Global Policy Forum

By Gerald Butt *

Few countries can be watching the Darfur crisis in Sudan with more anxiety than China.

At issue is its involvement in Sudan's burgeoning oil sector. China's investments there have become so important that Beijing might even feel inclined use its veto if the UN Security Council were at some point to recommend imposing sanctions on Khartoum.

Over recent years, China's state-owned firms have become active participants in Sudan's oil development. In 2000, the Khartoum government awarded a consortium led by the China National Petroleum Corporation (CNPC) a concession in the Melut basin east of the River Nile, about 700 kilometers south of the capital. This was in addition to CNPC's involvement in two producing blocks in the oil-rich Western Upper Nile region. The Chinese firm is the largest shareholder in the Greater Nile Petroleum Operating Company which dominates the country's production.

Despite the looming political crisis, the Melut development has begun, with production set to start next summer. By 2007, the expectation is that Melut will match Sudan's current output of 300,000 barrels a day - rising thereafter to 500,000 barrels a day. This would see total Sudanese production - somewhere in the region of 800,000 barrels a day - in roughly the same league as OPEC producers Qatar and Indonesia, and non-OPEC Oman. So the Sudanese prize is not inconsiderable. Already, China is the largest importer of Sudanese oil and Beijing hopes to keep it this way. At present, imports from Sudan account for some 6 percent of China's total. It will be surprising if this figure does not rise sharply over the next decade.

China, in general, has a large and growing thirst for oil. Rising Chinese demand is one of the major factors behind the current high price of oil on global markets. Beijing knows that it needs to take action urgently to cope with this new state of affairs. This is because, to quote a recent Deutsche Bank report, every aspect of China's energy industry seems to be on the rise except for oil production. "China was a net oil exporter during the last (1991) Gulf war and was insulated from the supply disruption that ensued," the authors said. "The US invasion of Iraq served as a wake-up call to China."

As a first step, the Beijing government decided it was time to stock up for a possible disruption of supplies. The plan is to build at least four coastal oil storage sites that will eventually give this vast country 50 days worth of imports in stock. But another key ingredient in China's evolving energy strategy is to go out into the world in search of new reserves that its own oil companies can exploit. And that is how Sudan comes into the picture. Such is China's commitment to the development of the Melut basin - a new oil province - that its companies are also involved in the construction of a 1,392-kilometer pipeline that will carrying the crude to Port Sudan. Furthermore, a Chinese firm has won the contract to build the $215 million export terminal where tankers will eventually be loading up for the long journey eastwards.

But that is by no means the whole story. China sees Sudan as a platform from which to launch its involvement in the Middle East oil sector as a whole. For a start, CNPC will be knocking at the door of the new government in Iraq in the hope of being allowed back to develop the Ahdab field that it was awarded in 1997. The firm did not carry out any oil exploration at the time because of UN sanctions, even though it was required to do so under the terms laid down by the Former Iraqi President Saddam Hussein's regime. While the fate of Ahdab is uncertain, China will be competing for other fields as they are put out to tender.

In neighboring Iran, CNPC is negotiating to take over a Canadian company that is carrying out development work in the Masjed-I-Suleman oil field. Other Chinese firms are working on drilling, refinery and oil terminal projects there. And on the other side of the Gulf, in Oman, CNPC has acquired the stake of a Japanese firm in a joint venture that is planning to develop an onshore block.

Chinese firms are also starting to make their mark on the North African oil scene. Last year, CNPC was awarded a contract for an integrated project in the Adra/Sbaa basin region of Algeria which involves not only exploiting the oil reserves there, but also the construction of a refinery. A few months later, the Chinese state firm was awarded two more exploration blocks. And another company from China is helping Algeria's state oil company Sonatrach boost production from one of its fields. Meanwhile, a Chinese petroleum engineering firm is involved in the construction of a pipeline in Libya, and CNPC is said to be preparing to bid for exploration blocks there.

All of a sudden, then, a region that is dominated by oil firms from the US and Europe has a new player from the Far East. Given China's fast growing demand for oil, the likelihood is that its presence in the Middle East will grow significantly over the next few years.

The broader implications of China's new energy strategy could be considerable. Huge investments of the kind needed for oil exploration and production involve risk assessment. That, in turn, means closely following political trends and, when necessary, seeking to influence them - a role that Beijing has not traditionally played in the Middle East. It also involves guessing what other major powers might be planning in terms of securing access to new reserves of oil, like those in Sudan, for example.

The Darfur affair is giving China its first close-up experience of a Middle East crisis. How it will react if the crisis deepens remains to be seen. Thus far it has shown its hand only in deciding to abstain when the Security Council voted last month to impose sanctions on Sudan if Khartoum does not take immediate and progressive steps towards ending the Darfur crisis.

But that could be an important signal. Even if the United States judges that Sudan's efforts have ultimately fallen short of what is required, Washington will still have to convince China that punitive measures should be taken. Aside from any other consideration, given the size of Chinese investments in Sudan's oil sector, Beijing will need a lot of convincing.

* Gerald Butt, Gulf Editor of the Cyprus-based Middle East Economic Survey, writes a regular economic analysis for The Daily Star

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