Hungry For Power

Indonesia has long been a playground for the West's oil giants. The names are familiar enough: Unocal, Caltex, BP, ExxonMobil, to name a few. For decades these Western majors have staked out turf in the Southeast Asian archipelago, hauling in billions in black gold. But the times--and the players--are starting to change: the Chinese are coming. Earlier this year some pin-striped American oil executives in Washington, D.C., were startled to hear Indonesia's visiting Minister of Energy Purnomo Yusgiantoro chide them about losing out to Chinese companies in his country's oil and gas scene. "If American businessmen don't become more active, their Indonesian presence will become less and less," he warned. "Maybe you should learn from the Chinese. [They] are very aggressive."

China can't afford to be anything else. Only 10 years ago Beijing was a net oil exporter and its commissars were just emerging from the shadows of socialist energy policies. But this year China overtook Japan to become the world's second largest oil importer--trailing only the United States--and it's looking everywhere for the energy resources it needs to feed its feverish economic pace. Indeed, the country's blistering growth--topping 9.1 percent in 2003--is making China's energy needs only more acute. Last summer rolling blackouts shut down factories in 21 provinces. More and more Chinese are purchasing their first automobiles: in 2003 mainland Chinese bought nearly 2 million cars, and experts expect 100 million gas guzzlers on China's roads by 2014. And after seeing a number of deals slip through its fingers, Beijing has quickly learned that the international hunt for oil and gas is a competitive, unpredictable and sometimes cutthroat business. "There's a great competition among big countries grasping for overseas oil supplies," says Wang Yupu, the general manager of Daqing, China's biggest oilfield. "We're all competing with each other."

Beijing's most recent lesson in the international contest for oil was dealt by its neighbor to the north. Last May President Hu Jintao traveled to Moscow to put his seal of approval on a 25-year, $150 billion agreement between the state-owned China National Petroleum Corp. (CNPC) and Yukos, Russia's largest oil company, for the construction of a 2,400-kilometer pipeline. Beijing seemed virtually assured of the deal, which would move some half-million barrels a day from the Siberian oil terminus of Angarsk to Daqing. The deal suggested that the two great powers were finally setting aside decades of bitter competition in favor of a union that would join Asia's biggest oil exporter with Asia's biggest oil importer.

That is, until Japan swept in as the spoiler. Tokyo, which must import nearly all its oil, raised the ante by offering to put up $5 billion for the pipeline's construction and several billion more for oilfield development and exploration. The Japanese proposal envisioned a pipeline carrying Russian oil to the Pacific port of Nakhodka--and notably bypassed Chinese oilfields. But Russian officials no doubt saw its strategic advantage too: a pipeline stretching out to the coastline holds the prospect of Moscow's selling its crude to multiple buyers, including Japan, South Korea, China and the United States. If that didn't kill the Chinese deal, then the arrest of the deal's chief Russian sponsor, Yukos CEO Mikhail Khodorkovsky, on charges of tax evasion probably did. "With Khodorkovsky in prison," says Vasily Mikheev of the Far Eastern Institute at the Russian Academy of Sciences, "the Chinese lobbying resources disappeared."

Given the natural rivalries that beset the race for energy resources, China is now following the tried-and-true path of most Western countries: cozying up to the Gulf states. Fourteen years ago Beijing didn't even have diplomatic relations with Saudi Arabia, the world's largest oil exporter. Now Chinese diplomats are spending more time in Riyadh, Saudi oil officials are learning Mandarin Chinese and the bonds between the two countries are stronger than ever. Little wonder that Chinese officials afforded VIP treatment to Saudi Oil Minister Ali al-Naimi when he visited in early April. And it may have paid off: the minister boosted hopes for a long-delayed $3 billion contract to enlarge an existing refinery and build an ethylene project in the Chinese province of Fujian. If it goes forward, the deal would raise Saudi energy exports by as much as 50 percent. Sinopec--the Chinese refining conglomerate with the largest stake in the project's development--was already awarded a gas-exploration license for nearly 40,000 square kilometers in Saudi Arabia's Rub al-Khali basin earlier this year.

Beijing is even hoping for a piece of the postoccupation oil action in Iraq. In February a convoy of Chinese diplomats in flak jackets drove into Baghdad to reopen Beijing's gutted embassy. Near the top of their to-do list is reviving a 1997 pact for oil shipments from Iraq's al-Ahdab oilfield. In Saddam's time, China imported as much as 3.7 million barrels of Iraqi crude a year--some of it illegal-ly. NEWSWEEK has learned that corrupt Chinese commissars sometimes bought tankers full of illicit, low-quality oil that was smuggled to China's east coast during the old regime.

Then again, China's energy crunch is so great that there are probably few places it wouldn't look. Chinese envoys are now showing up in a number of resource-rich countries, such as Sudan and Angola, where others fear to tread. The CNPC and Sinopec both grabbed production deals in Sudan after Western investors felt compelled by U.S. sanctions to pull out. Beijing's decision to build a spanking new refinery in the war-torn country raised eyebrows in the industry. "Nobody in Africa wants to build refineries anymore," says Mark Elliot of CITAC, an African energy-market consultancy. "Everyone assumed it was part of China's play to get into the Sudanese exploration industry--which they did. The Chinese don't look at the economics as much as the strategy."

And that strategy may be best summed up as diversified dealmaking. Having lost out on some projects in its own back-yard and understandably leery of becoming too dependent on Middle Eastern oil, China is continually broadening its search for the next energy find. Hu Jintao and his entourage of globe-trotting oil officials have been loitering in Libya and glad-handing in Gabon. In January Hu embarked on a tour of energy-exporting African states, inking a 30-year deal to buy Gabonese crude and laying the groundwork for future deals in Chad and Niger. The country's diplomats are scouring the globe for what one Chinese Foreign Ministry official calls "strategic, stable and long-term relationships" with key suppliers. Their current poster boy is none other than Australia. "The Australian economy dovetails with ours," says the diplomat. "They want to export the very things we need." China's recent $21 billion deal for liquid natural gas from the Gorgon project off the coast of Western Australia was the biggest commercial deal done Down Under--ever. And, once again, Hu was on hand for the contract-signing ceremony. "China's the big story," says Tim Harcourt, chief economist of Austrade, Canberra's official trade-development wing. "While the other Asian economies have been bruised and battered by financial crises and tech wrecks, China just keeps keeping on with strong growth rates."

But that economic performance will falter if China can't keep the oil taps on. Last May, when Chinese firms tried to buy a larger stake in the lucrative Kashagan oilfield in the Caspian, Western and Japanese companies thwarted the sale. Russian officials are supposedly considering building a spur off their main pipeline that would direct some of the oil flow to Daqing, but many analysts believe that, despite Beijing's efforts, that will never happen. If China ever sees a drop from the Russian-Japanese pipeline, it will probably be from buying it on the open market like everyone else. But the Chinese have responded in kind: in January Daqing stopped exporting its crude to Japan, putting an end to a supply contract that began in 1972. Altogether they are painful lessons in the hunt for energy, but Beijing has no time to dwell on what's done. It's too busy looking--aggressively--for the next deal around the bend.