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Government of the Russian Federation

National Research University Higher School of Economics

Faculty of World Economy and International Affairs

MASTER'S THESIS

China's energy diplomacy towards Russia in the XXI century

Master's thesis title

Student - Andrey Popov

Scientific Advisor - Sergei Shaposhnikov

Reviewer - Irina Petrovskaya

Moscow, 2018

Content

• Introduction
• 1. Theoretical paradigm of energy diplomacy studies
• 1.1 The nexus between energy diplomacy and energy security
• 1.2 Mercantilist approach to energy security
• 1.3 Liberal approach to energy security
• 2. China's oil diplomacy towards Russia
• 2.1 Domestic needs and limitations of oil industry
• 2.2 Foreign energy policy and energy diplomacy features
• 2.3 The role of Russia in China's foreign oil policy
• 2.4 Development of cooperation in oil sector
• 2.5 What China gets from Russia, how and why?
• 3. China's gas diplomacy towards Russia
• 3.1 Role of natural gas in China's energy consumption complex
• 3.2 Natural gas foreign strategy
• 3.3 Russia in China's gas diversification map
• 3.4 Development of negotiations on gas supplies from Russia to China
• 3.5 What fruit do negotiations on gas bring to China?
• 4. Analysis of china's soft mercatilism
• Conclusion
• List of literature
• Introduction
• This thesis is devoted to the issue of China's (the PRC) energy diplomacy towards Russia in the XXI century. In this paper the term “energy diplomacy” implies a set of practices conducted by states in order to provide their national energy companies an advantage in reaching international markets and guaranteeing stable energy supplies Goldthau A. Energy Diplomacy in Trade and Investment of Oil and Gas. Royal Holloway. University of London. 2010. P.25-48. The subject of the research is the developmental process of those diplomatic instruments applied to Russia in the present century.
• Scope of analysis:
• As the energy market is quite extensive and composed of many subtypes of commodity markets, such as nuclear energy, renewable energy, biofuels and fossil fuels, here the limitations of the research are linked to the fossil fuels significantly important for both Russia and China - oil and gas. China is one of the leading energy importing countries and Russia is one of the largest energy exporters in the world. Another globally traded fossil fuels - such as coal, for example - is not included into the scope of this research because those energy resources does not constitute the same value in bilateral trade turnover between China and Russia as oil and gas. Moreover, coal consumption is planned to be decreased in China, and the recent coal imports' trend justifies this intention, whereas the imports of gas and oil are rapidly growing and, therefore, oil and gas fields seem to be more actual areas for research International Trade Center. Mineral fuels (by quantities) imported by China. 2001-2017 URL: https://www.trademap.org/tradestat/Product_SelCountry_TS.aspx?nvpm=1|156||||27|||4|1|1|1|2|1|1|2|1 (accessed: 01.05.2018).
• Time limitations:
• The time limits are set on the period that starts at the beginning of the noughties and end by 2017. The beginning of the XXI century became a milestone in the bilateral relations of the two countries as in 2001 Russia and China signed the Treaty of Good-Neighbourliness and Friendly Cooperation, which laid a foundation for mutual trust and further development of multidimensional relations. Moreover, in 2001 China joined WTO, became more integrated into international economy and significantly influenced global political and economic layout. Another factor contributing to the given limitation of timespan is related to the new period of governance in the Russian Federation associated with Vladimir Putin. Putin's Russia also became more integrated into global community after 9/11 when Russia supported the global anti-terror campaign Michael Mcfaul. U.S.-Russia Relations after September 11, 2001. Carnegie Endowment for International Peaace. Oct 24, 2001. URL: https://carnegieendowment.org/#unheard-voices-what-syrian-refugees-need-to-return-home (accessed; 01.05.2018). Rising energy needs in Europe also made Russia to get its niche in the international markets. In sum, the beginning of the XXI century is the commencement of new periods for the both countries, Russia and China, and for their bilateral relations particularly.
• Literature review:
• The topic of China's energy diplomacy is quite recent and it started to draw attention of scholars simultaneously with the economic ascent of China and its increasing energy consumption needs. Zha Daojiong (2005) outlined the political intentions of the PRC in the international energy markets and linked China's efforts in guaranteeing energy security with its international policy in general. He argues that China's behavior in the international markets should not be considered as a threat to global energy security and that energy efficiency is the key problem of the country. James Tang (2006) devoted his research to the topic of China's energy security and the relevant foreign policy in Africa and Latin America during the Hu Jintao era. He claims that China should make a stress on more liberal practices of mutual cooperation in order to avoid the clash with the US. Erika Downs (2006) comprehensively studied China's “Go Abroad” policy aimed to secure its growing energy supply needs and the first practices of energy diplomacy, but at that moment it was too early to study Sino-Russian dialog in the energy fields as it was the very beginning of bilateral cooperation. She holds that China's energy diplomacy is in a state of flux ranging from market to statist practices. Guy Leung (2010) analyzed China's energy security perception and its real international contribution to the global energy security. He argues that transnational energy pipelines is a geopolitical instrument by which China projects its soft power.
• As the first Sino-Russian energy project, “East Siberia - Pacific Ocean” or ESPO oil pipeline, started to operate in 2011 scholars endeavored to ponder over the issue of bilateral cooperation and its implications. Nina Poussenkova (2013) conducted a research on the development of joint ventures of Rosneft and its Chinese partners. She claims that for China Russia is one of the partners among a great number of others and China will dictate its conditions as it enjoys several options of energy suppliers. Charles Ziegler and Rajan Menon (2014) highlighted Chinese and Russian energy diplomacy with regard to their energy competition in the post-Soviet republics of Central Asia. The authors suggest that flexible China's energy diplomacy might result in increasing Chinese influence in the region. James Henderson and Tatiana Mitrova (2016) collaborated over Sino-Russian energy cooperation and summarized the main facts and events that took place between the two countries in the energy fields and estimated their future planned projects. They argue that the recent relations in the energy field are quite cautious and significantly influence by external factors such as shale oil and gas revolution.
• The issue of China's energy diplomacy towards Russia was not considered particularly prominent so far due to the fact that the issue itself started to be noteworthy only after long-standing negotiations led to actual deals and certain tendencies in bilateral communication took place. It took Russia and China almost a decade to strike the first significant energy supply deal and another decade to develop energy cooperation to the strategic level. Although there was a plenty of factual material on bilateral cooperation, here were not many attempts to theorize China's energy diplomacy, especially with regard to Russia. Therefore, only in the very recent years the topic became explicitly salient, that is why for the time being Chinese energy diplomacy towards Russia is a relatively understudied spot in the field of bilateral cooperation. The issue represents certain significance both for China-watchers and decision-makers and contributes to understanding of a more general subject of international political economy as it displays behavioral patterns of a rising international power, which tries to keep its ascent and changes the global order.
• Methodology:
• This research is conducted in the sub-field of International Relations - International Political Economy - which deals with the interaction between international markets and states. The theoretical framework is composed of two approaches - neomercantilism and neoliberalism. The hypothesis of this thesis is that as China's economic and political influence grows the PRC tends to utilize soft neomercantilist diplomacy towards Russia, while energy interdependency is hard to avoid due to individual needs and objective circumstances. The research questions are:

- What aims do China seek to attain in its energy policy towards Russia?

- Why and how China does attain what it gets from its energy diplomacy towards Russia?

The research design combines features of descriptive research, case studies and meta-analysis. Descriptive design is applied in order to build the developmental line of events regarding China's energy diplomacy; case studies are utilized for defining the characteristics of diplomatic practices in gas and oil industries; meta-analysis is applied to combine the results of case studies. The empirical design leads the research from the theoretical observations related to energy studies and energy diplomacy approaches. Afterwards it entails the necessity to investigate the domestic needs of China's energy sector in order to understand what China needs from its international partners. Then, the international map of cooperation is observed in order to understand what role Russia plays in it - this step is required for comprehending China's diplomatic behavior with regard to Russia. In conclusion the results of case studies are summarized and analyzed. Therefore, it is needed to go through several steps in the research and consequently complete the following tasks:

1. to examine theoretical approaches suitable for China's energy diplomacy

2. to highlight domestic production and consumption of China

3. to outline the energy import diversification map of the PRC

4. to study Russia's role in China's energy supplies strategy

5. to assess the fruits China get from Russia through its energy diplomacy

6. to analyze China's diplomatic practices applied to Russia

The methods chosen in this paper are qualitative as the research seeks interpretation of relevant data rather than to build a static or causal picture based on quantitative data. The methods include statistical analysis as the research deals with trading data, qualitative observation of temporal development and recursive abstraction of incomparable data such as geopolitical conjecture and market-related data. General analysis was based on primary sources such as data of UN International Trade Center, World Bank, Energy Information Administration, statistical reviews of world energy provided by BP and the Oxford Institute for Energy Studies, and also speeches of officials. Apart from that, the research was backed up by a variety of secondary sources, including the books and articles already mentioned above in the literature review and also monographs and articles devoted to theoretical foundations of International Political.

The chosen methodological framework has certain limitations such as a relatively small number of methods - a broader variety including quantitative instruments could reveal existing deep correlations between different sets of data, for example, the nexus between bargaining power and changing market conjuncture; but in the framework of this thesis it is necessary to accept these limitations in order to comprehend the general trend of China's energy diplomacy towards Russia. These limitations are should be considered as challenges and might be overcome in the future on the basis of this research.

1. Theoretical paradigm of energy diplomacy studies

1.1 The nexus between energy diplomacy and energy security

china energy diplomacy toward russia

Interaction between states in the field of energy cooperation existed as long ago as the international trade of energy resources appeared. But “energy diplomacy” could be considered as a relatively recent term in both international policy-making and among academics. The importance of energy diplomacy became explicitly salient after the energy crises of the 1970s, when the largest energy exporters of the Middle East imposed embargoes on oil exports and limited the access of the Western countries supporting Israel to energy resources. Arab countries decided to decrease oil production volumes and, therefore, raised oil price initially from 2 USD per barrel up to 3.65 USD and then even up to 12 USD. That was one of the most prominent historical cases of tension between international energy markets and states. Since then different countries started to develop foreign policy aimed at preventing supply cuts and guaranteeing long-term energy security Давтян В. Энергетическая безопасность как политическая категория. // 21-й Век, №3 (15) 2010. P.26. According to Andreas Goldthau, this specific foreign policy securing access to energy supplies abroad and promoting government-to-government cooperation in the energy sector is commonly understood as energy diplomacy Goldthau A. and Witte J.M.. Global Energy Governance: The New Rules of the Game. Washington:

Brookings Institution. 2009. P.3-9. The main actors of energy diplomacy are states which seek to establish cooperative relationship with another country primarily in order to secure national security interests. As far as security issues are involved into analysis of interactions between states, economic logic of optimization of a deal is not necessarily prevails in decision-making and might step back in front of political goals that could be regarded by a government as much more important than pure profit maximization, although it is also a significant part of a deal.

Energy security and diplomacy might be analyzed through different perspectives based on the political and economic needs of a country concerned with an issue of stable energy supplies. For energy exporters the premier concern is security of demand - guaranteeing long-term and stable supplies to the markets that have relevant purchasing power and intentions to satisfy its domestic consumption needs. For energy exporters the issue of guaranteeing security of demand is often equal to underwriting the rent coming to state budget from export revenue. For energy importers the main interest is security of supply - ensuring long-term trade flows of energy resources to the domestic market in amount that provides energy security needed for stable economic development. Another aspect of energy security is transit security that is an issue of concern of both exporters and importers. Transit security implies a safe energy transfer from a seller to a buyer through a territory of a third country Zhiznin S. Russian energy diplomacy and international energy security (geopolitics and economics) // Baltic

Region, (1), 2010, p.10.

The topic of energy security is usually considered within the framework of international relations approaches. The two traditional approaches applied to international energy studies are realism and liberalism and their modern modifications. Realists claim that states are the main actors in the field of energy security, who firmly serve the national interests in the international struggle for scarce energy resources. Energy trade relations with neighboring countries is predominantly led by political forces rather than by the market and could be characterized as zero-sum game or “beggar-thy-neighbor” policy. The emphasis is made on unbalanced trade structure, import dependency and political conflicts with regard to energy resources. In contrast with realist thought, liberals claim that states are not the only actors and they are equally important along with transnational institutions, companies and NGOs. Free trade and win-win approach are the benchmark in the framework of liberalism and cooperation between countries takes place due to the organic interaction of market forces rather than due to political will. The key point of liberalism refers to energy securitization through mutually beneficial trade, investments and interdependency . Both of the approaches are utilized in energy studies nowadays and scholars do often mix some conceptual elements from them because the reality do not always perfectly fall within one theoretical construct Боровский Ю., Тратчук К., Исследования энергетики в теории международных отношений. Международные процессы, Том 13, № 4, 2015, с. 86-92.

As energy diplomacy is an interdisciplinary subject overlapping with such notions as trade and security and, therefore, simultaneously related to international economy and international politics, one might find an analytical framework of International Political Economy (IPE), a subfield of International Relations, the most suitable for studying the subject. According to Robert gilping, one of the fathers of International Political Economy, IPE is a field of inquiry that comprises the relations and interactions between states and markets at the global scale. IPE paradigm embraces the following characteristics: through the lens of International Political Economy (IPE), which embraces the following characteristics: 1) an interdisciplinary approach (international politics-international economics), 2) recognition of a multiplicity of actors and institutions (states, companies and markets), 3) identification of the systematic interdependence of global, regional and domestic levels, 4) openness to variety of methods and normative concerns Kuzemko C., Keating M.F., Goldthau A. Nexus-thinking in international political economy:

what energy and natural resource scholarship can offer international political economy // Handbook of the International Political Economy of Energy and Natural Resources. Edward Elgar Publishing. 2018. P.4. Robert Gilpin identified three schools of IPE derived from traditional international relations theories - realism/mercantilism, liberalism and Marxism/critical theory. The first two theories, liberalism and realism/mercantilism, became notably widespread in academic studies related to the subject of energy studies Gokhan Ozkan. Emergence of International Political Economy as a Sub-Discipline of International

Relations and Impact of the Global Crisis on International Political Economy. // International Journal of Business and Social Science. Vol. 3 No. 13; July 2012. P.198-203. Both of them are utilized in this thesis as they both give different insights with regard to the energy diplomacy, while critical theory is left aside because it concerns the problem from the angle of power and wealth distribution and more focused on the developmental problems.

1.2 Mercantilist approach to energy security

In the historical perspective the term mercantilism is usually linked to economic practices of the medieval states primarily seeking to maintain the security of the state. Within mercantilist view, the ability to provide national security is directly connected to the state power in the system of international relations, economic nationalism aimed at maximizing state interests was quite an omnipresent foreign policy. In the middle of XX century Hans Morgenthau in his book “Power Among Nations” (1948) formulated a concept of state behavior which influence the most recent variations of mercantilist approach in IPE. According to Morgenthau states are trying to maximize their power in international arena. Due to different paths of historical development some states occupy leading positions enjoying their clout over the others, and some others want to change the given power balance. Morgenthau claimed that there are three categories of states differing by their intentions in the international system. 1) Status quo states enjoy the current distribution of power and do not want the international order to be changed. 2) Revisionist states, in contrast, are not satisfied how power is distributed globally and, therefore, they want to change the global order so that their position is to be considered by the others. 3) Prestige-seeking states take a somewhat mixed position trying not to directly opposed global leaders but at the same time trying to gain more international influence within the system. In order to lobby their national interest and achieve a certain goal internationally states are actively utilize diplomacy as a bargaining tool for interaction with counterparts Morgenthau H. Politics Among Nations: The Struggle for Power and Peace. Boston:

McGrawHill Higher Education. 1972, P. 14-25. Apart from Morgenthau's concept of maximizing power, Gilpin's book “The Political Economy of International Relations” (1987) also significantly contributed to mercantilist understanding of IPE and also to mercantilist approach towards towards energy security and diplomacy studies. Robert Gilpin was not an orthodox realist scholar but rather a “soft realist”, as he called himself. Accepting the basic notions of liberal tradition, he argued that national security concerns and interests are key determining factors of economic interactions. Gilpin claimed that politics determines the framework of economic activity and channels it in directions which tend to serve political objectives and that “markets rest on political decisions”. At a larger scale, markets are dependent on influential national economies with predominance of a hegemon that transmits its political will globally and eventually stabilize international liberal economy Cohen B.J. Robert Gilpin and the Early Development of International Political Economy. // Robert Gilpin and International Relations. Reflections. Wolfgang Danspeckgruber. 2012. P.23-26.

The most recent thoughts about mercantilism in energy studies were developed by Charles Ziegler and Rajan Menon in their work “Neomercantilism and Great-Power Energy Competition in Central Asia and the Caspian” (2014). The authors defined neomercantilism foreign policy as “state-directed efforts aimed at making asymmetric economic gains at the expense of competitors” Ziegler, C. E., & Menon, R. Neomercantilism and Great-Power Energy Competition in

Central Asia and the Caspian. // Strategic Studies Quarterly. Summer 2014. P.17. Neomercantilism does not reject markets, but it places them under control of governments seeking to gain as much economic benefits from international trade and cooperation as possible. As far as governments are concerned with enriching they tend to manage the key sectors of economy by the hands of large monopolistic state-owned enterprises. Governments seek to utilize its political power and diplomacy to guarantee that key national companies have a solid access to essential raw material and resources. Noninterference into international markets and assumption of self-regulated international economy are the notions which are argued by the proponents of neomercantilism. Individual self-interested behavior of households and firms at the national level probably cause maximization of wealth but does not necessarily lead to the best standing with regard to national interests. Free trade may undermine national security by heavily increasing dependence on crucial commodities (agricultural products, raw materials and energy resources). In order to reduce volatility risks of international markets states tend to control trade and foreign investments Ibid. p.19 .

Energy resources are particularly important for states due to the fact that energy keeps the economy functioning, and well-functioning economic system is directly related to administrative capacities of governments and, eventually, to their legitimacy and even existence. That is why governments seek to guarantee stable energy supplies and accessible energy markets. As energy reserves are scarce and disproportionally distributed among states, governments tend to behave in a competitive way rather than in a cooperative way. In order to reach the required reserves and markets, governments try to subsidize their national energy companies, form exclusive trading blocks and lock up international energy supplies. All that instruments of mercantilist energy diplomacy are aimed at providing national energy firms with a competitive edge in their search for energy supplies in international markets.

1.3 Liberal approach to energy security

Liberal academic tradition derives from the notion of human freedom, and it holds that individual behavior of self-interested economic actors brings the market powers of demand and supply to the optimal state of equilibrium. The basic assumption of liberal approach in IPE is the notion of laissez-faire or free trade with minimal participation of governments. Robert Kohen and Josef Nye developed this assumption in their influential collaborative work “Transnational Relations and World Politics” (1971). They promoted a quite new understanding of interconnection between international economic relations and international political relations which they called a complex interdependence. Complex interdependence implies multiplicity of communication channels exceeding state-to-state level, mitigated role of military power and the absence of hierarchy among political and economic issues The Theoretical Evolution of International Political Economy. A reader. Ed.by Paul D.P., Amawi A. Oxford University Press. New York. 2013. P.149. Complex interdependency is based on the basis of game theory claiming that cooperative behavior is an optimal choice for the players. Interruption of existing trade and economic relationship in favor of some political considerations might bring more harm to national security rather than anticipated benefits of initial political concerns.

The liberal paradigm of IPE was significantly influenced by the intuitionalist tradition mainly created by Douglas North. According to the author, institutions are the set of constraints devised by people for the purpose of structuring political and economic interaction among them. The constraints might be informal (such as traditions, customs, taboos etc.) and formal (for instance, laws, constitutions, legal contracts etc.) The constraints shape socio-economic and political reality through creating a set of rules well known by everybody. In other words, institutions create order in interactions between people, enhance transparency and mutual trust in a society, and reduce transaction and production costs of economic agents by reducing risks. Thus, the more institutionalized a society is, the more efficiently its economic system functions North D.C. Institutions. // The Journal of Economic Perspectives, Vol. 5, No. 1. Winter, 1991, pp. 97-98.

Robert Keohane developed a similar approach called Neoliberal Institutionalism which holds that states are not the only ones actors on the international arena and institutions are becoming increasingly important in international relations. Keohane argues that international order is anarchic as international institutions are aimed at structuring and facilitating interaction and communication between states. Keohane defines institutions as “sets of implicit or explicit principles, norms, rules and decision-making procedures around which actors' expectations converge in a given area of international relations” Keohane, R. O. After Hegemony: Cooperation and Discord in the World Political Economy. Princeton University Press. Princeton. 2005, p.57. In the neoliberal institutionalist framework states prefer to coordinate their policy and behave cooperatively in order to avoid disturbance in trade and reduce the risks of mutual supplies cuts which eventually can bring tangible damage to all partners.

The same logic was developed by Andreas Goldthau and Jan Martin Witte in their book “Global Energy Governance: The New Rules of the Game”. According to the authors institutional rules, which might be formal (juridical documents and binding contracts) and informal (customs and traditions), function as means of compulsion for shaping behavior of states in a mutually acceptable manner. In case of energy security, international institutions aimed to correct the functioning of the market when it is not able to adequately respond to any unforeseen circumstances such as supply cuts or embargoes Goldthau A., Witte J. M. Global Energy Governance: The New Rules of the Game,

Brookings Institution. Washington. 2009. P.3-9. Moreover, institutions are supposed to increase transparency of data on energy reserves, production and consumption, and, as a result, to increase mutual trust among the players on the international energy markets. Playing by the rules is more beneficial than trying to circumvent them and exerting political pressure on a partner in an uncooperative way. Nataliya Esakova continue this understanding of liberal approach claiming that institutionalized international regimes is the basis for international energy security, and mutual need to secure energy supply from the one side and energy demand from the other one is a key factor that prevent importers and exporters from excessively hard bargaining and political pressure.

Although the two approaches, mercantilism and liberalism, seem quite contrast they do not necessarily contradict each other. Considering the nature of China's domestic political economy which combines the features of a market economy and administrative economy, one might ponder over extrapolation of the same combination of liberalism and statism upon China's behavior in the framework of International Political Economy. The specific form of China's behavior was called by Christopher Mcnally as Sino-capitalism. Sino-capitalism is characterized by three features: 1) the state and firms does not only rely on formal institutional codes, but it also utilize informal approaches in the process of communication with other actors; interpersonal relations based on reciprocity is an important part of China's political economy; 2) the involvement of state in political economy is significant as China happened to be a late state-led developer; 3) openness to global market makes China to incorporate the basic institutional arrangements of liberal trade Christopher A. McNally. Sino-Capitalism: China's Reemergence and the International Political Economy. // World Politics. Volume 64, Issue 4, October 2012.p.749-750. The second and the third features represent contrast sides of Chinese foreign policy, while the first feature is quite neutral with regard to mercantilism and liberalism. Interpersonal relations with other state leaders might tilt to both win-win and zero-sum results depending on a concrete situation. But interpersonal relations between the state and national companies and involvement of the state to companies business more frequently results in a mercantilist practices on the globalized markets. Therefore, combination of the two kinds of foreign policies and two analytical approaches is not contradictive.

2. China's oil diplomacy towards Russia

China is growing and the amount of inputs to the burgeoning economy is increasingly growing as well. As of 2016 oil covered 18% of China's primary energy demand. It is becoming a virtual fuel for the Chinese economic machine, and it order to satisfy its requirements for sustainable development China tries to balance between adequate domestic production rate and diversifying its import routes.

2.1 Domestic needs and limitations of oil industry

Over the last decades China has been demonstrating quite impressive growth of economy. The foundation of its economic miracle is usually related to the reforms and opening-up of Deng Xiaoping administration which decollectivized agriculture, partially liberalized the economy and welcomed foreign investments. The accession of the PRC to WTO in 2001 is another milestone in its economic history. Starting from the accession agreement the rates of growth skyrocketed to unprecedented levels, in terms of GDP PPP since 2001 till 2016 Chinese economy almost quadrupled and now it totals about 20 USD trillion World Bank. China - GDP (PPP). URL: https://data.worldbank.org/indicator/NY.GDP.MKTP.PP.CD?locations=CN (accessed; 01.05.2018). The rapid industrialization process that accompanied economic growth entailed annually increasing demand for energy resources including crude oil. Oil is a highly valuable primary energy resource due to a number of reasons. First, it has a higher energy density than natural gas - the respective figures are 45*106 Kj/m3 for oil and 40*103 Kj/m3 for gas Bradley E. Layton. A Comparison of Energy Densities Of Prevalent Energy Sources In Units Of Joules Per Cubic Meter. International Journal of Green Energy, 5, 2008 P.441. Second, burning oil products emit less CO2 than coal, for instance. Diesel fuel and heating oil emit around 161.3 lb/Btu CO2 , while hard coal emits 228.6 lb/Btu. Third, it could be transported much easier than gas and coal because of its liquid form which allows storing oil in a quite compact way, load trucks and tankers with it as well as pump it through pipelines. Finally, a much greater variety of things might be produced with oil as it is used not only as a fossil fuel but also is utilized in petrochemical industry, light industry and many other spheres. That is why simultaneous growth in economy and oil consumption is naturally determined.

In the first decade of the XXI century China's annual oil consumption almost doubled from 224.2 MT (million tons) in 2000 to 428.5 MT in 2010 and by 2016 reached the record of 578.7 MT which was the second largest share in the global consumption - the US consumed 20.3% and China took 12.8%. The global growth rate in oil consumption over the last decade amounted for 1% per year, for China this figure amounted for 5.5% per year. If one considers current oil consumption per capita in China and OECD countries, then it is quite logical to assume that the up-going trend in consumption is very likely to continue to take place in China, even though the marginal growth could be slower than over the last decade due to China's recent economic slowdown. For example, on a daily basis 1000 people in the US consumes 61.02 bbl of oil, in Japan - 34.95 bbl, in Germany - 30.69 bbl, and in highly populated China it is only 7 bbl and there is a huge room for further increase entailed by the idea of Chinese dream and relevant consumption patterns Index Mundi. Oil consumption per capita (bbl/day per 1000 people) URL: https://www.indexmundi.com/g/r.aspx?v=91000 (accessed; 01.05.2018).

But if China produced the amount of oil needed by itself and supported the growing demand exclusively by domestic resource extraction, it would be fairly close to run out of domestic oil reserves. China has been exploring new oil reservoirs over the last decades and constantly reported on expansion in proved oil reserves. For example, in 2000 the figure was 15.4 tmb, in ten years China reported on 17.3 tmb, and in 2016 China claimed to have 25.7 tmb. This data is quite impressive and in terms of proved reserves it put China alongside such prominent oil-reach exporting countries as Kazakhstan (30 tmb in 2016) or Qatar (25.2 tmb). But bearing in mind that population of those two countries is roughly equal to the population of Beijing, one could imagine the gap between China's domestic reserves, domestic needs and production possibilities and limits. Chinese share constitute 1.5% of global reserves, while Chinese population makes about one fifth of global population. China's production to reserves ratio in 2016 amounted for 17.5 - this is the number of years to come before the reserves become exhausted all else being equal. For instance, global production to reserve ratio amounted for 50.6. Hence, the PRC is not hastening to significantly increase its domestic production to the level of top producers. In 2000 domestic production was 162.6 MT (73% of domestic consumption), when consumption doubled in 2010 the production level moderately rose to 203 MT (45%). The recent oil production peak took place in 2015 and totaled 214.6 MT (38%); in 2016 production decreased below the level of 2010 and totaled 199.7 MT (35%). The global growth rate in oil production over the last decade was equal to the growth rate in global consumption and amounted for 1%. China's production growth rate fell behind its consumption growth rate (5.5%) and was almost equal to the growth rate of OECD - 1.7% BP. Statistical review of world energy. Full report. 2011 BP. Statistical review of world energy. Full report. 2017.

Graph #1. Comparison of China's oil production and consumption (million tons) BP Statistical review of world energy data.

China's needs for crude oil have been amplifying simultaneously with its economic ascent. Despite having huge oil reserves China's enormous consumption (#2 in the world) can not be met exclusively by domestic production, which is also quite impressive though (#7 globally). Thus, not being self-sufficient with regard to oil China had to go abroad in order to satisfy its hunger for crudes.

2.2 Foreign energy policy and energy diplomacy features

Since the beginning of the XXI century till until quite recently top 5 oil suppliers of China were Saudi Arabia, Oman, Iran, Angola and Sudan (before 2012). Since 2001 till 2010 their combined share in value constituted 59.6% of all imports and ranged around the span between 55% and 60% through the first decade. Moreover, the combined share of these exporters in China's consumption increased from 16% in 2001 to 30% in 2010. Other oil exporters were also mostly concentrated in the Middle East and Africa. Around 2010 some importing countries increasingly began to enlarge their import flows and struggle for the Chinese market with top oil suppliers. Eventually, starting from the second decade of the century a slow shift towards import diversification took place. As Sudan split into two independent states in 2011, Iraq that had just been left by American troops heavily increased its supplies to China and took Sudanese place among top 5 suppliers. But more importantly larger oil supplies began to come from Latin America poorly presented among China's trade partners at the very beginning of the century. In 2010 combined share of Brazil, Columbia and Venezuela, the most salient importing countries from the region, constituted moderate 7% of total imports, and in 2016 the share reached 13%. In addition the number of importing countries had risen since the beginning of the century. In 2001 the total number of international suppliers included 31 states, in 2016 there were already 44 countries selling oil to China UN International Trade Center. China imports. Mineral fuels, mineral oils and products of their distillation. URL: https://www.trademap.org/tradestat/Product_SelCountry_TS.aspx?nvpm=1|156||||27|||4|1|1|1|2|1|1|1|1 (accessed: 01.05.2018).

By diversifying its import routes China seeks to satisfy its rational securitization needs and trying not to put all eggs into one basket. Until a few years ago there were two main sea routes supplying China with crudes - the first one is form the Persia Gulf through Malacca Straight, and the second one is from North and West Africa through the Cape of Good Hope and then also through the Malacca Straight Yao Wang, Jing Lu. Optimization of China Crude Oil Transportation Network with Genetic Ant Colony Algorithm. // Information 2015, 6, Dalian Maritime University, Dalian , P.470. As China's oil self-sufficiency rate decreased in 2000s the Malacca straight, which plays a role of the Western gate to the disputed South China Sea, became an inescapable bottleneck for the oil-hungry giant. Moreover, some countries from the Middle East and Africa might be characterized as relatively unstable in political terms. For example, in 2009 Libya was ranked #12 among China's top suppliers with 7.4 MT of oil imports, but after the Libyan Revolution of 2011 the trade was distorted, imports plummeted to 2.6 MT and by 2016 supplies fell down to 1 MT. Another salient example is Sudan that split into two states in 2011. Before that it was one of the biggest importing partners of China and for 2011 its supplies amounted for 13 MT. After a year of separation South Sudan managed to deliver 0.7 MT, while North Sudan delivered 1.8 MT. Even by 2016 the previous scale of trade was not restored - the North and the South exported 6.3 MT taken together. Thus, it is quite reasonable to regard the search for new maritime routes as a tool of consumption securitization on the background of increasing import dependency.

Map #1. Maritime chokepoints for oil transit.

However, one could argue that China is trying to diversify its supply channels still with the help of quite unstable partners. But China has few options as global oil market is fairly tight and the PRC is considered as a late-comer, that is why for China there is no recourse but to apply the “niche strategy”. If one takes a look at Chinese top trading partners they could embrace the majority of those countries under an umbrella term of “undemocratic states”, for example those are Sudan, Iran, Iraq, Myanmar, Venezuela and Columbia, all of them are stigmatized in the West in different ways and characterized by the authoritarian rule and often by violation of human rights. This is not a simple coincidence that China picked up “the Rest” partners notoriously branded in the West due to the fact that Washington consensus links investments and economic cooperation between the West and the Rest with good governance and implementation of western-like political reforms. Therefore the West often isolates disobedient states through the imposition of sanctions. In contrast, China utilizes Beijing consensus and Five Principles of Peaceful Coexistence (1954) advocating political non-interference into inner affairs Stahl A.K. China's Relations with Sub-Saharan Africa. // IAI working papers 16 | 22 - September 2016. P.13. Thus, both sides, rogue states and China, benefit from each other as these states get an access to the largest market and Chinese investments and China gets a broader niche in the market and required energy resources.

China needs stable supply flows from quite unstable partners and seek to secure its import not only by simple contract commitments. China is interested in longstanding penetration to foreign production structures able to support its future consumption growth. There are two main investment strategies that China usually utilizes establishing energy cooperation. Both of them might be applied separately or simultaneously. The first one flows from “Go Out policy” promoted and supported by the CCP since 1999. The Party encouraged Chinese large companies to invest abroad and NOCs were not an exception. In accordance with “Go Out policy” Chinese oil giants began to buy assets in foreign national oil companies and create so called “equity oil”, which means that according to contractual conditions an equity holder, a Chinese state-owned national oil company, has a right to retain the respective share of production Downs E. China. The Brookings Foreign Policy Studies Energy Security Series. 2006. P.35-38. After equity acquisition the stakeholder has an option whether to transport the foreign oil back to China, which might be costly due to logistical reasons, or to go through the replacement strategy by capitalizing the foreign oil on the international market and then buying oil imports from countries, which are closer to domestic refineries Antje Nцtzold. Chinese energy policy and its implication for global supply security. // The Journal of East Asian Affairs, Vol. 26, No. 1. Spring/Summer 2012. P.138-140. Equity oil is produced by Chinese NOCs in every importing region it linked to, for example, in Angola, Sudan, Iraq, Iran, Kazakhstan and Brazil. Another strategy is called “loans-for-oil” implying that Chinese banks provide loans to foreign oil companies for different purposes such as exploring and studying new oil reservoirs, infrastructural investments into upstream and downstream sectors or transportation. The loans are usually provided by Export-Imoprt Bank or by China Development Bank - two institutions that are quite separated from global financial system and often play a role of China's wallets on the international markets. The Chinese counterparts in turn are obliged to sell a certain amount of oil to the PRC and service the loan with the money earned by exporting oil to China. By providing huge loans with a relatively low interest rate to developing countries China guarantees a long term oil supplies and creates a wider planning horizon for itself. Moreover, it makes a long term investments into relatively unstable and sometimes underdeveloped regions, and ultimately Chinese investments help those governments to have a stable oil-based budget, which, at least theoretically, allows to adequately provide public goods and make the region increasingly stable. For instance, apart from energy sector China invests into civil projects in Africa and in general seeks to make the development of the region more sustainable. “Loans-for-oil” strategy is also applied to a great number of Chinese partners such as Venezuela, Brazil, Sudan and Angola Meidan M. China's loans for oil: asset or liability? Oxford Institute for Energy Studies. Oxford. December 2016. P.1-15.

Thus, in quest for foreign oil China is trying to reach every available large exporter in all oil producing regions, regardless their political environment. The PRC is trying to secure its growing demand by import diversification bearing in mind the moto “nothing personal, it is just business”. Niche strategy links China with authoritarian countries often stigmatized by the West, but China does not avoid any possibility to get a new oil flow, whether through equity oil or through “loans-for-oil” strategy, and therefore invests in quite unstable regions trying to make them more stable.

2.3 The role of Russia in China's foreign oil policy

Russian oil industry plays one of the leading roles in international energy arena. As of 2016, Russia had 109.5 billion barrels of proved oil reserves (6.4% of the total) and ranked #6 in the world (after Venezuela, Canada, Saudi Arabia, Iran and Iraq). With the production volumes equal to 585.7 million tons per year Russia became one of the largest global oil producers second to Saudi Arabia. Around 75% of oil produced was assigned for exports, while domestically only 148 million tons are consumed BP 2017 Statistical Review of World Energy. P.12, 16-17. Thus, oil sector obviously plays a crucial part in the Russian economy as it significantly contributes to the state's GDP. In 2016 export revenue from crude oil totaled 73.7 USD billion and also 46.3 USD billion from petroleum products (5.8% and 3.7% of GDP respectively), moreover, crude oil brought 52.1 USD billion as budget revenue and by the same token petroleum products brought 13.5 USD billion (4% and 1.1% of GDP respectively) Heli Simola and Laura Solanko. Overview of Russia's oil and gas sector. BOFIT Policy Brief 5/2017, 19 May 2017, P.31. The most of the oil resources are situated in Western Siberia and along Ural mountains, but there are also large oil reserves in Eastern Siberia and Far East Oil map of Russia. World map. URL: http://worldmap.harvard.edu/maps/6176 (accessed; 01.05.2018). This geographic layout makes Russia a very interesting partner for China. But for quite a long time there was a fairly poor logistic infrastructure in Asian part of Russia that did not allow Russia to become a leader in oil imports to China.

2.4 Development of cooperation in oil sector

Although the production possibilities and consumption needs, as well as geographical proximity of the two countries should encouraged China and Russia to embark on cooperation in oil trade as soon as diplomatic relations began to get warmer in the beginning of 1990s, until the beginning of XXI century little progress was made by them except for several agreements on energy cooperation in 1996 and 1997. The Treaty of Good-Neighbourliness and Friendly Cooperation signed in 2001 by Jiang Zemin and Vladimir Putin increased mutual trust between the two states and pushed forward the following cooperation in many fields, including the energy sector. In 2001 privately-owned Yukos proposed to CNPC a plan of constructing an oil pipeline from Angarsk, Irkutsk Oblast - Eastern Siberia, to Daqing, Heilongjiang province. CNPC agreed to build a part of the pipeline from Daqing to the border, but the further project was suspended as the Russian government catalyzed a tax investigation against Yukos, which very soon went bankrupt. Later on in 2004 the assets of Yukos were taken over at auction by the state-owned Rosneft, which right away became the larger national oil company.

Though the pipeline project was suspended, Rosneft and CNPC very soon managed to signed 5-years contract for oil supplies to China by railroads, moreover, 25.1% of shares of Rosneft's project in “Sakhalin-3” were sold to Sinopec in 2005 Nina Poussenkova. Russia's Eastern Energy Policy: A Chinese Puzzle for Rosneft. IFRI, Paris.

April 2013. P.15. In the following year Vladimir Putin during his visit to China signed several energy contracts with Hu Jintao, which eventually led to reviving the Yukos plan of building a pipeline from Eastern Siberia to China (the official name of the pipeline is East Siberia-Pacific Ocean or ESPO). The project was negotiated by Transneft and CNPC in 2006 and the agreement was signed in 2008. In 2006 under the framework of the Agreement on the Basic Principles for the Establishment of Joint Ventures in China and Russia for Strengthening Oil Cooperation CNPC and Rosneft embarked upon a joint venture Vostok Energy Ltd. with 49% of Chinese share Zhang Chi. The Domestic Dynamics Of China's Energy Diplomacy. National Defence University. 2016. P.150. Sinopec also made a deal on the Russian oil market through buying a medium-size Udmurtneft and subsequent reselling 51% of its shares to Rosneft. In the same year CNPC tried to purchase shares of Rosneft during its IPO valued around 10 USD billion, the part CNPC sought to obtain amounted for 3 USD billion, but Russian government felt reluctant to endow such a huge stake to Chinese partners, and ultimately agreed to offer only 500 USD million, while Malaysian “Petronas” purchased 1.1 USD billion and BP bought 1 USD billion РБК. Малайзийская Petronas подтвердила, что приобрела акции "Роснефти" на 1,1 млрд долл. 26 июл., 2006. .