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Syrian crisis highlights China's Middle East problem

The Syrian crisis highlights the tricky balancing act China faces in managing its energy relations in the Middle East

As the West once again gears up for possible military action in the Middle East, China finds itself in a familiar bind. Increasingly dependent on Middle Eastern oil to fuel its economic growth, the world's second largest crude importer is hit harder than most by the inevitable rise in oil prices that accompanies any talk of conflict in the region. Yet even as China becomes more deeply involved in the Middle East, and increasingly at the mercy of developments there, it has little sway over events.

The Syrian government's alleged chemical attack on its own people has caused outrage, and the US, UK and French leaders have called for a military response to punish Bashar al-Assad. Turkey and a number of Arab nations have also backed limited military strikes. The pall of Iraq hangs over the debate, particularly in the UK where parliament voted against a military intervention. The push to war, though, continues, with Western leaders trying to push their case at a meeting of the G20.

Crude prices have surged -- not because an intervention in the country would cut off a major source of supply. It would not. Syria is a marginal oil producer, and its output has been reduced from around 350,000 barrels a day (b/d) to about 50,000 b/d since the fighting started. As analysts at Deutsche Bank point out, though, "the real concern with Syria is that any conflict could draw in Iran, Russian and other Middle East nations".

China has spoken out against military action, partly over fears that it could spark a larger conflagration that would be disastrous for its interests in the region. "We express grave concerns over the fact that some countries are considering unilateral use of force against Syria," a foreign ministry spokesperson said.

China could join Russia in vetoing any proposal that comes before the UN Security Council. But it is clear that the US is ready to act without UN backing, in which case China would be left no other option than to sit on the sideline. "Even as Iran, Iraq, and the Gulf Cooperation Council (GCC) states all seek stronger ties with China, and many seek a greater role for China in the Middle East, China remains cautious: China continues to seek to avoid becoming entangled in these regional dynamics," said Jon Alterman, director of the Centre for Strategic and International Studies' Middle East Programme, in a recent report.

That cautiousness has hampered Beijing's ability to influence events such as the potential conflict in Syria, even though the economic consequences of it could be severe for China. It may now be a major investor and trading partner with the Middle East, but China's relationship with the region remains superficial and one-dimensional.

Chinese cash is flooding into the Middle East. State-owned oil company China National Petroleum Corporation (CNPC) has become the largest foreign investor, by production, in Iraq's post-war oil industry. CNPC is developing the Rumaila oilfield, one of the largest in the world, alongside BP.

China's national oil companies are also deeply involved in developing oil and gas fields in Iran, though international sanctions on the country have clearly impeded those investments.

Sinopec recently paid $3.1 billion for a stake in US independent Apache's Egypt operations in a deal that appeared to be timed to win favour with an Egyptian government desperate for foreign investment amid civil strife that has wrought havoc in the country.

And China's investments go well beyond the energy sector, which in many countries is closed off to foreign involvement. The country's state-owned enterprises are investing tens of billions of dollars in port, rail and power infrastructure across the region.

At the same time, China is becoming increasingly reliant on the region's oil. Wood Mackenzie, a consultancy, forecast that by 2020 China would import 70% of the crude oil it needs. Much of that will come from the Middle East, where China is replacing the US as the most important customer. "The US is becoming more North America-centric for its supply needs and China more dependent on Middle East and Opec crude,"Â said William Durbin, president of global markets at Wood Mackenzie. "We will therefore see Opec suppliers, who traditionally focused on the US for crude sales, compelled to shift their focus towards China." Short of a shale miracle in China, that trend will continue over the coming decades.

To date, China has tried to balance its relationships with regional rivals Iran and Syria on one side and Saudi Arabia and the GCC countries on the other without getting sucked into the conflict.

That balance, Alterman says, will become more difficult to manage. "China will not be able to avoid making hard decisions amidst the tangle of regional relations for a simple reason: There is no scenario in which China does not become increasingly reliant on the Middle East for energy over the next several decades."

The US and Saudi Arabia would like nothing more than to drive a wedge between China and Iran. As part of that effort, the Saudi government has sought to position itself as a reliable supplier to China, in contrast to Iran, which has appeared, in rhetoric at least, more keen to use oil as a weapon in its international relations, Alterman says.

Some analysts think the rise of the US' unconventional oil and gas sector could influence China's role in the Middle East.  As the US pulls back from the Middle East because of it needs to import less oil and generally retreats from the active military role it has played around the world, runs this argument, China would have little choice but to step up its involvement in the region's oil geopolitics. 

In that case, "oil security concerns might compel Beijing to play a larger role in defusing the primary threat to the free flow of oil from the Persian Gulf - the closure of the Strait of Hormuz by Iran," said Erica Downs, an expert on Chinese energy policy at the Brookings Institution, a US think tank. "At a minimum, this might entail Beijing communicating to Tehran that it would regard the disruption of oil exports bound for China as a threat to one of China's vital interests."

Downs also points out that China is increasingly eyeing the US energy sector as an attractive investment prospect. Iran has vast resources that China is keen to secure for its home market. But the US also has something potentially more valuable to China's state oil companies: technology that could unlock the country's own big unconventional deposits.

Sinopec and China National Offshore Oil Corporation have already spent billions of dollars gaining access to US shale fields, and more investment is likely to come. "The more Chinese companies are invested in the US, the more they are likely to think twice about doing business in Iran," according to Downs.

Because of US sanctions, Chinese companies know their Iranian investments could face scrutiny from US authorities as part of any government approval process for its investments. They also recognise that their Iran investments could undermine an effort to improve their public perception in the US, Downs notes.

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