy of

the Indian Government is to expand and diversify sources of international oil, as the

country is largely dependent on foreign reserves. ISO Consequently, the· oil firm has

established the objective of doubling its reserves by the year 2020, pursuing international

oil proactively. 151 This priority is visible in Sudan, an increasingly essential source of oil

for India, saving the country $400 million every year. IS2 Moreover, ONGC continues to

expand its operations in Sudan and seeks to acquire further oil concessions. IS3 The Indian

oil firm's keenness to expand its international operations is also due to the fact it is a

relatively new player in the global marketplace. Thus, ONGC was seeking more than just

oil resources in Sudan, but a learning experience in exploration and production. The

shipment of crude oil from the GNPOC in 2003 to India represented the first delivery of

Indian-owned crude from a foreign oil source. 154 While ONGC is a large and proactive

corporation, it is still a newcomer in the international oil marketplace. Thus, the need to

learn from operations in Sudan represents a further element explaining its strategic

behaviour. Altogether, the behaviour of ONGC is largely defined by the influence of the

Indian Government. ISS

Although the current situation. of ONGC expansion in Sudan demonstrates the Indian

Government's tremendous demand for Sudanese oil, ONGC cautiously entered the

country. The decision to enter the country was delayed by unwillingness within certain

sections of the Government to invest in the war tom country due to the insecurity the

http://www.ongcvidesh.comJdisplavl.asp?fotname=Media&file name=med53&get pic=in=Media&p titl e=News%20::%20In%20Media&curr f=53&tot file=94, accessed on 4 July 2006. 150 Business Standard (June 19,2002), "ONGC aims to buy Stake in Nile Project," Business Standard. 151 ONGC (2005), "Strategic Vision," Company Document, hup:l/www.ongcindia.com. accessed on 2 June 2005. 152 Outlook (I July 2002), "Gift of the Nile," Outlook. 153 Dow Jones (23 June 2004), "India ONGC Videsh seeks Total's stake In Sudan oil block," Dow Jones. 154 Oil and Gas Journal (2 June 2003), "Government Developments," Oil and Gas Journal, 101 ( 22), p. 20-22. 15' L k P . - u e atey, Op.CIt.

169

company would be facing in such a venture. 156 Political risk insurance had to be garnered

to satisfy the demands of those in Government that felt the investment was a poor

decision. The oil finn took out the insurance from the World Bank's Multilateral

Investment Guarantee Agency and the Sudan Government when first entering the African

country,IS7 and later from the Export Credit Guarantee Corporation wheri investing in the

oil pipeline expansion project. IS8 Furthennore, the Indian Government also put pressure

on ONGC to engage in joint ventures with other oil companies to reduce political risk.IS9

The ONGC also set up two hospitals and an ambulance service for villages around its oil

concessions as well as provided aesthetic limbs for landmine victims in order to enhance

its goodwill among the local population. The peace accords between the Government in

Khartoum and the SPLA gave the Indian oil finn further leeway in expanding its

operations. Though ONGC entered Sudan despite insecurity from the civil war, it

remained a factor in the oil finn's strategic behaviour by prompting the company to make

arrangements to better secure its financial position. However, once ONGC was settled in

Sudan, opposition to further investment in the Indian Government diminished.

The growmg economIC and political relationship between the Governments of both

Sudan and India elucidates further how ONGC has been able to expand so rapidly in the

African country. The Indian Government engaged in intense diplomatic efforts with the

Sudan Government to first acquire Talisman's interest in the GNPOc. 160 From this point

on bilateral cooperation betweenJndia and Sudan grew significantly. India has invested

in textiles, infonnation technology, telecommunication, and other infrastructure projects

156 Outlook (l July 2002), "Gift of the Nile," Outlook. 157 The Economic Times (27 June 2002), "Sudan Government, World Bank Cover for Oil Deal," The Economic Times. 158 The Financial Express (28 April 2004), "Indian ONGC seeks political risk insurance for 2nd phase of Sudan investment," The Financial Express. 159 The Telegraph (19 January 2004), "Peace accord boosts ONGC Sudan assets," The Telegraph. 160 International Petroleum Finance (March 2003), "ONGC makes progress in Sudan," International Petroleum Finance, 26 (3), pp. 25 -31.

170

III Sudan.161 Furthermore, the Indian Government has provided millions of dollars in

credit to Sudan to engage in more business opportunities with Indian companies. 162

Apart from economIC relations, political affairs between India and Sudan have also

improved since the investment of ONGC was made. India has supported the Sudan

Government's position in regards to the Darfur crisis that threatens to have UN economic

sanctions applied on Sudan for violations of human rights by pro-Government military

forces in the Western province of the country.163 India has also signed on to be a

prominent member in the UN Mission in Sudan to mediate peace between the

Government in Khartoum and the SPLA. These increased economic and political

relations between Sudan and India supported the ONGC's entry into the country and

continue to leverage its expansion in the Sudpnese oil industry.164

The existence of civil war in Sudan made political risk a certainty for all foreign oil

firms. However, a particular political risk was also present for Western oil companies,

which faced pressures to disinvest from Sudan as a result of criticism from international

human rights organisations and civil society groups. For ONGC, and other Asian State­

owned companies, this factor was not influential. Consequently, ONGC faced less

competition from large Western oil companies, some opting to leave Sudan partly due to

the criticism from international NGOs while others simply did not consider a possible

investment given the political repercussions. 165 Furthermore, the presence of Asian oil

majors, such as Petronas and CNPC, demonstrated to the Indian company, that the

investment in Sudan was a plausible venture. 166 The ONGC has also stated that it hopes

to strengthen a growing relationship with co-partners, CNPC and Petronas, through

expanding its operations in Sudan.167 Thus, developments in the Sudanese oil industry,

such as the competitive positioning of foreign oil firms, further explain the strategic

161 The Financial Express (15 January 2004), "Buoyed by ONGC Videsh, Reliance, Gail set to join treasure hunt in Sudan," The Financial Express. 162UNI (9 June 2005), "India to extend $ 500 million credit to Sudan," UNI. 163 UNI (9 June 2005), "Sudan backs India's permanent membership of Security Council," UNI. 164 Luke Patey, op.cit, p. 37. 165 The Financial Times (13 June 2002), "ONGC seals first move into Sudan oil," London edition. I66The Telegraph (19 January 2004), "Peace accord boosts ONGC Sudan assets," The Telegraph. 167The Financial Times, "ONGC pursues Sudan expansion," September 16, 2003.

171

behavior of ONGC in Sudan.168 As well, the ONGC is operating in Egypt and Lybia in

North Africa. 169

4.4.1. Indian Interest in African Oil: Africa has appeared to be one of the major

attractions for Indian oil companies in recent years, when India has diversified its energy

sources across the world. Currently, roughly one fourth of India's crude oil imports come

from sub-Saharan Africa. This is mainly from Nigeria. India has also decided to invest in

~quity oil in Africa. The African countries that India has focused so far are Sudan,

Angola, Ivory Coast and Ghana. The other countries of the interest are in the Gulf of

Guinea region in West Africa are Equatorial Guinea, Chad and Mauritania. l7o

India's interest in African oil is spurred by a number of factors. First, the oil from Africa,

particularly the Gulf of Guinea, is of high quality, being low in sulphur. Second, bulks of

the new discoveries are found offshore, away from potential conflict on shore. Third,

Africa's oil market is open for foreign participation unlike those of Saudi Arabia and

some other countries in the Gulf. Fourth, only Nigeria is a member of the OPEC, which

sets limits on member countries' output leveL Finally, India has centuries old ties with

African countries. India has also fought together colonialism and apartheid in the

continent. India and Africa have been partners of peace and development. The people of

Indian origin who reached African shores in the mid 19th century also bind India and

Africa together. Also, both have shared similar experiences in nation building. Thus,

India has certain bonding with the African countries that is helpful in foraging energy

ties. 171

The interdependepence between India and African countries is, therefore, manifested in

the crucial sector of energy. India has been engaged in working out an elaborate energy

procurement plan through its energy diplomacy because of the growing pressure of

demand on the energy sector. India is unable to meet such demands with the internal

168 Luke Patey, op.cit, p.38. 1690NGCVidesh, Operations, Africa, Egypt.http://www.ongcvidesh.com/Egypt.asp; ONGC Videsh, Operations, Africa, Lybia, http://www.ongcvidesh.com/Libva.asp. accessed on 21 July 2008. 170 Ruchita Beri (February-April 2007), "India's Energy Safari in Africa," Africa Quarterly, 47 (1), p.47. 171 Ibid.

172

resources. In the short run, Nigeria, Persian Gulf countries and South-East Asian

countries, particularly Indonesia, are likely to be energy suppliers of India. While in the

long run, Bangladesh, Qatar and Turkmenistan are also likely to emerge as India's future

partners for the supply of energy, especially natural gas. As for now, Egypt continues to

export petroleum products to India. 172

India signed a major oil deal with Nigeria in 2000. As per the deal, Nigeria was to supply

oil to India at the rate of 1, 20, 000 barrels a day on a sustained annual basis. The

hydrocarbon deal between the two countries that entailed the annual supply of 6 million

tones was seen by analysts as an important "building block in India's quest to achieve

energy security". Likewise Indo-South Afiican joint working groups are operative since

1998 to promote cooperation in the oil sector between the two countries. The

participation of ONGC in the South Afiican upstream sector has forged energy ties

between India and South Africa. Besides, the two countries have decided to jointly

explore oil in third countries. 173

India is the 6th largest oil consumer, and receives 70 per cent of the crude oil by imports

and more than 65 per cent comes from the Gulf region. There are alternative energy

sources in the Caspian region, Southeast Asia, Australia, Afiica and Europe. India

accounted for 12.5 per cent of total primary energy consumption in the Asia-Pacific

region and 3 per cent of world primary energy consumption in 2000-01. 174 Import options

from Afiica and Europe are of high strategic priority as well as an economic necessity

because crude oil from these regions has lower sulphur content and is environment-

fii dl 175 en y.

172 Rajen G. Harshe (5 October 2002), "Recasting Indo-African Development Cooperation," Economic and Political Weekly, 37 (37), p.4118. 173 Ibid. :74 The British Petroleum (BP) Statistical Review of World Energy (200 I), www.bp.coml .. .ISTAGING/local assets/downloads pdfs/s/statistical review of world energy 200l.pdf. , accessed on 4 March 2004. 175 Akhilesh Chandra Prabhakar (April 2005), "Regional Energy Security Cooperation and Geo-Politics: Part II -India's Policy Options", Journal of Indian Ocean Studies, 13 (I), p.60.

173

India's primary energy utilisation mix, for the commercial sources, is as follows: coal

approximately 50 per cent, oil 32 per cent, gas 15 per cent, hydel 2 per cent and nuclear 1

per cent. India's oil reserves amount to 5.9 billion barr-els (0.5 per cent of global reserves)

with total proven, probable, and possible reserves close to 11 billion barrels. India's

dependence on oil imports is projected to grow to 91.6 per cent by the year 2020.

According to the World Energy Outlook, published by the International Energy Agency,

the demand for oil is expected to be to 3.2 million barrels per day by 2010. The gas

consumption is growing and is likely to be 1.6 trillion cubic feet in 2010. The world

liquefied natural gas (LNG) suppliers are Indonesia, Algeria, Malaysia, Qatar, Australia,

Oman, United Arab Emirates (UAE), Nigeria, Brunei, etc. 176

India is scouting for oil fields in Saudi Arabia, Vietnam, Australia, Myanmar,

Bangladesh, Iran, Iraq, Qatar, Kazakhstan, Syria, Egypt, Libya, Algeria, Senegal,

Nigeria, Sudan, Arigola, and West Africa. The proven reserve of crude oil is 732 million

metric tons. The production is around 33 million tons but the demand is around 107

million tons. Looking at the requirements, India has outlined a strategy by defining

parameter of its hydrocarbon policy in 2025 time frame, officially called Hydrocarbon

Vision 2025. In terms of global engagement, the vision promotes linkages of long-term

nature by signing long-term deals and acquiring stakes in overseas projects. 177

India has signed two deals of twenty-five year duration with Qatar and Iran respectively.

The ONGC has a planning to invest over Rs. 6,000 crore annually in acquiring oil

properties abroad and is currently in dialogue for buying out stakes in oil fields in more

than a dozen countries including Australia, Indonesia and Russia. The ONGC has its

presence in oil and gas fields in nine countries including Vietnam, Russia, Libya, Syria,

Iran, Iraq, Sudan, US and Myanmar, and is looking for having "Stakes in oil properties in

South America, Central Asia, Australia, Indonesia, Russia and Middle-East". 178

I7b Ibid. 177 Ibid. 178 Ibid; Akhilesh in his article quoted Girijesh Pant's paper presented in two days seminar on India's Energy Security and the Gulf, at School oflntemational Studies, Jawaharlal Nehru University, New Delhi, 19-20 March 2004.

174

Taking into account the demand and supply matrix, it is obvious that the three Asian

players would be actively pursuing their interests in the Gulf market. Whether their

search would enhance the intensity of competition and conflict could be an issue of

debate. In the changing context where hydrocarbon, despite being a strategic community,

is moving to the arena of market to be traded as "just another commodity", the pressure

of market seems to be prevailing in defining the parameter of emerging regime. One

plausible scenario could be that Asia's tremendous expansion of energy demand over the

next two decades would force the key regional powers such as India and China to accept

to greater levels of cross-border energy dependency, and that would constitute a new

cultural mind set for leaders long accustomed to viewing energy primarily as security

vulnerability. There is, therefore, a choice for the shift from buying natural gas via LNG

ships to laying permanent pipelines that create long-term energy interdependence. 179

The requirements of energy security as well as of national interest suggest that public

sector oil and gas companies should be strengthened; made autonomous and free of

political interference and bureaucratic delays in their regular functioning. Excessive

bureaucracy has prevented companies like ONGC, Gas Authority of India Limited

(GAIL) and other petroleum companies from playing a more effective role at the global

leveL Opportunities to invest abroad, to acquire oil equity and to undertake projects at

home have been missed due to a range of political and administrative constraints on the

functioning of these companies. Even as India develops large private sector companies in

the oil and gas sector, it has to strengthen existing public sector companies so that they

would be able to compete more effectively with Western oil firms. ISO

The external dimension pertains mainly to security of energy supply, the security of sea

lanes of communication and of land-based and underwater pipelines, security of supply

contracts, insurance against extreme price fluctuations, investment in oil equity and,

finally, issues pertaining to environmental security and the ecological dimension of

energy security and global inequalities in energy consumption. While oil and gas have

179 Ibid, p.62. 180 Ibid, p.65.

175

been found in abundance in and around the Indian subcontinent, from the Persian Gulf to

Southeast Asia, India's own reserves of oil and gas are rather limited. Hence, India's

import dependence is bound to increase in the years to come. By the year 2010, India's

import dependence in crude oil is expected to touch 80 per cent and in natural gas 77 per

cent. 181 Supplies are expected largely from the Persian Gulf, but India has been

diversifying its portfolio of suppliers and investing in oil equity across the world. 182

While a more diversified portfolio of suppliers is desirable, the fact remains that the bulk

of India's requirements would come from its neighborhood, including the Gulf, Iran,

Central-Asia, Southeast Asia and Bangladesh. The objective of stabilising the supplies

requires a diversification of source and ensuring the security of key source. Several

policy options exist, ranging from investing in oil equity, building up adequate strategic

oil reserves, entering into-long-term and future contracts, investing in the required

infrastructure to handle throughout from source to destination and, finally, assurance of

the security of supplies within the country as well as between the source country and the

destination. These objectives are to be met by a combination of policy instruments

ranging from investing in the materials handling infrastructure, ports and store facilities

to further empowering the naval forces and coast guards to improve policing of sea lanes

and coast lines. 183

India's increasing dependence on external energy source is an extension of the growth in

demand for energy in Asia that has been forecast to surpass growth rates in all other

regions. 184 By 2020, the world is projected to consume three times the amount of energy

it used before the 1973 oil crisiS.18S The US Energy Information Agency predicts that

nearly half of the world's projected incremental demand will occur in developing Asia, in

181 The Energy Research Institute (2003/2004), TERl Energy Data Directory & Yearbook (TEDDY), (New Delhi: TERI Press), pp. 30-45. IS2 Akhilesh, op.cit, p.66. 183 Ibid.

IS4 Juli A. MacDonald and S. Enders Wimbush (August 1999), "India's Energy Security", Strategic Analysis, 22 (5), p. 821. ISS Energy Information Demonstration (1998), International Energy Outlook, (Energy Information Demonstration: Washington D.C.), p_ 24_

176

which they include principally India, China and the members of the ASEANY6 Oil

demand growth in Asia is expected to be the fastest of any region in the world. The

region's oil demand in the year 2000 is expected to average 13.3 million barrels per day­

close to Western Europe's 14.3 million barrels per day. Experts anticipate that by 2020,

Asia would consume 28.6 million barrels per day, which is greater than projected

consumption in the US 924.4 million barrels per day. China's demand for oil will drive

this significant increase, growing at approximately 5 per cent per annum. By 2020, ,

China's oil consumption is expected to be approximately 9.5 million barrels per day.18?

As Asian energy demand grows, its regional resources, particularly oil resources, are

being depleted. As a result, Asia's dependence on extra-regional imports would rise.

Dependence on oil imports is expected to rise to approximately 77 per cent by 2010.188

As the world's sixth largest energy consumer, India has not only been affected by these

energy dynamics but has remained a major part of the trends that has been outlined. India

is endowed with a variety of energy resources, but it lacks substantial indigenous supplies

of oil and gas. Demand for these commercial fuels has been growing at an average of

approximately 5 per cent per annum and is projected to continue at this rate into the next

century. Coal is India's most abundant indigenous energy resource, supplying over half

of India's total energy demand. India imports coal to meet only 20 per cent of its total

energy demand, but has to import approximately 60 per cent of its oil. I89

Asia as a whole has been the world's largest energy consumer. Asian dependence on oil

imports is expected to rise to approximately 77 per cent by 2010. According to the

International Energy Agency (lEA), developing Asia, encompassing China, East Asia

186 According to International Energy Agency projections, the world's primary energy demand will grow at an annual rate of annual rate of 2.2 per cent from approximately 8,{)00 million tons of oil equivalent in 1993 to approximately 11,800 million tons in 2010. During this period, Asia's primary energy demand is predicted t\' grow at a rate of 3.9 per cent, down from its 6-7 per cent annual growth rates before the financial crisis. 187 Fereidun Fesharaki, Sara Banaszak, and Wu King (February 1998.), "The Outlook for Energy Supply and Demand in Northeast Asia", in Northeast Asia Cooperation Dialogue V Energy Workshop Repon. IGCC Policy Paper #36, p. 34. . 188 Ibid. 189 US Department of Energy (1998), EIA, Country Analysis Brief, India, http://www.eia.doe.gov/emeu/cabsllndialOil.html..ac<:essed on 2 April 2004.

177

and South Asia, has accounted for about a quarter of global GDP and total primary

energy demand. lEA projects 42 per cent increase in the primary energy demand between

2002 and 2030 in this region. The region's share in the global energy market would reach

nearly a third in 2030. Oil demand in this region would account for 26 per cent of the

world's demand by 2030. Import dependence on oil is projected to increase from 43 per

cent in 2002 to 78 per cent in 2030, out of which India and China's oil import

dependence rises from 69 and 34 per cent respectively in 2002 to 91 and 74 per cent

respectivel y in 2030, impacting energy security of this region in major ways. 190

According to the various reports, the Gulf has 66 per cent oil reserves, Africa has 8 per

cent and Caspian Sea has 26 per cent of the world reserves oil. As Africa's leading

exporter of crude oil, Nigeria is set to increase daily output from 2.2 to 3 million barrels

in 2005 and raise it to 4.42 million barrels by 2020. In 2002 Angola, Africa's second

largest producer, emerged from 15 years of civil war. By 2020, it expected to double its

output to 3.28 million barrels a day. Alongside Angola, Equatorial Guinea currently holds

the record for oil prospecting permits. Over the next 20 years it could become Africa's

third largest producer, ahead of Congo and Gabon, with 740,000 barrels a day.191

The world has witnessed a significant shift in energy consumption patterns since the

1990s. The share of developing countries in global energy consumption has increased

noticeably, compared to the 1970s. In 1971, Asia, including the OECD Pacific region,

accounted for only 14 per cent of the total world demand for energy. Today its share has

doubled to 28 per cent. In fact, Asia has emerged as the largest oil consuming region in

the world, one per cent ahead of North America. In 2000, South Asia accounted for

approximately 3.9 per cent of the world's commercial energy consumption, up from 2.8

per cent in 1991. By 2010, the energy use in developing Asia, including China and India,

190 Akhilesh Chandra Prabhakar, "Situating India in the Geo-Politics of Energy Security", Journal oj Peace Studies, 12 (2), pp.13-14. 191 Ibid, p.20.

178

but excluding Japan, Australia and New Zealand, is projected to surpass consumption of

all of North America. 192

According to the World Economic Outlook, Asia's share of oil in the global total would

continue to increase and touch 35 per cent by 2020. The increase would be evident

mainly in China, India and Southeast Asian countries. In volumetric terms, this means

that demand for energy in Asia, which was 19 million barrels per day in 1997, would

grow to over 28 million barrels per day in 2010 and more than 37 million barrels per day

in 2020.193 However, given the limited and declining production of oil in the region, the

incremental demand for oil are to be met with imports. 194

The trends of cooperation and collaboration between States and global companies have

opened up many opportunities in the hydrocarbon sector. A significant change has been

witnessed in the debate on energy security in the 1990s. The energy security calculus of

present period has been different from that of 1970s and 1980s, when oil shocks and fear

of global supply shortages determined Government resource policies. The notion that

conflict may arise over energy competition, fueled by a perception of supply shortage, is

not the main concern of States today. Rather, the changing patterns in trade, a greater

reliance on the West Asia for oil and therefore, a greater reliance on open access to sea

lanes and shifting strategic relationships are sources of conflict that might have an impact

on the region's energy security. In fact, some scholars argue that the common challenge

of greater external reliance on energy supplies among Asian States would create incentive

to 'cooperate', not 'compete' .195

India, for instance, is a major energy seeking power in Asia. While it has significant

reserves of coal, it is relatively poor in oil and gas resources. Its oil reserves amount 5.9

billion barrels, only 0.5 per cent of total global reserves. The majority of India's oil

1 92Paul Horsnell (1997), Oil in Asia; Markets, Trading, Refining and Deregulation, (London: Oxford University Press), p. 34. 193 The World Economic Outlook (2003), Energy Sector, (Paris: The World Economic Outlook), pp. 25-28. 194 Aparajita Biswas (April 2005), "Energy Security Issues - Cooperation between India and African Countries",Journa/oflndian Ocean Studies, 13 (I), pp.71-76. 195 Ibid ..

179

reserves are located in offshore Bombay and onshore in Assam. India imports 70 per cent

of its oil, much of it from the West Asia because of the stagnated domestic crude

production. What is more, according to the projection of the World Energy Outlook,

India's dependence on oil imports would grow to 91.6 per cent by 2020. Thus, in order to

enhance energy security, India has undertaken dramatic reforms in the hydrocarbon

sector. These include the participation of the private sector, both Indian and foreign, in

upstream and downstream activities. The setting up of a deregulated and market driven

oil and gas industry in India that was first contemplated by the Government in the early

I990s.1 96

India is also exploring possibilities to seek oil from Latin America, Southeast Asia and

Africa. Since 2003, it has been making major efforts to enhance its oil security through

accelerated steps for increasing domestic production of oil and gas, and through investing

in the oil fields. Recently, the Government of India empowered the State-owned ONGC

to invest in overseas oil and natural gas exploration projects. 197

It may be mentioned here that the Indian Government launched 'Focus Africa'

programme in 2002-2003 to strengthen India-Africa cooperation in the area of trade,

investment, technology transfer, information technology, health care, etc. African

countries hold 7 per cent of the world's oil reserves and account for II per cent of world

oil production. Of the 8 billion barrels of crude oil reserves discovered worldwide in

2001, 7 billion were in West and Central Africa. The ONGC has participated in South

. Africa's upstream sector thereby forging energy ties between the two countries. The

ONGC has also bagged an oil field in the North Ramadan area of Egypt. It had also

signed a deal to explore oil in Ivory Coast. 198

The energy has added a new dimension to traditional relationship between India and

Africa. While countries of North Africa, such as Alg~ria and Libya, were already

196 See A vinash Chandra (2001), Overview of India's Hydrocarbon Policy, Government of India, Ministry of Petroleum and Natural Gas (MoPNG). 197 ONGC, Report, 2004; See also Rajen Harshe (2002). 198 A·· . paraJlta,op.clt.

180

principal oil-producing countries through much of the 20th century, it is only in the last

few years that the African continent as a whole has come to be seen as a global oil and

gas producer. In 2004, Africa as a whole produced 9.3 million barrels of oil per day,

accounting for nearly 12 per cent of the world's total production. Over the last 10 years,

sub-Saharan Africa has recorded an extraordinary increase in production (over 51 per

cent), which is matched only by the Commonwealth of Independent States (CIS)

countries. With regard to natural gas, in 2004, Africa produced about 21,400 million

cubic feet per day, accounting for 7.5 per cent of tgtal global gas production. Over the

last 10 years, Saharan Africa and sub-Saharan Africa have recorded significant increase

in gas production, of70 per cent and 89 per cent respectively.199

The positive outlook pertaining to Africa's hydrocarbon potential is attested to by new

acreages being regularly offered by different countries, significant new discoveries, and

active production activity supported by infrastructure development. Nigeria has been, and

is expected to remain, Africa's principal producer. Oil production began in this country in

1958; it became an OPEC member in 1971. Today, Nigeria produces over 2.4 million

bpd; in terms of oil reserves. Nigeria accounts for 35,651 million barrels as against total

African reserves of 105,000 million barrels i.e. 34 per cent at the end of 2004. Nigeria

also dominates the African gas scene, with 35 per cent of total African gas reserves of

455 trillion cubic feet at the end of2004?OO

In North Africa, Libya, Algeria and Egypt are the dominant players in the African

hydrocarbon scene. The oil reserves of the North African countries are estimated at 46

billion barrels, with Libya having 65 per cent and Algeria 20 per cent of the total reserves

in the region. Algeria produces 1.9 million bpd and ranks second in Africa, after Nigeria,

Libya commenced producing oil in 1961; it ranks third in Africa, with production at 1.6

bpd. With the recent lifting of sanctions, Libya has offered several acreages for E&P

contracts which have evoked considerable international interest. Egypt has so far been a

modest oil producer, with most of its oil being used domestically. However, gas

199 Talmiz Ahmad (November 2005), "Imparting Energy to India-Africa ties", Africa Quaner~v. 45 (I), p.30. 200 Ibid.

181

discoveries in North Africa in recent years have significantly transformed the region's

hydrocarbon scenario. North Africa is estimated to have gas reserves of about 8 trillion

cubic meters, with the principal sources being Algeria with 957 per cent, Egypt with 21

per cent and Libya with 16 per cent. Algeria is the third-largest gas exporter in the world,

after Russia and Canada, and is destined to emerge as a significant player in the global

energy security scene. It was the world's first LNG exporter, and, in the mid-1970s, it

became the world's largest LNG producer. Algeria was also involved in the setting up of

the first transnational gas pipeline in. the Mediterranean carrying Algerian gas to Italy,

and later to Spain.20\

Egypt has also now emerged as a global supplier of natural gas. With increased gas

reserves discovered in the 1990s, Egypt began to develop its LNG capabilities. By 2006,

Egypt is expected to produce 17 billion cubic meter of LNG per annum, which may

increase in later years. A pipeline is carrying Egyptian gas to Jordan to fuel power

projects; there are plans to extend this pipeline to Lebanon and Syria, and possibly even

to Turkey and Europe.202

The principal producers in Saharan Africa would be Mauritania, Sudan and Chad, while

the significant players in sub-Saharan Africa are expected to be Angola, Nigeria,

Equatorial Guinea and Ivory Coast in coming years. Though oil exploration began in

Angola in 1910, the first commercial discovery was made in the 1950s. Through the

1980s, in spite of the raging civil war, there was extensive onshore exploration in the

country. In the 1990s, deepwater and ultra-deepwater exploration was started by major

international oil companies and met with a high success rate. Mauritania, a new source,

was to begin production in 2006.203

Intensive oil and gas exploration over the last 10 years has increased Africa's oil reserves

by 25 per cent. The U.S., which imports 7 per cent of global production of oil, obtain ! 5-

17 per cent of its needs from West Africa; it hopes to increase this to 25 per cent by 2015.

201 .bid, p.31. 202 Ibid. 203 Ibid.

182

West Africa's proved, probable and possible reserves taken together are estimated at 35

billion barrels of oil and 151 trillion cubic feet of natural gas. However, in spite of major

recent discoveries, due to war, political instability and difficulties relating to physical

access, much of sub-Saharan Africa remains unexplored.204

According to the u.S. Geological Survey, West Africa's undiscovered oil reserves could

be as much as 72 billion barrels. In terms of oil-equivalent, sub-Saharan total reserves

could be about 121 billion barrels, more than these of North America, Europe, the Asia­

Pacific region and South Asia. Significant reserve are available ev~~ in areas that have

been producing oil and gas for some time, i.e. Nigeria, Angola, Gabon, and Congo­

Brazzaville, particularly in deep off-shore waters. Recent exploration activity has

identified considerable potential in new areas such as Ethiopia and Niger, and in East and

Southern Africa. East Africa is a relatively new area with considerable potential: An

observer has described it as having "some of the greatest and most existing exploration

potential on the continent,,?05

According to the u.S. estimates, the exploration and production of deep-water and ultra­

deep water development in West Africa would require nearly $110 billion, up to 2020,

with investment between $20-25 billion going just to Nigeria and Angola; the balance

would to go Gabon, Equatorial Guinea and Congo-Brazzaville during this period.

However, these investments would, in due course, yield very rich returns. The five

principal producers of West Africa would cumulatively earn about $ 800-900 billion up

to 2020; Nigeria and Angola would earn about 80 per cent of these returns. The discovery

of Africa's natural gas potential has significant politico-economic implications for the

continent. The technological effort and the substantial investment required for

exploration and development, and the transnational character of the transportation of gas

through pipelines, all of these taken together mean that a narrow· nationalistic and

204 Ihid. 205 Ibid.

183

unilateralist approach in the gas sector is not viable, and needs to be replaced by regional

d . 1 . 206 an supra-regIOn a cooperatIOn.

Africa's rich hydrocarbon potential has added an entirely new and potentially very

significant dimension to India's ties with this continent. India is hydrocarbon deficit to

the extent of 70 per cent; this deficit is expected to increase to 85 per cent by 2025.

Hence, India's quest for energy security has made it necessary for the country to pursue a

proactive oil diplomacy to diversify its hydrocarbon sources as also to acquire

hydrocarbon assets across the world through equity participation in developed fields and

through exploration and production contracts and midstream and downstream joint

ventures and investments.207

These efforts have already met with some success in Africa in recent years. Nigeria is the

second-largest supplier of crude oil to India, after Saudi Arabia, meeting about 12 per

cent of her annual needs. India's first foray into Africa in equity participation was the

acquisition of a 25 per cent stake in the GNOP in Sudan, which is today providing India

with about three· million tonnes of oil per year. This was followed by a contract to

const~ct a products pipeline from a refinery in Khartoum up to Port Sudan. India's

investment in Sudan's hydrocarbon sector cumulatively amounts to nearly $2 billion. The

other recent success for India has been in Libya where Indian companies, the Oil India

Limited, Indian Oil Corporation (OIL-IOC) combine and ONGC, have between them

won three blocks in the face of stiff international competition. The ONGC also acquired

shares in some E&P blocks in Nigeria?08

These early successes constitute the basis of a substantial long-term engagement of India

with Africa across and even beyond the hydrocarbon value chain. India is well placed to

pursue such engagement. India carries considerable goodwill across the continent for the

role it played in the anti-colonial struggle as also for its Indian Technical and Economic

Cooperation (lTEC) programme. The programme has developed the knowledge base of at

206 Ibid, p.32. 207 Ibid. 208 Ibid, p.33.

184

least three generations of Africans. Beyond these strengths, the possibility of the success

of Indian efforts is also enhanced by the fact that African counties are increasingly

linking the award of upstream E&P contracts to participation by interested parties in the

midstream and downstream sectors (pipelines and refineries) and, more importantly, in

economic development project covering sectors such as railways, power projects, and the

development of domestic natural resources and infrastructure. India, with its capabilities

in the hydrocarbon sector and its national development experience over 50 years, is well

equipped to meet these challenges.209

India few years back hosted a composite delegation from Nigeria made up of the

Ministers of power and steel, commerce and energy, the Chairman of the Nigerian

Railway and the Special Advisor to the President for Economic Development. The

delegation, over three days, conveyed its interests in linking Nigeria's E&P contracts to

downstream and economic development proposals, particularly in regards to power and

railways. India has speedily responded to the Nigerian offer by setting up an inter­

Ministerial task force to pursue E&P proposals in tandem with specific power and

railways projects in Nigeria. The Angolan Government has also conveyed to India their

interest in linking E&P proposals to economic development offers, particularly the

revival of mines and the up gradation of road, railway and port systems which have

suffered serious damage on account of the prolonged civil war.2IO

India is at present pursuing three major transnational gas pipeline projects to bring natural

gas to her borders from Iran, Turkmenistan and Myanmar. India is thus uniquely placed

to participate in African pipeline projects. A proposal that has considerable economic and

strategic value for Africa and Asia would be the Egyptian project to take oil and gaS'

pipelines from Alexandria to the Red Sea, which would create a new "Suez Canal" for oil

and gas transportation, providing a convenient access to India and the rest of Asia to

North African and even Caspian hydrocarbon resources.211

209 Ibid. 210 Ibid. 211 Ibid.

185

An important area for an Indian role in meeting Africa's urgent requirements is in the

development of human resources that would be required to explore and develop the

continent's hydrocarbon potential. A pan-African initiative in this -area that is already

underway is Africa Array, a 20-year programme designed to strengthen geophysics

education and research and build a training and research support system. India, with its

70-year experience in the hydrocarbon industry, and its numerous research and training

institutions, can make a useful contribution this initiative.212

Africa's substantial hydrocarbon reserves hold the promise of economic development and

prosperity for the people of this continent who have for several decades suffered poverty,

loss of dignity and exploitation. The challenges are to harness the resources generated by

the energy reserves and invest them in all-round development of infrastructure, socio

economic upliftment and the development of human resources. This empowerment would

enable the continent to obtain the highest standards of achievement, which are warranted

by its ancient civilisation, the wisdom of its leaders and the sincere commitment of its

people to excel. The traditional links with the continent and the experience in the both

developmental issues and hydrocarbon sector enable India to be an effective partner of

African countries.213

4.5. Sino-Indian Engagement in Sudan's Oil Sector: China and India have assumed

relatively greater attention among several Asian players operating in Sudan's oil sector,

because of their rising significance in the present world order. Both are oil deficit

countries depending extensively on the external acquisition of oil resources. This external

dependence makes them look for overseas oil fields to ensure steady supply of energy

materials. In their search for energy resources, Africa including Sudan has become a

meeting ground for both to negotiate with each other, as they are entrenching themselves

as major Asian partners in the region to participate in transnational oil production. Since

experience in domestic oil production has enabled both China and India to negotiate for

212 Ibid. 213 Ibid.

186

African equity oil, Table - 4.6 below gives a comparative profile of the two countries in

their respective domestic oil sectors.

Table - 4.6

China and India: Comparative Oil Profile

Country Proven Production Consumption Net Refining

Reserve Imports Capacity

China 18.3 billion 3.62 million· 6.53 million --2.91 million 4.65 million

barrels barrels per barrels per barrels per barrels per

day day day day

India. 5.4 billion 838.9 2,524.7 1,685.8 2,254.6

barrels thousand thousand thousand thousand

barrels per barrels per barrels per barrels per

day day day day

Source: Energy Information Administration, US Department of Energy, 2006

The engagement that two Asian partners build up between each other in Sudanese oil

sector, as is the case in some other overseas oil fields, is competitive cooperation. They

compete because both are located in the extended demand side of the present world

regime. On the other hand, they cooperate because they are relatively new players of the

globalised world regime where the US and West European powers are already existing

dominant players of the demand zone. Thus, if competitive cooperation is the contour of

engagement between China and India in the present diversified world regime, then Sudan

stands out as a major oil field to facilitate this dynamic aspect of the wider process of

globalisation of oil. GNOP is a case in point, since CNPC and ONGC operate in

partnership in this project that produces oil from the most commercially lucrative oil

fields at Blocks 1, 2 and 4 in Sudan.

To sum up, there is a coincidence in the expansion of Sudanese oil industry with rising

Asian interest in African oil. Asian powers have over the years acquired extensive

knowledge and experience in domestic oil production; yet that failed to meet their

187

constantly rising energy demands triggered by economic globalsiation. The increasing

external dependence compelled these countries to enter into transnational oil ventures.

The 9/11 terrorist attack has further propelled the oil-seeking countries to diversify their

supply lines by drifting away from West Asia and getting closer to Africa Asian quest

for African equity oil has provided a concrete ground for the Afro-Asian interdependence

that has evolved in the post cold war economic world order in terms of trade and

investment partnership.

As an extension of Afro-Asian econom~c complemtarity, the current regime in Sudan has -' ~-. diversified the pattern of its transnational production linkage through consolidation of

multiple Asian participations in its oil sector. The shift that Sudan's foreign oil policy

behavior has undergone is due to the withdrawal of major Western oil firms, which have

initiated the exploration and production activity in its oil field. The underlying rationale

for such approach, therefore, lies in the intents to ensure that Sudan's oil production

remains less dependent on the partnership with West, and at the same time to foreclose an

eventuality where any single Asian player does monopolise its oil sector. Asian

orientation has consequently become the dominant trajectory of the transnational

production partnership that Sudan is currently forging for its oil industry. Sudanese oil

sector on the process has created another context for Sino-Indian competitive cooperative

engagement that is perceived to be a dynamic aspect of the wider process of globalisation

of oiL

188