China is mobilizing its vast state-run energy industry to prepare for an economic tussle with the U.S. that could escalate further and might last for years.
Top oil executives were busy this week touting the need for energy security, and even discussing the previously far-fetched notion that the nation could be cut off from overseas supplies. The public comments show China is beginning to prepare for the worst scenario in the trade war, said Laban Yu, an analyst at Jefferies Group in Hong Kong.
In an internal meeting in Beijing on Wednesday, the chairman of top producer China National Petroleum Corp., Wang Yilin, urged employees to develop contingency plans for a “protracted and complex” trade dispute with Washington, according to a company statement. At another event in Shanghai the same day, Sinopec’s former chairman, Fu Chengyu, said China should prepare for an extreme case whereby its overseas oil supplies are blocked entirely in the short term.
President Xi Jinping, meanwhile, hosted a meeting in Beijing approving Shanxi province to test new policies to drive its energy independence. On the national scale, Xi’s policy to cut China’s massive import bill is now taking on added significance due to the trade war and Washington’s sanctions on major suppliers such as Iran and Venezuela.
The comments signal that energy security is moving to the top of China’s political agenda as the trade war intensifies. While tariffs resulted in cuts to U.S. supplies to China, the world’s largest oil and gas importer may now be positioning itself for any escalation or widening of the dispute that, according to a recent prediction from a senior government researcher, could last until 2035.
“China is now looking at its oil supply situation from the worst-case scenario, like what the U.S. has done to Iran,” Yu said. “Obviously, China believes now more than ever that similar U.S. sanctions against a whole country could happen to China.”
China’s escalating rhetoric around rare earths, of which it’s the world’s dominant supplier, suggests the trade war may take a darker turn, with financial penalties on imports morphing into actually choking-off supplies of critical raw materials.
The need for China to achieve energy self-sufficiency has become an “urgent reality,” according Sinopec’s Fu reported remarks. He called for shale gas development to be fiercely pursued, albeit without making an explicit link to the tensions with Washington.
China’s energy purchases from the U.S. have faded. Imports of American liquefied natural gas has slumped after Beijing tagged them with a 10% tariff that’s set to rise to 25% from June. Although excluded from duties, oil imports from the U.S. have become intermittent, as buyers exercise caution in doing business with a trade adversary.
Over the past six months, China’s overall oil imports have been expanding at about 10% compared with refining growth of around 5%, according to Neil Beveridge, a Sanford C. Bernstein & Co. analyst in Hong Kong. “It appears they are building up strategic petroleum reserves, in the event of any supply disruption,” he said.
Still Beveridge doesn’t think it’s likely for China’s overseas supplies to be cut off. “It only happens when both countries going into war. Cutting off oil supplies to China to some extent is equal to a declaration of war,” he added.
China’s oil giants have committed to spend the most money in five years in pursuit of higher energy output after orders from President Xi. The nation’s reliance on oil imports has risen steadily to over 70% amid shrinking domestic production. The government is now keenly tracking the progress of majors’ plans to increase output as part of a seven-year action plan.
It won’t be easy for China to raise production. The majors are working with fields that are old and high-cost. Unlocking the country’s large shale reserves could be crucial to the effort, but challenges are plentiful as reserves are deep, broken up and hard to reach.
The broader outline is that “China has lost trust in the U.S., either as a supplier or as a market,” Yu said. “It seems resolved to mobilize all resources it has to make sure the U.S. plays less of a role in China’s economic growth going forward."