Oil began flowing into a crucial pipeline in Myanmar this week, after years of delay. The pipeline, along with a twin natural gas line running along the same route, is an essential element of China’s strategy to diversify its sources of oil supply. When the pipeline reaches maximum capacity, it could account for as much as 6 percent of China’s oil imports.
China is the largest oil importer in the world, but most of its imports travel along one route through Southeast Asia and Chinese officials worry that it is vulnerable to disruption. In recent years, as part of the government’s “One Belt, One Road” strategy, Chinese companies proposed and began construction on an extensive network of roads, railways and pipelines, deepening connections and transit routes to China through Central Asia. “One Belt, One Road” is a 21st Century reincarnation of the ancient Silk Road—maritime and overland trade routes connecting East and West.
The oil pipeline through Myanmar is one component of this strategy. The project will reduce China’s vulnerability to supply disruptions and is consistent with China’s broader effort at improving energy security through long-distance pipelines.
The key objective of the Myanmar pipeline for China is to geographically diversify its oil imports. The oil running through the pipeline will still come from the Middle East, just as before, but the pipeline will allow China to bypass the Strait of Malacca, a narrow passage between Indonesia, Malaysia and Singapore, linking the Indian Ocean to the South China Sea. Often billed as the second most important “chokepoint” in the world after the Strait of Hormuz in the Persian Gulf, the Strait of Malacca saw more than 15 million barrels of oil per day squeeze through its narrow waters in 2013, or about 17 percent of global supply. At its most narrow point, the Strait is only 1.7 miles wide.
Roughly 80 percent of China’s oil imports travel through the Strait of Malacca, which raises strategic concerns. For one, the region is rife with pirates. But more worrying for Chinese leadership is some potential future clash with the U.S.—a hypothetical blockade of the Strait by the U.S. Navy would be crippling. Dependency on one narrow passageway spurred interest in alternative routes.
In 2009, the last section of a long-distance pipeline through Kazakhstan and into China was completed, bringing roughly 400,000 barrels per day (b/d) of Caspian oil to Western China. Two years later, China gained access to Russian oil after a spur from Russia’s East Siberia-Pacific Ocean Pipeline reached completion, providing a reliable source of supply for northeastern China from its northern neighbor. Before the pipeline, China was importing Russian oil by rail. In 2016, CNPC announced plans to lay a second pipeline that will expand the system’s capacity to 600,000 b/d. Several years ago, Russia and China signed a multi-decade, $270 billion deal that envisions ambitious plans to deepen the gas and oil connections across several different points of their extensive border.
Myanmar
Myanmar is also central to China’s plans to diversify its oil imports. The oil pipeline through Myanmar was supposed to open in 2014, with a capacity of 440,000 b/d (see map from Bloomberg below). Although construction of the pipeline was completed a few years ago, it has sat empty as the Burmese government and PetroChina, the pipeline’s owner, fought over taxes and fees. After a long delay, recent pricing concessions on the behalf of Myanmar paved the way for the commencement of the pipeline.
The pipeline has been highly controversial, due to the expropriation of land from Burmese farmers and landowners and the enormous environmental toll, as the pipeline slashes through forests and rugged mountains. The Burmese government is also wary of too much Chinese influence over its economy and has made overtures to the U.S. as a way of trying to fend off China.
Moreover, Myanmar may not get much from the pipeline beyond some transit fees and the ability to unload some 40,000 b/d of oil, Suresh Sivanandam, a senior research manager for Asia refining at Wood Mackenzie, told Bloomberg.
From China’s standpoint, the resistance the pipeline has met in Myanmar has dampened enthusiasm for future investment. “There are open questions about the economics and future cooperation with Myanmar, given the repeated delays and under-utilization,” a senior PetroChina official who requested anonymity told Reuters in March.
Ultimately, however, the pipeline will bolster China’s energy security. The pipeline will service a large refinery in the landlocked Yunnan Province in China’s southwest, a facility that will produce 261,000 b/d of refined products. Moving oil through Myanmar will slash the transit time for deliveries to China by around a third.
Refining operations have been delayed as the facility awaits delivery of oil from the pipeline, but it is slated to start up in June. Bloomberg reports that PetroChina is soliciting investment from Saudi Aramco in the refinery as it tries to augment its downstream sector. Crude oil from the Myanmar pipeline will be processed into diesel and gasoline, potentially leading to an increase in refined product exports.
To be sure, even though this pipeline is just one project, the route through Myanmar adds a new source of supply equivalent to 6 percent of China’s imports. Moreover, it reduces China’s dependence on the Strait of Malacca, albeit only slightly; and it provides fuel for a large refinery in China’s southwest. Bit by bit, with projects of these sort, China hopes they will help insulate the country’s economy from potential oil supply shocks.
China remains the world’s largest oil importer with imports steadily rising, although the U.S occasionally may pull in more. Oil imports hit a record high of 9.2 mbd in March. China’s oil demand is no longer growing at the blistering rate that it used to, but it is still one the largest sources of demand growth in the world. China is expected to burn through roughly 12.2 million barrels per day this year, up 300,000 b/d from 2016. Moreover, China’s import dependence is worsening because its domestic production is falling. Old and depleting oil fields have become too expensive to maintain, and China’s state-owned oil companies have slashed investment. Output plunged by about 7 percent last year and is projected to decline by a similar amount in 2017. Less production will have to be made up through imports, which puts extra emphasis on projects such as the Myanmar pipeline.
Source: The Fuse
