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Edge on China


The New Silk Road: China’s Energy Strategy in the Greater Middle East—An Increasing Footprint

May 18th 2011

China Topics - China Energy String of Pearls

China’s widesspread energy investments have extended to most every corner of the Greater Middle East, particularly the Caspian Basin and key nodes such as Iran, Turkey, and Greece. In many cases, this growing economic foothold has translated into a military foothold as well, given the large-scale participation of Chinese army personnel in energy projects and the “strategic partnerships” that Beijing has formed with key states.

Caspian Sea

In the Caspian Sea Basin, China has invested most heavily in Kazakhstan, Turkmenistan, and Iran, in addition to increasing its ties with Azerbaijan.

Its main energy infrastructure projects in the region are the Kazakhstan-China oil pipeline (completed in July 2009 with maximum discharge of 20 million tonnes per year) and the Turkmenistan-China gas pipeline (completed in December 2009 with maximum discharge of 40 billion cubic meters per year; also known as the Central Asia–China pipeline). Beijing has invested in Iran’s North Azadegan oil field and South Pars gas field as well; between 2005 and 2010, Chinese firms signed an estimated $120 billion worth of contracts with the Iranian hydrocarbon sector. In addition, Beijing is considering infrastructure projects that would eventually link China and Iran via pipelines, railways, and roads, allowing the People’s Republic to import Iranian energy sources overland in case current maritime routes in the unstable Persian Gulf region are threatened. And as described previously, Turkmenian president Berdimuhamedov announced a $2 billion project in June 2010 to connect the eastern pipeline with China to Turkmenistan’s western resources, which had been earmarked for the EU-backed Nabucco pipeline.

A Key Node in the Persian Gulf

Iran is of particular significance to China because it borders both the Caspian Sea and the Persian Gulf. In the Gulf, Beijing views Iran as a means of counterbalancing U.S.-supported Arab states such as Saudi Arabia and neighboring kingdoms. More specifically, it believes that the U.S. Navy is incapable of completely closing the Gulf so long as Chinese-allied Iran controls the eastern flank. Tehran is also a key node in China’s overland and maritime Silk Road. Accordingly, Beijing is looking to connect railways with Iran, Turkey, and Europe, and and perhaps establish a naval base on one of Iran’s islands.

On some levels, the uncertain nature of energy relations between China and Iran seems to belie the strategic importance of their broader relationship. The bulk of China’s Gulf energy relations are with Iran, Saudi Arabia, and Iraq. Yet according to analyst Erica Downs, while Beijing sees the Saudis as a reliable partner and Iraq as a land of opportunity for the China National Petroleum Company (CNPC), it views Iran as a tough place to do business. Despite the publicity attending recent multibillion-dollar Sino-Iranian deals, in actuality Chinese investment is less than meets the eye. According to Downs, Iranian media tend to inflate figures in order to emphasize that Iran is not isolated, whereas the Chinese media downplay them for stealth’s sake. For example, some investments are “committed” in memoranda of understanding between Tehran and Beijing but not necessarily finalized. And the details of any given “agreement” are often opaque, whether the reported transaction is a letter of interest, buy-back agreement, or memorandum of understanding. Moreover, Chinese oil companies “have a history of signing agreements for projects in which they have no intention of making substantial investments until after sanctions are lifted and geopolitical risks reduced. CNPC, for instance, signed a contract with Saddam Hussein’s government for al-Ahdab oil field in 1997, held off on investing due to U.N. sanctions, and then inked a new agreement with the postwar Iraqi regime in 2008.” As analyst Afshin Molavi put it, energy-wise and economically, Iran needs China as a partner more than China needs Iran.

Geopolitically, however, Iran remains a strategic partner for China in the Shanghai Cooperation Organization (SCO). And Beijing views Gulf allies as more important than Mediterranean allies because they are close to the Arabian Sea, the Gulf of Aden, the Red Sea, East Africa, the Indian Ocean, and the Pakistani port of Gwadar, where China has established a foothold and hopes to eventually build a naval base.

Beijing is also attempting to balance its Iran interests in its relationship with Saudi Arabia. Since 2005, when King Abdullah ascended to the throne, Riyadh has adopted a “look east” policy and views China as a steady demand market for oil exports. More than half of Saudi oil now flows to Asia, compared with the 14 percent that flows to the United States. Saudi Aramco owns a refinery in China’s Qingdao province and has another in Fujian, while Chinese firms have begun to invest in Saudi infrastructure and industry, including the recently completed light railway to transport Hajj pilgrims to Mecca. Meanwhile, bilateral trade reached $40 billion in 2010, with the kingdom remaining China’s largest trading partner in the Middle East. Yet Sino-Saudi cooperation extends beyond oil and trade interests. During the 1980s, China supplied the Saudis with nuclear-capable CSS-2 missiles, and Washington is now concerned that Riyadh may seek to create a deterrent against Iran by acquiring more Chinese-designed missiles as well as dual-key nuclear warheads from Pakistan.

Both countries are also stepping up their military cooperation, especially on the naval front. On November 27, 2010, a Chinese naval escort flotilla arrived at the port of Jeddah, the first-ever call to Saudi Arabia by Chinese naval vessels. Rear Admiral Abdullah al- Sultan, commander of the Saudi navy’s Western Fleet, received the flotilla and expressed hope that the visit would enhance bilateral military cooperation. The Jeddah stop came on the heels of PLA naval port calls earlier in 2010 to the United Arab Emirates, Egypt, Greece, and Italy, with China steadily stepping up its naval presence in the Gulf of Aden and Mediterranean. Although the United States remains Saudi Arabia’s key security guarantor (with a recent $60 billion arms package, for example), the kingdom is also hedging its bets in the face of a potential nuclear Iran. According to one analyst, Riyadh believes that “engaging its regional rival’s main ally in Beijing will help ensure that its interests are taken into account with respect to Iran.”

At the same time, Iraq is emerging as a potential wild card among China’s energy and strategic interests. Recently, the Organization of the Petroleum Exporting Countries (OPEC) readjusted Iraqi oil reserve estimates to 143.1 billion barrels—25 percent larger than previous estimates and ranking above Iran’s 137 billion barrels. China has already stepped up its investment portfolio in Iraq and is now the country’s top oil and gas investor. In November 2008, for example, CNPC and China North Industries Corporation set up a joint venture and signed a twenty-year development contract for al-Ahdab oil field. In June 2009, CNPC and BP won a bid for a twenty-year technical service contract for Rumaila oil field, a “super giant” with 17.7 billion barrels of proven reserves. Two months later, Sinopec expanded into the country by purchasing Swedish oil firm Addax, which has operations in Iraq. In late 2009, CNPC set up a consortium with the French firm Total and the Malaysian firm Petronas to develop Halfaya oil field. And in 2010, the China National Offshore Oil Corporation partnered with the state-run Turkish Petroleum Corporation in a twenty-year contract to develop the lucrative Maysan oil field in southern Iraq.

Iraq currently produces about 2.5 million barrels of oil per day (bpd), with the goal of reaching 4 million by 2015. Yet the International Energy Agency recently announced that China’s oil needs will increase to 11.3 million bpd by 2015, meaning that it will still rely heavily on its current top suppliers: Saudi Arabia, Angola, and Iran.

Moreover, security continues to be a problem in Iraq. For example, on September 27, 2010, China ran into problems when local authorities raided CNPC’s al-Ahdab facilities, demanding to see the company’s contract with the Iraqi government and alleging mismanagement. In general, the Chinese have neither integrated with the local community nor created local jobs, instead importing most of their oil workers. The September raid underscored the importance of engagement with the local population and the continued challenge of Baghdad’s legitimacy among provincial authorities. The continued lack of a national hydrocarbon law in Iraq is another problem, one that has prompted foreign oil companies from China and elsewhere to sign with the Kurdistan Regional Government to develop energy-rich regions in northern Iraq.

In strategic terms, Iraq’s fragile state represents a fissure of sorts in the emerging Chinese-Russian coalition stretching from Iran in the East to Turkey in the West. The trajectory that Iraq takes as it continues to rebuild—whether toward the Sino-Russian or U.S./ Western axis—will play a key role in the region’s security architecture.

As for Saudi Arabia, it will likely remain China’s reliable energy supplier for the foreseeable future given its current production level of 10.9 million bpd, more than double that of OPEC’s second-largest producer (Iran, at 4 million bpd). The kingdom has barred foreign ownership of upstream activities, however, so China has diversified to other suppliers (Iraq, Iran, Angola, Central Asia) and resources (natural gas, along with solar, wind, nuclear, and hydropower).

The Black Sea and the Mediterranean

Turkey is another key node in China’s Silk Road strategy. In addition to bordering both the Black Sea and the Mediterranean, it is a longtime NATO member, enjoys a customs union with the EU (and prospects of eventual accession), and serves as a key energy transit corridor for twelve multinational pipeline projects. Eight of these are existing networks: the Blue Stream gas pipeline, the Baku-Tbilisi-Ceyhan (BTC) oil pipeline, the Russia-Turkey gas pipeline (Turusgas), the Kirkuk-Iskenderun oil pipeline, the Baku-Tbilisi- Ezurum gas pipeline, the Iran-Turkey gas pipeline, the Arab Gas Pipeline, and the Interconnector Turkey- Greece-Italy gas network. The other four projects are in the proposal or planning stages: the Nabucco gas pipeline, the Trans-Caspian gas pipeline, the Samsun- Ceyhan oil pipeline, and the Iraq-Turkey gas pipeline. Turkey’s geostrategic location is ideal for rail networks connecting Europe with the Middle East and Asia, and it already has an agreement to connect its power grids with those of Egypt, Iraq, Lebanon, Jordan, Libya, and Syria. According to analyst Selcuk Colakoglu, Beijing “wants to use Turkey in logistical terms to reach Europe and build the contemporary Silk Road.”

Indeed, China recently upgraded its bilateral ties with Turkey to “strategic cooperation” when Premier Wen Jiabao visited Ankara in October 2010. His trip came on the heels of the Anatolian Eagle joint air combat exercises, conducted by the People’s Liberation Army Air Force (PLAAF) and the Turkish air force from September 20 to October 4. Those exercises also overlapped the SCO’s Peace Mission 2010, a military counterterrorism drill held in Kazakhstan September 9–25. Anatolian Eagle has traditionally been a NATO exercise between Turkey, the United States, other NATO members, and Israel (a member of NATO’s Mediterranean Dialogue). Yet Ankara seems to have replaced Israel with China. During Wen’s trip to Ankara—the first visit by a Chinese premier in eight years—he signed strategic cooperation agreements regarding trade, railway construction, infrastructure, communications, and cultural exchanges. These agreements also called on both countries to conduct bilateral trade in their own currencies, excluding the U.S. dollar.

As Washington and Israel grow increasingly concerned about Beijing’s expanding military ties with Turkey and Iran, legitimate security issues have been raised regarding possible divulgence of technological, operational, and other military secrets from the United States and NATO to China. As a former U.S. Marine Corps fighter pilot and Pentagon technology security official put it, allowing PLAAF personnel to see NATO combat tactics up close could inadvertently improve China’s war-fighting capabilities.55 Moreover, Ankara and Beijing have expressed interest in holding future joint military exercises. According to one Turkey specialist, the Anatolian exercises should be seen as a “debut,” and the two militaries will likely continue such cooperation “whenever applicable.” Similarly, a Chinese source expressed hope “that the Chinese Air Force regularly trains in Turkey and the two countries successfully develop other areas of cooperation.” Indeed, Beijing seems intent on maintaining a military presence on NATO’s southern flank in Turkey. It is also hoping to enter Turkey’s domestic defense market, in part by bidding to supply the country’s national missile defense system with the HQ-9 missile, based on Russia’s S-300.57 In addition, both Ankara and Beijing are interested in stabilizing Afghanistan after U.S. and NATO troops withdraw. It was therefore telling when PLAAF SU-27s en route to Turkey chose to refuel at the Gayem al-Muhammad air base near the town of Birjand, Iran, situated opposite the large American base near the Afghan-Iranian border town of Herat.

The Anatolian drill also underlined China’s search for potential strategic partners as it grows in stature and seeks to become a rule-maker in global politics, not just a rule-follower. Meanwhile, Turkey has demonstrated an ability to bring different perspectives to the table on persistent regional issues involving Iran, Iraq, and the Palestinians, reflecting Ankara’s independent foreign policy thinking since the Justice and Development Party came to power in 2002. As China’s ambitions for geopolitical and geo-economic influence in Central Asia, the Balkans, and the Middle East have grown, Beijing has come to see Turkey as a potential gateway to those regions.

China is also conducting dollar diplomacy in Turkey’s neighborhood.60 In June 2010, Chinese state-owned shipping giant COSCO took over management and full operational control of a major pier in Greece’s largest port, Piraeus, in a £2.8 billion deal to lease the pier and manage two container terminals for the next thirty-five years. COSCO is also building a new pier to handle larger ships and triple the volume of cargo the port can handle.61 Given that Greece controls one-fifth of the world’s merchant fleet and is the largest client for Chinese shipbuilding yards, this effort aims to boost Chinese trade with emerging markets around the Black Sea rim and the Mediterranean. Other deals include the exchange of know-how between China’s Huawei Technologies and the Greek telecommunications firm OTE, as well as plans for China to purchase a stake in the debt-ridden railway network OSE, build an airport on Crete, and build a logistics center north of Athens.

In this manner, China envisions creating a network of ports, logistics centers, and railways to distribute its products to and across Europe—a sort of modern-day Silk Road. And as China increases its economic presence, its military planners are watching with increasing aspirations. In addition to investments in overland pipelines, roads, and railways through the Caspian region, Chinese economic assistance to Burma, Bangladesh, Sri Lanka, Pakistan, and Greece form part of the military’s String of Pearls strategy, aimed at ensuring the free flow of energy and trade in the event of a Taiwan conflict and resultant U.S. naval blockade.

Military Dimensions

The String of Pearls strategy: This approach centers on establishing Chinese footholds with military or geopolitical influence along the Indian Ocean littoral and into the Persian Gulf and Mediterranean. Several elements are needed to carry out such a strategy:

  • Obtaining access to airfields and ports: This can be accomplished by building new facilities or establishing cordial relations with nations that already possess key facilitites. In some cases, securing such access involves heavily subsidizing construction of new facilities in other countries with the understanding that they will be made available as needed.
  • Increasing diplomatic relations: This is to ensure that airspace and shipping lanes remain clear, and is often accompanied by mutually beneficial trade and export agreements. Since securing a string of pearls relies on linking a series of disparate locations, it is important to ensure that each pearl is safe from any potential threats by neighboring states.
  • Modernizing military forces: A modern military can move effectively to hold individual pearls when necessary. It will also be prepared for related actions and exercises.

The pearls that Beijing has established in recent years fall along the sea routes used centuries ago to connect China and the Mediterranean Basin, particularly those extending from the coast of mainland China through the South China Sea, the Strait of Malacca, across the Indian Ocean, and into the Arabian Sea and Persian Gulf. The regime is building relationships and developing a naval forward presence along the sea lanes of communication that connect China to the Middle East. Specific pearls include:

  • upgraded military facilities on Hainan Island an upgraded airstrip on Woody Island, located in the Paracel archipelago about 300 nautical miles east of Vietnam
  • oil-drilling platforms and ocean survey ships in the South China Sea
  • the Kra Canal in southern Thailand, which links the South China Sea to the Indian Ocean
  • intelligence-gathering facilities on Great Coco Island near the Strait of Malacca
  • a deep-water port under construction in Sittwe, Burma
  • a container shipping facility in Chittagong, Bangladesh
  • the proposed Irrawaddy transportation corridor, which would link China’s Yunnan province to the Bay of Bengal through Burma
  • Hambantota port in Sri Lanka
  • a potential extension of the IPI pipeline through Islamabad and over the Karakoram Highway to Kashgar in Xinjiang province, intended to transport
  • fuel into China
  • a naval base under construction in Gwadar, Pakistan
  • upgraded facilities in Port Sudan, which provide vital access to the Suez Canal and the Horn of Africa.

As discussed in the previous section, China has also added the Greek port of Piraeus as a new pearl in the Mediterranean, and it is considering similar steps in Yemen, a potential pearl in the Gulf of Aden. On August 9, 2010, the Chinese destroyer Guangzhou and frigate Chaohu stopped in Piraeus following escort missions in the Gulf of Aden. This was followed by an August 24 meeting in Beijing between Greek air force chief of staff Vasileios Klokozas and Chinese defense minister Liang Guanglie, intended to boost military exchange and cooperation. Previously, in December 2009, Rear Admiral Yin Zhou expressed Beijing’s intentions to establish a permanent naval base in the Gulf of Aden/Arabian Sea, where China is currently engaged in antipiracy efforts to safeguard its oil shipments from Africa.69 Chinese warships have been using ports in Oman, Yemen, and Djibouti for resupply, but Djibouti is mainly a NATO stronghold, and Oman is considered a U.S. protectorate. Accordingly, China is eying Yemen’s Aden port for a base. These port calls and China’s overall string-of-pearls approach have prompted many analysts to draw parallels with fifteenth-century Admiral Zheng He’s Treasure Fleet voyages to the Arabian Peninsula, heralding the rise of China’s international influence once again.

Overland infrastructure strategy. As China increases its naval presence along the Indian Ocean littoral, it is also increasing its military footprint overland by deploying PLA troops and People’s Armed Police Force (PAPF) personnel to oversee energy and infrastructure projects. The PAPF is a component of China’s armed forces under the dual leadership of the State Council and the Central Military Commission. Both the PLA and PAPF actively participate in construction projects in the energy (including hydropower), transportation, and communications sectors, building schools, hospitals, airports, power stations, highways, water conservancy facilities, and television transmission facilities. In Africa, for example, China has used such projects as a platform to establish cooperation in other sectors, including enhanced military ties throughout the continent. As described earlier, this approach—a continuation of President Hu Jintao’s 2004 New Historic Missions strategy—is also being replicated in Central Eurasia and the Middle East. In Afghanistan and Iraq, for example, China has deployed troops to help guard its energy and infrastructure projects. Moreover, the PLA and PAPF are training Afghan and Iraqi soldiers on PLA bases in Nanjing, capital of China’s Jiangsu province.

Beijing has also reportedly deployed several thousand soldiers to Kashmir, where India has long worried that the PLA is working on roads and railway projects in the Karakoram Mountains to connect with Pakistan’s Gwadar port. According to Western and regional intelligence sources, these personnel are under the command of China’s Xinjiang military district, a Muslim-Uyghur-dominated region that borders Central Asia. On December 2, 2010, representatives from China’s Ministry of Commerce, Ministry of Foreign Affairs, Xinjiang Uyghur Autonomous Region, and Xinjiang Production and Construction Corps (PCC) attended the fourteenth session of the China- Pakistan Joint Committee in Economy, Trade, Science, and Technology in Islamabad, where they discussed large projects such as the Karakoram Highway, Gwadar port, and Duddar lead-zinc mining construction. The PCC is a paramilitary organization under joint government, Communist Party, and military control, tasked with land reclamation, agricultural production, and economic development, particularly with regard to large transportation projects (highways, airfields, railroads), water infrastructure projects, and oil and natural gas infrastructure.

Xinjiang district itself has seen a steady military buildup over the years. It is unusual among Chinese military districts in that it contains a significant number of combat troops along with the 11th Highland Motorized Infantry Division, reportedly either at Urumqi or in the Karakoram Mountains. Home to the Lop Nor nuclear test base and the Second Artillery Corps strategic forces, Xinjiang also includes detection and tracking radars covering Central Asia and China’s northern border, two regiments of H-6 long-range nuclear-capable bombers with stand-off missile launchers, a ground-based anti-satellite laser system, and DF- 15D guided tactical ballistic missiles. The buildup is indicative of increased Chinese intentions and capacity for undertaking a proactive and potentially interventionist role in Central Asia, allowing Beijing to project military power into the region to safeguard critical energy supplies. Indeed, troops from Xinjiang formed the ground elements of the PLA contingent that took part in the Shanghai Cooperation Organization’s Peace Mission 2007 joint military exercise.

As mentioned previously, China’s strategy of rerouting energy supplies overland in order to sidestep maritime risk hinges on its investment in ports such as Gwadar in Pakistan, along with rapid highway, rail, and pipeline construction projects. These include the Karakoram Highway and twelve other major roads to connect Xinjiang with neighboring countries such as Russia, Kazakhstan, Kyrgyzstan, and Pakistan, as well as ongoing high-speed rail negotiations with seventeen countries. Beijing also hopes to establish a pipeline (as indicated above, perhaps an extension of the IPI project) to carry Iranian gas to China’s western provinces.85 Taken together, these projects would reduce a 16,500-kilometer journey to just 2,500 kilometers. And when high-speed rail links are completed, China will be able to transport cargo from its eastern provinces to Gwadar at the mouth of the Persian Gulf within forty-eight hours.

Christina Lin, a former visiting fellow at Washington Institute with expertise in energy security, Chinese military doctrine, relations between China and the Middle East, and other issues, wrote the article (of which this is part 3) for the Institute.

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