Is It Really CPEC? Or Is It China's Karakoram Corridor That Is Now Unravelling?-1

It was on June 2, 2004 that the US Department of Defense announced that the forthcoming simultaneous deployment of seven aircraft carrier strike groups (CSG) under ‘EX Summer Pulse 04’to demonstrate the US Navy’s ability to provide credible combat power across the globe by operating in five theatres with other US, allied, and coalition military forces. This was to be the US Navy’s first exercise of its new transformational operational construct, the Fleet Response Plan (FRP)—which is about new ways of operating, training, manning, and maintaining the fleet that results in increased force readiness and the ability to provide significant combat power to POTUS in response to a national emergency or crisis—all this being part of the US Navy’s ‘Sea Power 21’ strategy. Beginning in early June and continuing through to August 2004, the US Navy exercised the full range of skills involved in simultaneously deploying and employing its CSGs around the world. The exercise included scheduled deployments, surge operations, joint and international exercises, and other advanced training and port visits. Under the FRP construct, the US Navy is required to provide six CSGs in less than 30 days to support contingency operations around the globe, and two more CSGs can be ready in three months to reinforce or rotate with initially responding forces, to continue presence operations in other parts of the world, or to support military action in another crisis. The seven aircraft carriers involved in the exercise were the Norfolk-based USS George Washington CSG and the San Diego-based USS John C Stennis CSG (both deployed at the outset of the exercise); the Yokosuka-based USS Kitty Hawk; the Mayport-based USS John F Kennedy CSG (which began a combined and joint exercise early in June, followed by a scheduled overseas deployment); the Norfolk-based USS Harry S Truman CSG (which conducted a scheduled training exercise, followed by overseas operations with the Norfolk-based USS Enterprise CSG, beginning in early June); and the USS Ronald Reagan (which conducted operations in the US Northern Command and US Southern Command theatres during the ship’s inter-fleet transfer from Norfolk to its Pacific Fleet homeport of San Diego).

It was this unprecedented, combined show of multinational naval might that provided the spark for China to seriously contemplate the usage of land routes for trade and commerce, instead of relying solely on sea lanes of communications (SLOC). Back in 2004, China's economy was heavily dependent on foreign trade, 90% of which traveled by sea. China's near seas—the Yellow Sea, the East China Sea and the South China Sea—are bounded by what Chinese strategists call the ‘First Island Chain’, a series of islands (many of which are controlled by US allies) that stretches from Japan to The Philippines to Indonesia. To reach ports on China’s eastern coast, seaborne trade from the west must now pass through maritime chokepoints such as the Strait of Malacca (through which 82% of China’s crude oil imports passed in 2013). Passage through these maritime chokepoints is secured by another country: the US, the world’s dominant naval power. The geographic enclosure of China’s near seas would thus make it relatively easy for an adversary to disrupt or interdict China’s SLOCs. China still faces many challenges in developing its ability to project sufficient naval power to safeguard seaborne trade as it passes through distant chokepoints. Instead, China must rely on the US to provide security of the sea-lanes. Although maritime security is ostensibly a public good, China worries that, as a potential peer competitor to the US, it will not always be able to rely on the US to protect its shipping.

Consequently, back in late 2004, Beijing conceived the ‘Belt and Road Initiative’ in order to mitigate the risk of maritime interdiction by constructing transit routes along six land-based economic corridors: 1) The China-Mongolia-Russia corridor, anchored by the Trans-Siberian railway. 2) The New Eurasian Land Bridge, anchored by a set of railways running from central China (Wuhan, Chongqing and Chengdu) to Europe via Kazakhstan, Russia and Belarus. 3) The China-Central Asia-Western Asia Corridor, passing through Central Asia, Iran and Turkey to reach Europe. 4) The China-Pakistan Economic Corridor (CPEC), which would extend the Karakoram Highway, which already crosses the mountains between China and Pakistan, and build highway and rail links all the way through Pakistan to the port of Gwadar. 5) The Indochina Peninsula Corridor. 6) The Bangladesh-China-India-Myanmar Corridor.

In all these corridors, China has since 2005 been enhancing existing transportation networks, constructing new roadways and building intermodal transport hubs and energy pipelines. Two of these corridors, the China-Mongolia-Russia corridor and the New Eurasian Land Bridge, will be entirely overland. They center on existing transcontinental railway lines and mainly focus on delivering relatively high value-added goods, such as consumer electronics, which are sensitive to rapid changes in demand. China will shift a small fraction of its total trade to these routes, providing an outlet for industries in China’s interior and giving the country a measure of insurance against naval interdiction. China will continue investing in port infrastructure along other corridors in the Belt and Road Initiative, particularly in the Bay of Bengal and the Indian Ocean Region (IOR). However, China will find ways to link land and maritime routes, aiming to bypass the South China Sea chokepoints and minimise the distance of any single maritime leg of Chinese merchant shipping. For example, the CPEC could allow some China-made goods to travel overland to Pakistan before embarking for Africa and the Middle East at Gwadar. And of course, the Belt and Road investments will also serve to build political support for China. 

Crude oil represents almost one-fifth of the China’s energy demand. In the decisive year of 1993, the Middle Eastern and African countries, namely Oman, Yemen and Angola were among China’s most prominent crude oil suppliers. China’s foreign oil supplies from 1993 till 1999 originated between 40% and 61% per in the Middle East, and supplies from Africa accounted for up to 18%. Since 1995, countries such as Saudi Arabia, Kuwait, Iran, Iraq, Angola, Sudan, Equatorial Guinea, Libya and Congo were among those which have supplied crude oil to China. CNPC had since 1996 invested substantially into Iranian, Nigerian and Sudanese oil fields.  By 2003, Sudan and Iran accounted for almost 7% and 14% of China’s imported crude oil stock,

In 2009 China needed almost 120 million tons to cover its domestic crude oil needs. By 2020, China will become the world’s largest nett importer of crude oil, reaching around 13 million barrels a day of nett oil consumption by 2035, which means nearly 80% of its crude oil consumption will depend on imported oil. In 2013, China overtook the US to become the world’s largest nett importer of crude oil and liquid fuels, and its total oil imports are expected to reach 9.2 mbd by 2020, nearly four times the level of 2005. Meanwhile, Chinese natural gas demand is growing fast, rising 11.4% last year to 163.4 billion cubic metres. China plans to boost the share of natural gas in its energy mix to 10% by 2020, from under 5% in 2010, in order to cut its dependency on coal, which now supplies 70% of its energy needs. Part of this will be met by China’s huge shale gas reserves, although large-scale production of shale gas isn’t expected before late this decade.

Trade between Iran and China soared from US$4 billion in 2003 to more than US$20 billion in 2009. By 2013, it had doubled to US$53 billion. Presently, China accounts for 25% of Iran’s foreign trade. In 2011, approximately 10% of China’s crude oil imports were from Iran. But CNPC’s rapid global expansion into easier operating environments reduced the need for it to push further into Iran. In 2012 China had cancelled a US$4.7 billion project to develop the South Pars gas field. An Iranian decree officially excluding CNPC from the $2.5 billion contract North Azadegan oilfield project’s Phase-2 near the Iraqi border came into force in April 2014. Iran’s oil reserves are one of the largest in the world after Venezuela, Saudi Arabia, and Canada. The country is also home to 18% of the total natural gas reserves in the world. In the near future, Iran may re-award Phase-2 of the North Azadegan oilfield to China for development. CNPC and Iran’s PEDEC have already signed an initial agreement to produce 25,000 barrels a day from the field. CNPC had earlier also participated in Phase-1 of North Azadegan and had begun production of 75,000 bpd last October. China’s Sinopec Group and CNPC will had begin producing 160,000 bpd barrels from South Azadegan and Yadavaran in southwestern Iran from October 2016. Phase-1 of the Yadavaran oilfield will yield 85,000 bpd. Yadavaran, which Iran shares with Iraq’s Sinbad, was awarded to Sinopec about nine years ago in a US$2 billion deal to operate Phase-1 in July 2014 and raise recovery to 200,000 bpd in Phase-2.

In 2008 CNPC renegotiated a production-sharing contract to develop Iraq’s al-Ahdab oilfield, which it had previously entered into with the Iraqi government during the Saddam Hussein era. The new technical service agreement granted development rights to CNPC for 23 years. A year later, in 2009, CNPC combined with UK-based BP in a consortium that won the rights to develop the Rumaila field and to increase its output from 985,000 bpd to 2.85 million bpd. CNPC also formed a consortium in December 2009 with France’s TOTAL and Malaysia’s PETRONAS to successfully bid for the Halfaya field. The consortium’s plateau production target is 535,000 bpd. The Halfaya oilfield has estimated reserves of 4.1 billion barrels of oil. In May 2010 China National Offshore Oil Corp (CNOOC) acquired a stake in the Maysan oilfields along the Iraq–Iran border. Chinese companies have secured a significant foothold in the Iraqi upstream sector, with investments in roughly 20% of Iraqi oilfield projects. They have also signed deals that more than double Iraqi exports of crude oil to China, a process that started in 2013 as Baghdad lowered its export prices. In April 2014 CNPC gained its first upstream stake in the United Arab Emirates through a deal with its Emirati counterpart, Abu Dhabi National Oil Company (ADNOC). The deal is Abu Dhabi’s first concession deal with China, and highlights the UAE’s shift away from traditional Western international oil companies to Asian partners.

All in all, the Communist Party of China has constructed or invested in energy projects in more than 50 countries to date. This enabled Beijing to import approximately 60% of its crude oil supply in 2014 as well as about 32% of its natural gas supply. In 2011, China imported almost 5 million barrels of crude oil per day, of which almost 50% came from the Middle East, and 20% came from Russia. In addition, China’s imported crude oil from Africa totaled 1.23 mbd, which accounted for about 20% of China’s total imported crude oil. Presently, China imports at least 52% of its crude oil from the Middle East. Approximately 43% of this has to pass through the Strait of Hormuz, while 82% of all Chinese oil imports and 34% of LNG imports must pass through the Strait of Malacca. In order to minimise its dependence on SLOCs transiting through the Malacca Strait, China in June 2010 zeroed in on Myanmar for solutions. 

In late January 2015, Beijing opened a pipeline linking southwestern Yunnan to Maday Island, east of the coastal city of Kyaukpyu in Myanmar, and also began operationalising an oil tank farm accommodating 12 storage tanks. China National Petroleum Corp’s (CNPC) Huanqiu Contracting and Engineering Corp subsidiary built the 12 tanks, each with a capacity of 100,000 cu m. Total storage capacity is thus 1.2 million cu m, or about 7.6 million barrels. Maday Island, just 10 sq km in area with almost no other infrastructure, is also the origin point for both a crude oil pipeline for carrying 440,000 barrels per day, and a natural gas pipeline intended to ship 12 billion cu m annually to China’s land-locked southwestern province of Yunnan. The oil pipeline, costing US$2.45 billion to build—with US$1.20 billion coming from Myanmar and US$1.24 billion from China—starts in Maday, enters China at Ruili in western Yunnan province, then heads to Chongqing. It runs for 771km in Myanmar and 1,631km in China.  This 2,400km-long pipeline is bringing bring 23 million tons of Middle Eastern and African oil into China every year. In 2010, CNPC’s Yunnan branch started work on an oil refinery project in Kunming, designed to handle more than 10 million tons per year. The natural gas pipeline became operational in late September 2013. It brings gas from Myanmar’s offshore Shwe fields off the coast of Rakhine, a western state bordering Bangladesh, to Yunnan province. Myanmar has proven natural gas reserves of 2,540 billion cubic metres and crude oil reserves of 3.2 billion barrels. These two pipeline have saved 30% of delivery time, since the distance the crude oil and LNG from the Middle East and Africa has to travel by sea has been cut by 2,000km.

To Be Concluded