China’s Exaggerated Arctic Interests

The world’s awareness of petroleum resources in the Arctic soared in 2008 after an assessment from the United States Geological Survey indicated that 12.3 percent of global undiscovered oil resources and 32 percent of gas resources could be found there. The analysis was widely misinterpreted to reflect offshore reserves and created the perception of a huge untapped potential that was becoming more accessible because of the ice melt. It resonated strongly in China, which worried about soaring energy needs and over-dependence on the Middle East.

A common misperception in China was that much of the Arctic’s resources were up for grabs. Literature and media coverage supported the myth that untapped energy resources were in maritime areas outside national jurisdiction. In fact, those resources overwhelmingly are located within national jurisdictions. This means that engagement in Arctic energy development essentially becomes a bilateral issue. It cannot be separated from the overall bilateral relationship with the resource owners, notably Russia, which has the largest Arctic continental shelf, by far.

Not long after China set its sights on the Arctic’s energy resources, major developments in the oil and gas markets created a new supply situation. The “unconventional revolution,” mostly associated with shale oil and shale gas, mainly took place in the United States but had repercussions for world markets. It made the world’s largest oil importer almost self-sufficient and opened the possibility of the United States exporting liquefied natural gas (LNG). Moreover, supplies previously destined for the United States became available for other buyers. In sum, the supply situation for China did not look as constrained as it had only a few years earlier.

For China, a breakthrough in gas supplies came through the construction of a pipeline from Turkmenistan with a capacity of 30 BCM (billion cubic meters) per year in 2012, involving supplies also from Kazakhstan and Uzbekistan. It was followed by a pipeline from Myanmar, completed in 2013, with a capacity of 12 BCM and a deal with Russia in 2014 for supplies of 38 BCM via a new pipeline from Eastern Siberia. With three major pipeline gas supply routes in addition to a more diversified group of LNG suppliers, the need for Arctic gas seemed less pressing.

Oil is a different story. After China became a net oil importer in 1993, Chinese state oil companies were encouraged to acquire production assets abroad. In addition, China embarked explicitly and implicitly on a hedging strategy to enhance its energy security. Whereas the Chinese policy was successful in establishing new energy links, it did not manage to reduce the dependence on oil supplies from the Middle East. In fact, the share of China’s oil imports from that region increased from 39 percent in 2006 to 51 percent in 2015. These supply dynamics suggest greater Chinese interest in Arctic oil resources than in gas resources.

But actual Arctic offshore oil-related investments and projects have been quite modest. In 2013, Rosneft, Russia’s largest oil company, agreed to cooperate with the Chinese National Petroleum Company (CNPC) to study three structures in the Barents Sea. Since then, nothing has happened. China National Offshore Oil Corporation has a big stake in a still commercially uncertain project on Iceland’s continental shelf, but there has been no serious Chinese interest in licensing rounds on Norway’s Arctic continental shelf. An important reason is that Chinese companies have become more familiar with technological, cost, and operational challenges in the Arctic. They are in no position to replace Western majors as partners for Russian companies. Another reason is that companies are re-evaluating their Arctic prospects after the fall in oil prices.

The major exception is Chinese involvement in the Yamal LNG project. The project, which involves the development of gas fields on the eastern side of the Yamal peninsula in West Siberia and construction of an LNG factory and port, was initiated by the Russian gas company Novatek and the French company Total. In 2014, CNPC bought a 20 percent stake in the $27 billion project, and the Chinese Silk Road Fund obtained a 9.9 percent stake in 2015. A contract of $12 billion for project financing was signed with two Chinese state banks in 2016. Chinese shipping companies are involved in international joint ventures set up to own and operate the large icebreaking LNG carriers custom built for the project. Lastly, CNPC has contracted annual deliveries of 3 million tons of LNG, out of a total production of 16.5 million tons. Through the Yamal LNG project, therefore, China is deeply involved in Arctic energy.

Why has China jumped into this project, while limiting its energy engagement elsewhere in the Arctic? To explain this apparent contradiction, it is necessary to understand the particularities of Yamal LNG. When CNPC entered the project, it was already far advanced: the resource base was extensively explored, and infrastructure construction was underway. Solid partners with technical competence, particularly Total, brought credibility to the project. Russia also played an important role, providing subsidized infrastructure and preferential tax conditions to make the project commercially attractive. Taking these factors into account, the risk level must have been perceived as very low, especially compared to Arctic offshore oil projects.

There is no doubt that China wants to be a player in the Arctic and gain competence for such a role. Chinese technology and service companies can be expected to play an increasing role, even if Chinese oil companies will not be in the driver’s seat. The Chinese stepwise approach is to learn from others, without taking undue risks or incurring unnecessary costs. China may initially have approached the region with unrealistic energy expectations, but its currently cautious approach could give way to greater confidence over the long term.

Arild Moe is a Senior Research Fellow at the Fridtjof Nansen Institute, Norway.

This essay is part of our Big Questions series.