The Gwadar Port Disillusion

The Gwadar Port Disillusion

Mei Xinyu

Date: Tue, 04/11/2017 - 17:57 / Keywords: Trade, macro-economy, Baki, Pakistan, one belt one road
The Gwadar Port Disillusion
The Gwadar Port Disillusion

(Yicai Global) April 11 -- Pakistan’s Gwadar Port, a Chinese construction project, officially opened in November last year. It is undoubtedly a landmark project in trade ties between the countries and a key part of the China-Pakistan Economic Corridor. As the home of the port’s operating company, China hopes the port will play an important role in Pakistan’s sustainable development. However, the port has no links to China’s energy imports, both security and economic issues prevent the creation of the proposed China-Pakistan Oil and Gas Pipeline.

Advocates of the oil and gas line claim that resources from the Persian Gulf could be shipped to Gwadar Port and transported to China by land, shedding 85 percent of the distance covered by sea-only transport. The line could also break the ‘Malacca Dilemma,’ that casts a shadow over the security of China’s energy imports. Around Chinese New Year in 2015, an article titled Pakistan’s Third Largest Port Will Open in April, Shortening the Oil Transport Distance to China by 85 Percent spread online. The basic premise and conclusions of the argument were misleading. In fact, the Middle East-Gwadar-China transport route for gas and oil is unreasonable, both in terms of security and economic efficiency.

No Business Value

The conceptual error in the premise of this article’s argument, that “the pipeline shortens the oil and gas transport distance from the Persia Gulf to China by 85 percent”, lies in how it ignores the vast size of China and its unbalanced regional development. Its population, economic activity, and oil and gas consumption are mostly distributed around the eastern coast and central regions, far from Xinjiang. It also translates the arrival of resources shipped from the Persian Gulf to China as reaching the country’s major consumer market. If the oil and gas shipped to Xinjiang’s Kashi city through Gwadar Port, it still needs to travel between 4,000 and 6,000 kilometers by rail to reach China’s more populous areas. The actual transport distance could never be cut by as much as 85 percent.

At the same time, it also replaces low-cost, large-capacity sea transport with expensive land transport. The whole concept of the pipeline is inefficient, and that’s without considering the increased security costs. After building the required infrastructure, even for the pipelines built in regions with simple terrain conditions, the return on investment would be lower than when transporting by sea. For example, with a USD2 billion investment in pipelines, 1,000 kilometers of line could be built, transporting 30 million tons annually. If the same amount was injected into marine transport, 20 very large crude oil carriers could be built, transporting 40 to 60 tons a year and resulting in more liquid assets.

China has a complete fundamental infrastructure to transport oil and gas by sea, but such groundwork for the pipeline would be built from scratch. A stable electricity supply can’t even be guaranteed in the host country, Pakistan, a problem which is yet to be solved by a series of power generation projects under the China-Pakistan Economic Corridor framework. The pipeline would require ultra high-power pump stations as it has to pass through the Karakoram Pass, at an altitude of 5,000 to 6,000 meters above Gwadar and Kashi. Add in heating and insulation required for the section of piping on the plateau and the required investment climbs further.

After entering China, the pipeline section from Kashi to the major consumer markets in China has to travel thousands of kilometers through the Gobi Desert, where construction costs are much higher than the plains.

In terms of transport costs, the proposed China-Pakistan Oil and Gas Pipeline cannot compare to marine transport routes. Japanese scholars once described the transport costs of modern very large crude oil carriers as being so low that Saudi Arabian crude oil and be shipped to Japan at zero cost, and the Persian Gulf could be considered a ‘local’ oilfield to Japan. With today’s shipping costs, the same holds true for the east of China.

It costs just USD1.25 a barrel to ship oil 7,000 kilometers from Saudi Arabia’s Ras Tanura to Ningbo, in China’s eastern province of Zhejiang, according to The Reality and Strategic Consequences of Seaborne Imports: China’s Oil Security Pipe Dream, a research report from February 2010. Considering a ton as seven barrels, that’s USD8.75, or just over CNY60 based on exchange rates from November 2016. If oil and gas from Africa’s east coast could also be sent to China, it would come at a similar price. In contrast, the report forecast the cost of the CPOGP raising transport costs by USD100 per ton.

Combined with the costs of pushing oil from Xinjiang to China’s main consumer markets, the transport costs come in at nearly CNY1,000 a ton, more than 16 times the cost of sea transport from Saudi Arabia to Ningbo. Using figures from last November, Brent crude oil futures were USD49.09 a barrel. Counting seven barrels as a ton, that comes in at CNY2,363 per ton. Using the pipeline, transportation costs are around 42 percent of the selling price of crude oil, compared to just 2.5 percent when transporting by sea. The competitive advantage of shipping is quite apparent.

Also, with the growth of America’s oil and gas exports and the opening of the Panama Canal expansion, global trade routes have quietly shifted. As well as bringing in oil from the Persian Gulf and Africa, China’s eastern ports can accept oil and gas from the US and Venezuela with competitive transport costs. Brazilian subsalt oil and gas may also be used to enhance facility utilization and cut costs.

Venezuela’s oil reserves are larger than Saudi Arabia’s, and the Brazilian subsalt oil field is regarded as the world’s largest oil discovery of the millennium to date, with conservative estimates suggesting its home to around 50 billion barrels. There is a 90 percent chance its usable reserves could reach 176 billion barrels and a 10 percent possibility there is as much as 273 billion barrels, according to the Universidade Federal do Rio de Janeiro’s Oil and Gas Research Center, who gave those figures in 2015.

In its 2013 Outlook for World Energy, the International Energy Agency forecast that by 2035, Brazilian oil production would account for one-third of global supply. If the Nicaragua Canal is completed, transportation costs would be even more competitive, with the Gwadar route paling in comparison.

Concerns Over Strategic Value

From a security viewpoint, the Malacca Dilemma is a pseudo-concept, to a great extent. This concept was originally proposed in Japan during the Cold war. At that time, its oil and gas supply was highly dependent on the Persian Gulf, with allies in America and Britain controlling the gulf’s security. The only route for oil, gas and other goods to Japan that couldn’t be cut off by the Soviet Union, Japan’s quasi-enemy, was the Malacca Strait.

Today, China’s situation is very different. Our quasi-enemies are the navies of America, Britain and India. The US and UK control the security of oil around the Persian Gulf. The US Naval Forces Central Command and US Fifth Fleet are stationed in Bahrain, and the construction of a UK military base in Bahrain’s Mina Sulman Port began in 2015. They also have military bases in gulf countries, like Saudi Arabia. In order to cut off oil and gas supplies from the gulf to China, they just need to advise gulf countries to close oil wells, they don’t need the Malacca Straight. With the Diego Garcia Base in the Indian Ocean, they can also block export ports along the coast of that ocean. Supposing that China went to war with the US, UK and India to protect its oil and gas supplies, it would be easier for its enemies to use the Arabian Sea and the rest of the Indian Ocean.

Some believe the new pipeline improves security for China’s oil and gas imports, but it would actually introduce more security hazards. First, compared with the South China Sea, the Arabian Sea and Indian Ocean have fewer geographical advantages for the Chinese Navy. Secondly, land-route risks would emerge and quickly grow. With its formidable anti-government armed forces, Pakistan is plagued by wars. For example, there are strong separatist forces in Baluchestan province, where Gwadar Port is located. Taliban forces have existed for a long time in Khyber Pakhtunkhwa province, which is semi-independent of Pakistan. The nation’s government once sent out 100,000 soldiers to quell rebellion in Federally Administered Tribal Areas. Disputes between the Kashmir region and India cause frequent military conflicts. Considering all of this, it’s hard to imagine the pipeline being secure when crossing through these regions.

The land-based transport method would also be even more threatening to China’s energy imports. A modern navy would be required to truly threaten China’s sea-based energy imports, which would cost tens of hundreds of billion yuan. In contrasts, the land alternative would be possible with just millions of yuan spent on weaponry and other military costs.

Some suggest a benefit of the CPOGP comes from access to the future Iranian oil and gas pipeline, but this is not the case. First, even if Iran’s resources are exported to China through pipelines, the central Asia-northern Xinjiang line, which has several ready-made pipelines, would be preferable over the China-Pakistan line, in terms of both security and economy. Secondly, Iran may not be happy to export its commodities via Pakistan. Saudi Arabia and other gulf countries, including Iran, have a negative attitude towards the advancement of the China-Pakistan Economic Corridor as it will lower then standing and influence over the country. These countries would prefer that China’s One Belt, One Road imitative focus more in East and Southeast Asia rather than countries to the west of the nation.

Further reviewing China’s energy security goal, the aim should not be to maintain ordinary energy consumption during times of war. It is wrong to invest in resources for such an irrational goal, China is the world’s largest country in both industrial development and exports. Such a vast quantity of exports cannot be maintained when at war, and as a result, a large amount of oil and gas energy usually consumed for production and transport of exports will decline sharply. Even in extreme situations, e.g. marine transport of oil and gas from the Persian Gulf is interrupted, domestic production capacity and imports from other countries will be sufficient. In order to guarantee competitiveness in the downstream industrial market when not at war, it’s inappropriate to use expensive resources. Furthermore, China is home to the world’s most abundant coal resources. When at peace, cheap imported gas and oil should be used as much as possible, but during war, coal consumption can be increased to compensate for the lack of gas and oil.

The bear market for primary products, that could last 10 to 15 years from when it began in 2012, brings more benefits to India than Pakistan, which may sharpen the imbalance between the strength of countries in the subcontinent. For the sake of China’s international strategy, and in order to balance strength in South Asia and undermine extremist forces in Pakistan, China must offer support to Pakistan’s economy, mostly through commercial projects. The world’s largest country should remain objective when selecting projects, take full account of economic law and security concerns, and properly control investment amounts.

Given the issue, China should prevent domestic groups from attempting to make misleading national decisions. We should also stop opinions from pushing up the political and economic value of the China-Pakistan Economic Corridor, which could misdirect social understanding of the project.

Mei Xinyu, the author, is a researcher at the Chinese Academy of International Trade and Economic Cooperation for the Ministry of Commerce. The article was initially edited by Wang Yanchun and published in Caijing Magazine on Dec. 19, 2016.

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Keywords: Trade, macro-economy, Baki, Pakistan, one belt one road