Belt and Road Initiative and Transformation of International Energy Order
With a profound adjustment in international energy supply and demand, the transformation of international energy order is in the making. In line with this trend, the Belt and Road energy cooperation promotes interaction between producer and consumer countries, and provides new security and economic values to the international energy order.
Stimulated by the ease in global energy supply and demand in recent years, new trends in the transformation of international energy order have gradually emerged. The shift in major players has made the international energy pattern more balanced and elevated the status of consumer countries in the international energy market. The interactive relationship among various actors in the market tends to be equal and fair; a common, integrated, cooperative, and sustainable international energy security concept and green and low-carbon energy economic values have begun to replace traditional concepts based on zero-sum games and cost efficiency. Energy cooperation under the Belt and Road Initiative (BRI) is in line with this trend and provides opportunities for countries and energy companies along the routes to expand oil and gas development and transportation capacity, enhance technologies, and broaden the scope of new energy applications. This will help further improve global energy supply and demand. Furthermore, energy cooperation under the Belt and Road will also promote the interaction between producer and consumer countries, by both boosting production capacity and constructing a cooperative mechanism among consumer countries. The principle of upholding justice while pursuing shared interests and new thinking on common, comprehensive, cooperative, and sustainable security advocated by the BRI energy cooperation will also provide new security and economic values to the Yang Chenxi is Assistant Research Fellow at the Department for International Strategic Studies, China Institute of International Studies (CIIS).
international energy order. This article analyzes the concept of international energy order and the factors that influence it, and discusses the impact of BRI energy cooperation on the transformation of international energy order.
Factors in the Transformation of International Energy Order
The conceptual framework of “power, institution, and culture” is often applied in international relations theory to changes in the international order. Within this framework, there are three dimensions characterizing that order, namely the structure of power distribution among the actors, the rules of their interaction, and the cultural environment of the interaction. Similarly, we are dealing with three key variables in any analysis of the international energy order: the structure of power distribution among international energy actors and their mode of interaction, the international energy institutions and their code of conduct, and the values of international energy economy. Taking shape under a defined pattern of supply and demand, the international energy order is closely associated with fossil energy exploration and development, energy efficiency, progress in the development of new energy, and energy consumption patterns. It can thus be defined as “the interactions, based on a defined pattern of supply and demand, among energy stakeholders including nations, international organizations and energy enterprises, and the operational rules, energy security safeguard mechanisms and energy economy values emerging in the process of the interactions.”
The forces pushing for change in the international energy order include changes in global energy supply and demand, in the relative power of various actors, and in the geopolitical situation in oil- and gas-producing regions. Among these, the total supply and demand of energy is the primary factor and has an important influence on the other two.
The change in total supply and demand of global energy is the first factor in the transformation of international energy order. With the advancement of fossil energy exploration, new energy development and energy efficient technologies, the total amount of global technologically available energy has
continued to increase in recent years, easing long-term energy supply and demand, diversifying the supply in global energy market, and accelerating the structural transformation of primary energy consumption. In terms of global oil and gas supply, compared with 2006, the remaining proved recoverable reserves of oil and natural gas in 2016 increased by 22.9% (an increase of approximately 318.4 billion barrels) and 18% (an increase of 28.4 trillion cubic meters) respectively, while their annual output increased by 11.7% (an increase of approximately 3.5 billion barrels) and 23.5% (an increase of 675 billion cubic meters) respectively. At the same time, reserves have increased more quickly than production, with the reserves-to-production ratio of global oil and gas both surpassing 50 years. Regarding the demand for oil and gas, North American energy has shown an evident trend of independence in recent years. The oil and gas imports of European Union countries have peaked, and the oil and gas imports of Western countries from West Asia and North Africa have begun to shrink. At the same time, the development of new energy sources in various countries has increased. EU countries have generally formulated medium- and long-term new energy technology development and utilization plans and achieved breakthroughs in core technologies such as ultra-highcapacity batteries, nuclear power and photovoltaics. China’s installed capacity of new energy generation and application of distributed renewable energy have also grown rapidly. As new energy technologies continue to mature, the profits from their commercial development and utilization will also increase, thus bringing about an adjustment in the mix of global primary energy consumption. It is predicted that the share of renewable energy such as biofuels, wind and light energy will increase in power generation from the current 2% to 7% in 2035, surpass the proportion of nuclear power by 2025 and approach that of hydropower by 2035. The decline of oil and coal consumption will become a trend while natural gas consumption will increase by a large margin, with consumption of these kinds of energy staying at around 25-28% of the total market. Some studies have pointed out that the increase of energy consumption in the future will be slower than global economic growth, which will be 3.5% annually on average from 2012 to 2035. In the same period, the
energy consumption per unit of GDP will drop by 36%, and energy intensity will witness an accelerated decline. The deceleration after 2020 is expected to be more than double that from 2000 to 2010.1 Total global energy supply and demand will continue to ease, shifting the relationship between major international energy actors and further promoting a change in international energy rules, safety protection mechanisms and values.
The change in the balance of power among the world’s major energy actors such as the United States, the European Union, Russia, the Organization of Petroleum Exporting Countries (OPEC), and energy consumers in East and South Asia is the second factor in the transformation of international energy order. The relations and interaction patterns among the international political and economic actors often depend on their relative power. As the global oil and gas production center shifts westward, the consumption center moves eastward, and the total amount of technologically accessible energy increases, the status of the US and energy consumers in East and South Asia has been rising in the international energy structure, while the OPEC, Russia, and Central Asian oiland gas-producing regions are faced with more intense market competition. The regulatory effect of the market on the actors will lead to a change in their behavior and mutual relations, and the relationship between oil- and gasproducing and consuming countries will become more equal.
Geopolitical factors such as the adjustment of US Middle East policy and changes in Us-russia relations are the third variable influencing the transformation of international energy order. Since Trump took office, the US national strategy has become more inward-looking, and the increased energy independence of North America has reduced its reliance on the oil and gas resources in the Middle East. In this case, the political preference of the US for geopolitical stability in the region will be witness a significant decline. This has enabled Trump to concentrate more on his counter-terrorism strategy, and the US may intervene more actively in the political development of regional countries and utilize Western discourses on “democratization,” “human 1 The data are compiled by the author. For more, see BP Energy Outlook 2017, https://www.bp.com/ content/dam/bp/pdf/energy-economics/energy-outlook-2017/bp-energy-outlook-2017.pdf.
rights” and “responsibility to protect” to realize its strategic interests. Once the Middle East’s geopolitics is disrupted, it will have an adverse impact on global oil supply. Iran’s return to the international oil and gas market will hinder the recovery of the US oil and gas industry, and Trump’s resumption of sanctions against Iran will limit that country’s oil and gas exports and capacity recovery, which adversely affects global oil and gas supply and demand. The contradiction between Saudi Arabia and Iran is likely to intensify, and the resulting regional conflicts or surrogate wars will threaten regional oil and gas production and the security of energy infrastructure. The Us-russia relations have failed to improve under the Trump administration, and instead continued to deteriorate due to US domestic politics. The diplomatic relations between Russia and other Western countries have also experienced collision. As the US and European sanctions on Russia continue to gradually intensify, the international environment facing Russia’s mid- to long-term development of alternative oil and gas, the upgrade of energy equipment and technology, and the financing of energy infrastructure construction is still not promising.
Belt and Road Improves Global Energy Supply and Demand
Along the Belt and Road routes, there are important energy-producing regions such as Russia, Central and West Asia, as well as important energyconsuming regions such as East Asia, South Asia, and Europe. There is great potential for expanding cooperation in energy production capacity within the vast area. Looking at oil and gas resources alone, it is clear that while energy supply and demand are booming along the Belt and Road, the balance between the two within the region is yet to be achieved. This leaves enormous potential for closer integration of capital and technology in Europe and East Asia with energy resources in Eurasia and West Asia. In terms of cooperation in oil production capacity, the area along the Belt and Road is an important sector for both global oil supply and demand. At the end of 2016, the proved oil reserves of the region were 1016.7 billion barrels, accounting for 59.5% of the world’s total. Among them, the proved
reserves in the Middle East were 813.5 billion barrels, accounting for 47.7% of global total. The average daily oil production in the area reached 57.847 million barrels in 2016, accounting for 62.8% of the world’s total, which is a significant increase from 2015. This shows that the region can play an important role in supporting energy resources in the context of a recovering global economy. Among the countries along the Belt and Road, Saudi Arabia, Iran, Iraq, Kuwait, the United Arab Emirates and Russia are the world’s most important oil exporters, whose oil reserves and production respectively accounted for 52% and 43.3% of global total in 2016. This has important implications for maintaining global energy security and stability in both supply/demand and price. Looking from the consumers’ side, the total consumption of petroleum in 2016 along the Belt and Road was 2.853 billion tons, accounting for 64.56% of the world’s total, and the region’s share of natural gas consumption reached 48.9% of global total. China, Europe, Japan, South Korea and India are the world’s most important oil consumer markets. In 2016, China’s oil consumption reached 578 million tons, accounting for 13.1% of the world’s total amount.2
With regard to trade, China and India have become the most important strategic buyers of oil in the world, and their demand is still rising. China has become the world’s largest growth driver in the demand for oil: in the next 20 years, China’s oil demand will increase by 7 million barrels per day, reaching 18 million barrels per day by 2035, exceeding the US demand (whose daily demand is now predicted to fall by 2 million barrels per day to 17 million barrels per day by 2035). India is the second largest driving factor. In the next 20 years, its consumption will increase by more than 4 million barrels per day. By 2035, India will surpass China and become the largest source of increasing global demand for oil. The oil trade in the Belt and Road region can, to a large extent, ensure market security for the oil-producing countries along the Belt and Road and provide energy security for the consumer countries, thus improving 2 The data are compiled by the author. For more, see BP Statistical Review of World Energy, June 2017, https://www.bp.com/content/dam/bp/en/corporate/pdf/energy-economics/statistical-review-2017/bpstatistical-review-of-world-energy-2017-full-report.pdf.
the supply and demand of international oil and gas.
The potential for natural gas cooperation among the countries along the Belt and Road is reflected in many areas such as exploration and development, trade, pricing, pipeline operation safety, maritime transportation safety, and the integration of industrial chain. At present, Russia and the gas producers in Central and West Asia are facing difficulties in expanding production and are lagging behind in the exploitation of natural gas reserves in deep seas and the Arctic region. Russia’s energy and financial industries are impacted by severe Western sanctions and capital outflow, and the development of alternative natural gas fields are not adequately funded. Moreover, most of Russia’s alternative oil and gas fields are located in deep seas and the Arctic, which makes extraction difficult and costly. There is still a long way to go in terms of technology before economic development of the reserves is possible. In Central Asia, Turkmenistan, Kazakhstan and Uzbekistan are highly dependent on the export of energy resources for their economic sustenance. However, in recent years, the economies of the region have suffered stagnation, and the expansion of natural gas production capacity is seriously short of capital investment. In West Asian countries, capital is relatively abundant, but the fall in oil prices has had a huge impact on them, placing them also in difficult financial straits. Despite the rising global demand for natural gas, expansion of production capacity in the short term faces a funding gap. Relatively speaking, China, India and European countries have abundant capital as well as advanced technologies, and all of them are eagerly looking forward to the diversification of natural gas imports and have a strong desire to invest in upstream resources and industries of natural gas. The potential of cooperation among all these parties in natural gas exploration and development has yet to be realized.
As with oil resources, cooperation in the integration of natural gas industrial chain is also an important growth point for energy production in countries along the Belt and Road. Sino-russian joint development of the Yamal gas field and the use of relevant natural gas resources for downstream industrial cooperation in the Tianjin Refinery have become an example of regional gas industrial cooperation between the upstream and the downstream.
Cooperation in the integration of industrial chain will ensure the consumer countries a stable supply of oil and gas at a stable price, and help the producing countries maintain their market share and achieve long-term benefits. In the process, resource-owning countries, transit countries, and consumer countries can combine their mutual benefits, create a community of interests, and achieve common energy security. Natural gas extraction and transportation capacity will also further expand.
In terms of new energy production capacity, the continuous progress of new energy in recent years has enabled wind, light, water, nuclear, geothermal, tidal, biomass, among other energy sources, to increase their share in primary energy consumption, which is expected to reach about 25% of the total by 2035.3 Under the combined effects of technological advancement, practical exploration, and economies of scale, the cost of electricity generated from renewable energy will drop dramatically in the next 20 years. Both solar cells and wind power follow a very steep learning curve, with costs rapidly declining as production increases. Even without subsidies and taking grid-connection costs into account, land-based wind power in prime locations is increasingly able to compete with new conventional fossil-fuel power plants. Solar photovoltaics have become competitive in a growing number of specialized markets. In addition to technological advances and economies of scale, the driving force behind the rise in new energy consumption also stems from factors such as the need to reduce greenhouse gas emissions and the demand for countries to optimize their energy consumption portfolio. Countries along the Belt and Road have become the main source of incremental new energy consumption worldwide.
Among these countries, China and the European countries have invested heavily in the development of new energy technologies, and have gradually achieved technological progress in fields such as wind, solar and nuclear power generation and high-performance batteries. Investment in new energy across the region continues to expand, and new energy generation has for several consecutive years accounted for about half of total new generation capacity.
China has become the world’s largest source of incremental new energy generation, and huge investment has been made in nuclear power projects since their restart. China’s new energy technology is advancing with abundant capital. Under the dual requirements of reducing greenhouse gas emissions and controlling air pollution, China’s investment and promotion of new energy technologies will maintain rapid growth in the next few years. European countries have long played a role as a global leader in climate change and environmental protection, and their investment in new energy applications and technologies has been enormous. In Central and West Asia, the countries with oil and gas resources are actively adjusting their primary energy consumption structure, expanding the share of wind, solar, hydro and nuclear power in electricity production. By so doing they are, on the one hand, sparing more oil and gas resources for export, and on the other hand achieving their goals in emissions reduction and environmental protection. The investment and capacity cooperation among Belt and Road countries in new energy will not only have a promising future but will also increase the total amount of global technologically available energy and help optimize the structure of primary energy consumption.
Belt and Road Affects Interaction of International Energy Powers
Energy cooperation along the Belt and Road will, besides improving the global aggregate supply and demand, have a profound impact on the relative strengths of various international energy actors and the nature of their interaction.
First of all, cooperation among the major consumer countries along the Belt and Road can effectively mitigate the existing imbalance in the international energy power structure, create a more equal and fairer international energy market, and elevate the status of emerging consumer countries in the international energy order. In the case of energy cooperation between China and India, companies of the two countries have begun to collaborate in the exploration and extraction of oil and gas resources in third
countries, such as the joint implementation of the Greater Nile Oil Project in Sudan, joint exploitation of the Yadavaran oil field in Iran, and the joint acquisition of Petro-canada’s oil assets in Syria.4 Promoting similar cooperation under the Belt and Road framework can reduce unnecessary competition between Chinese and Indian companies and help achieve more economically favorable results. In addition, if China and India, as important energy importers in Asia, can actively cooperate in the field of international energy pricing rights, they can not only improve the overall bargaining power, but also ease the effect of the “Asia Premium,” and can even lay the foundation for a collective bargaining mechanism for oil and gas importing countries across Asia. This would also include important energy consumers such as Southeast Asia and Europe. Political consensus reached by relevant countries under the Belt and Road framework, to promote cooperation between their respective companies in oil and gas exploration and production and avoid vicious competition, will greatly improve the status of consumer countries in the international oil and gas market and also meet the common interests of all countries.
Second, cooperation in energy financing and oil price bargaining is a focus of energy cooperation among East Asian oil consumers under the BRI framework. This will also help reverse the dependence of producing countries on Western capital and financial services and that of consumer countries on highpriced resources. It will also change the existing power balance and interaction patterns of energy actors and establish a fairer energy cooperation relationship. The Belt and Road construction will ease the over-reliance on Western countries for the funding of energy infrastructure and capacity development in the countries along the routes, and will play a positive role in establishing a more balanced structure of power in the international energy order.
The focus of energy price bargaining cooperation under the BRI framework is to offset the adverse effects of “Asia Premium” by working together with East Asian consumer countries. A fair market environment is beneficial to both supply and demand. Breaking the “Asia Premium” will not
only guarantee the supply security of consumer countries, but will be beneficial for maintaining the market share of producing countries and the share of oil in global primary energy consumption. Asian oil-consuming countries have long faced a high “Asia Premium.” With a global balance in oil supply and demand, actively pursuing price bargaining cooperation among Asian oil-consuming countries and seeking a fair market position has ushered in new opportunities. In the future, under the BRI framework, the Roundtable of Ministers of Principal Asian Oil Suppliers and Consumers can be institutionalized, and the oil-producing countries in Central and West Asia can be involved in discussing in depth the negative impacts of “Asia Premium” on both supply and demand. Consequently, the parties concerned could gradually promote negotiations on a new pricing formula. In this way, the BRI energy cooperation can help transform the pattern of interaction between supply and demand sides in formulating pricing rules.
Belt and Road Reconstructs Energy Economic Values
First of all, the Belt and Road energy cooperation has provided new values of justice and shared interests to the world’s energy economy. Advocating justice has been a fine tradition of the Chinese people for thousands of years; China’s diplomacy has consistently insisted on making independent judgments on international affairs according to their merits. In the BRI energy cooperation, China has always been taking care of the interests of small and medium-sized countries on issues that do not involve core interests. It consistently takes politics into consideration, giving more than taking or giving before taking, so that small and medium-sized countries can enjoy real benefits and realize sustainable development in all areas of economy, society and people’s livelihood. It is by winning widespread trust that China is able to promote the continuous progress of Belt and Road energy cooperation. Through the cooperation, China has helped countries along the routes improve their energy infrastructure and expand their connectivity, and has gradually reached a series of statements of intent with
the countries on the trade of goods and services and financial cooperation. In particular, it is necessary to precisely match the needs of the countries in their socio-economic development, and promote progress in various fields such as transportation, agriculture, science and technology, and financing, to fully demonstrate China’s sincerity in sharing economic achievements and benefiting neighboring countries.
Second, the Belt and Road energy cooperation spreads the concept of common, comprehensive, cooperative, and sustainable security. In the BRI energy cooperation, China has consistently taken into consideration the relationship between the export countries’ market security and the consumer countries’ import security, between energy security and overall security, and between short-term and long-term security. It has consolidated the energy security of all countries in the course of cooperation. This will also facilitate the establishment of fairer and more reasonable international energy governance.
Third, the development and application of new energy technologies will lay the foundation for low-carbon and green development. The BRI energy cooperation adheres to the green and low-carbon concept, promoting it as an important value of international energy order. With the rapid economic development in the past 40 years, China is increasingly under heavy pressure to reduce greenhouse gas emissions and control air pollution. India, Southeast Asia, and the Middle East countries are also faced with the arduous tasks of optimizing their energy consumption structure and reducing greenhouse gas emissions. European countries have always played a leading role in global climate governance; with mature technologies in fossil energy utilization, an important path for them to reduce emissions is to vigorously increase the proportion of new energy consumption. Among the countries along the Belt and Road, the European countries have advanced new energy technologies while China has a huge investment in new energy resources. Both provide huge government subsidies for new energy applications, helping new energy companies compete with low-cost traditional fossil fuels and stabilizing their market share. This shows that in China and European countries alike, green and low-carbon development has gradually replaced the emphasis on the availability
of fossil energy and pure cost considerations, and become a new value in energy utilization.
The Belt and Road energy cooperation has not occurred in a vacuum, but rather in the general environment of a profound adjustment in international energy supply/demand and power structure in recent years. From the perspective of global oil and gas supply, the in-depth development of the US shale gas revolution, the export of Central Asia’s oil and gas to East Asia, Europe’s breakthroughs in new energy technologies, and Iran’s return to the international oil and gas market have greatly strengthened the long-term expectations of the international energy market for increased supply. On the demand side, the growth rate of imports by major energy consumer markets has generally slowed down, and the growth of global oil and gas supply has therefore exceeded that of the demand. As oil and gas exploration and development technologies make steady progress, the reserves-to-production ratio continues to rise, which strengthens the market expectation of eased supply and demand, and suppresses the long-term curve of international oil prices. Changes in supply and demand have profoundly affected the global energy landscape. OPEC can no longer single-handedly dominate the balance between supply and demand in the international market. Russia and Central Asian countries, whose finances are highly dependent on energy export, have seen their fiscal deficits surge and faced economic difficulties due to the plunge of oil price. Asia-pacific consumer countries have an enhanced role in the international market, while China and India have become the world’s most important strategic buyers of oil and gas. China has even become the most important energy infrastructure investor in Eurasia. The Belt and Road energy cooperation is in conformity with the trend of the times and will make the international energy power structure more balanced and the interaction patterns fairer, and will gradually establish new values of energy economy and security.