Research on Deepening Energy Cooperation between China and Countries along the Belt and Road

Wang Chunyu and Lan Qingxin＊

University of International Business and Economics

Abstract: Promoting broader and deeper international energy cooperation is an important part of China’s energy development under the new development paradigm of “dual-circulation.” The proposal and practice of the Belt and Road Initiative (BRI) cooperation have encouraged closer energy cooperation between China and countries along the Belt and Road.Energy cooperation has become one of the areas with the fastest growth and the most remarkable achievements in the BRI construction, which has made an important contribution to the realization of China’s energy development with high quality under open conditions. To accelerate higher levels and more sustainable development of energy cooperation between China and the countries along the Belt and Road, it is necessary to further improve energy policy coordination mechanisms, widen the breadth and depth of energy facilities connectivity, promote unimpeded energy trade, and actively undertake innovative modes of financial support for energy cooperation as well as lay a sound social foundation for people-to-people bonds.

Keywords: the Belt and Road Initiative, energy cooperation, energy policy

Introduction

China’s significant decision to jointly build the BRI to promote opening-up and international cooperation conformed to the trend of world multi-polarization and economic globalization and met the common aspirations and fundamental interests of China and countries along the Belt and Road. As Men Jing, a professor at the College of Europe in Belgium, said, “The BRI is a highly innovative and forward-looking development strategy and a positive exploration of a new model of global development and governance”(Su, 2016). Energy cooperation, which is a crucial area in the construction of the BRI,brings new impetus to global energy governance (Zhu, 2015). Accelerating the high-quality development of energy cooperation between China and countries along the Belt and Road is of great practical significance for building a new development paradigm in which the domestic cycle is the main body, and the domestic and international dual-circulation cycles complement each other (An economic policy put forward by the Chinese government in 2020. Taking the big domestic circulation as the main body means making efforts to open up all links of domestic production, distribution, exchange, and consumption, giving full play to the advantages of China’s super-large-scale market and meeting domestic demand as the starting point and foothold of economic development. The domestic and international dual cycles complement each other, meaning that domestic economic circulation does not mean closing the door. Still, by exerting the potential of domestic demand, the domestic market and the international market can be better connected and promoted). Building this new, high-quality national energy development system will well serve the needs of China’s economic and social development.

Countries along the Belt and Road Are Rich in Oil and Natural Gas Reserves

In addition to China, the countries along the Belt and Road include Mongolia, Russia,five countries in Central Asia, 11 countries in Southeast Asia, 16 countries in Central and Eastern Europe, eight countries in South Asia, 16 countries in West Asia and North Africa,and six additional countries in the Commonwealth of Independent States (CIS). Most of these are emerging economies and developing countries, with rich oil and gas resources totaling 159 sedimentary basins. Among the top 20 basins with the richest recoverable oil reserves in the world, Arabia, Zagros, West Siberia, Volga-Ural, Caspian, and the South Caspian basins in countries involved in the BRI rank first, second, third, fifth, 11th,and 17th in the world respectively, with Arabia, Zagros, and the Western Siberia basins accounting for 81 percent of total conventional oil resources in BRI countries (Li, Bai, et al., 2015). By the end of 2015, the proven recoverable reserves of natural gas in countries along the Belt and Road had reached 217.54 trillion cubic meters, accounting for 72.2 percent of the world. The natural gas resources to be discovered are 91.96 trillion cubic meters, accounting for 57.9 percent of the world. In 2017, the total natural gas output of countries along the Belt and Road was about 1.98 trillion cubic meters, accounting for 53.7 percent of the world. The conventional natural gas resources of Iran, Russia, Saudi Arabia,Qatar, UAE, Turkmenistan, and Iraq account for about 80 percent of the total amount along the Belt and Road.

The Clean Energy Prospects of Countries along the Belt and Road Are Promising

Countries along the Belt and Road boast excellent light radiation and wind resources.In terms of geothermal energy, these countries are closely related to the four major tropical zones in the world, with the tropical zones around the Pacific Ocean on the east,Himalayan-Mediterranean tropical zone, and Red Sea-Gulf of Aden-Rift Valley tropical zone in the middle (Wang & Guo, 2019). Thus, Iran, Turkey, Italy, India, Kenya, and other countries are rich in high-temperature geothermal resources. In terms of light and heat, the total annual power generation potential of the countries along the Belt and Road reaches 448.9 trillion kWh, among which the West Asian and East Asian countries reach 207.7 trillion kWh and 122 trillion kWh, respectively, accounting for 73.4 percent of the solar power generation potential of the BRI. The CIS countries and Central and Eastern European countries have 4.7 trillion kWh and 1.5 trillion kWh, respectively. In terms of wind energy, the countries along the Belt and Road are one of the regions suitable for developing wind energy in the world, among which Russia is rich in wind energy resources, and its technical exploitable capacity exceeds 7 trillion kWh. More than 10 percent of Mongolia’s land area has reached an excellent level of wind resources, and its capacity is 2.5 trillion kWh. In terms of water energy, the overall per capita water resources of countries along the Belt and Road are lower than the world’s average, and the renewable inland freshwater resources are 15.23 trillion cubic meters, accounting for 35.58 percent of the world. Countries with higher water resources are concentrated in Central Asia, South Asia, West Asia, North Africa, and Southeast Asia, which have the most water resources. In terms of nuclear energy, the proven uranium resources (nuclear fuel for nuclear power generation) of countries along the Belt and Road account for about one third of the global proven total, among which Kazakhstan ranks first and second in the world in terms of uranium output and resources, and Russia ranks third in the world. In the coming period, most of the growth of uranium resources in the world will be concentrated in the major uranium resource countries along the Belt and Road. As the economic development level of some countries along the Belt and Road is lagging, their energy resources have not been fully developed. The power facilities are generally weak, and the power equipment is aging, resulting in a large power gap. The per capita installed power generation capacity of countries along the Belt and Road is 409 watts, which is 54 percent of the world average. The per capita electricity consumption is 1,892 kWh, which is 61 percent of the world average. To change the mismatch between renewable resource potentials and power demands, countries along the Belt and Road should extensively carry out international cooperation in the field of energy efficiency, promote investments in the development and utilization of clean energy, and realize the coordinated development of energy, economies,societies, and environments.

Progress of Energy Cooperation between China and Countries along the Belt and Road

The excellent energy resources of the countries along the Belt and Road provide broad market for energy cooperation. Over the past seven years, China has deepened its energy cooperation with the countries along the Belt and Road to promote and complement mutual energy cooperation and growth.

Policy Coordination: An Important Guarantee for Energy Cooperation

To promote cross-regional energy cooperation on a larger scale and at higher and deeper levels, the National Development and Reform Commission (NDRC) and the National Energy Administration issued the Vision and Actions on Energy Cooperation in Jointly Building the Silk Road Economic Belt and the 21st-Century Maritime Silk Road in May 2017, taking China’s practical energy cooperation with countries along the route to a new level. In October 2018, China and 18 countries, including Turkey, Algeria,and Azerbaijan, jointly issued the Joint Energy Ministers’ Declaration on Building the Belt and Road Energy Partnership to build a closer community of common destiny in energy cooperation. The Belt and Road Energy Partnership (BREP) was established in April 2019 with 30 participating countries and five observer countries. and released the Cooperation Principles and Concrete Actions of the Belt and Road Energy Partnership to establish a new mechanism to promote policy exchanges and cooperation between China and the countries along the route and strengthen mutually beneficial cooperation in energy. China has effectively strengthened cooperation with the International Energy Agency, the International Renewable Energy Agency, and other international energy organizations and has established the SCO Energy Club under the Shanghai Cooperation Organization mechanism. China’s role in the global energy governance system has been steadily increasing. At present, China and BRI countries have established and participated in more than 70 multi-bilateral energy cooperation mechanisms (such as China-Russia Energy Cooperation Committee, China-EU Energy Cooperation Platform, and East Asia Summit Clean Energy Forum) and signed more than 100 energy cooperation agreements(such as EU-China Roadmap on Energy Cooperation [2016-2020], Sino-Russia East Line Natural Gas Cooperation Project Memorandum). The continuous improvement of energy cooperation communication platforms and bilateral and multilateral cooperation mechanisms has become an important prerequisite for China and the countries along the route to achieve mutually beneficial development.

Facilities Connectivity: A Priority Area for Energy Cooperation

The continuous promotion of energy infrastructure has greatly facilitated the in-depth cooperation between China and the countries along the Belt and Road and released their cooperation potential (Ma & Lei, 2019). The six economic corridors open new channels for China’s oil and gas imports. The Central Asia-China Gas Pipeline, the Sino-Kazakhstan oil pipeline, the China-Russia crude oil and natural gas pipelines, the Sino-Myanmar oil and natural gas pipelines, and the four energy arteries in the East China Sea provide energy and raw material guarantees for the development of China’s downstream enterprises. By the end of 2017, the crude oil and natural gas transmission capacity of cross-border oil and gas pipelines along the Belt and Road had reached 63 million tons each year and 60.2 billion cubic meters per year, respectively. The interconnection of oil and gas pipelines promoted the diversification of China’s energy transportation and imports and reduced the risks to energy supplies and transportation (Zhang & Xiang, 2017). It also significantly improved the guaranteed capacity of China’s energy channels. In terms of power grid facilities, the cross-regional interconnected power grid (CRIG) between China and countries along the Belt and Road has basically taken shape, optimizing power resource allocations. As the demand for electricity is increasing, the power infrastructure will be in place to provide the needed services (Liang, Gao & Yang, 2018, pp. 228-233), thus alleviating the uneven distribution of power resources and electricity supply tensions in countries along the Belt and Road. China has accelerated the development of the global energy Internet, initiated the establishment of the Global Energy Interconnection Development and Cooperation Organization (GEIDCO), and proposed the first “One Belt and One Road” energy Internet construction plan, which has gained widespread support from countries along the Belt and Road in the context of prominent contradictions between global energy supplies and demands and the rapid development of the Internet. The BRI and global governance are being brought into play and applied in the process of global energy Internet construction,accelerating the speed of renewable energy cooperation between China and countries along the Belt and Road and, to some extent, further reducing the dependence on energy supplies from outside the region (Fan & Tan, 2017).

Unimpeded Trade: Key Links of Energy Cooperation

The smoothness of energy trade is the main factor influencing the deepening of energy cooperation along the Belt and Road (Li, Fu & Li, 2015, pp. 109-120). The scale of energy trade between China and countries participating in the BRI has been expanding while the areas of cooperation have been broadening. Eighty percent of China’s crude oil and 90 percent of its natural gas comes from countries along the Belt and Road, and 6 of China’s top 10 providers of imported crude oil and three of China’s top five suppliers of liquefied natural gas(LNG) imports are located in BRI countries. China is also accelerating the development of refined oil export markets. In 2019, China’s refined oil exports reached 6.85 million tons, an increase of 14 percent year-on-year, and more than 70 percent of the oil was exported to countries along the Belt and Road. The cooperation of the entire oil and gas industry chain has driven strong exports of petrochemical products, energy equipment,and power equipment. From 2011 to 2018, the trade of chemical products between Sinopec and countries along the Belt and Road was close to US$18.4 billion, and the trade of equipment and materials was about US$500 million; In 2018, China exported 18GW of photovoltaic (PV) modules to countries along the Belt and Road, accounting for 40 percent of China’s total PV module exports. The export value is US$ 5.33 billion, accounting for 38.8 percent of China’s total PV module exports. Therefore, Countries along the Belt and Road have become the most important export markets for China’s PV module products.From 2013 to 2018, China exported US$6.284 billion of power equipment and US$2.248 billion of technology to countries along the Belt and Road. Overseas projects have driven the export of power equipment by US$17.768 billion and the export of technology by US$5.122 billion.

Financial Integration: An Important Support for Energy Cooperation

The development of energy finance is closely related to national economic development,and the energy industry capital and financial capital of the BRI are continuously optimized and aggregated (Zang, Cai & Ke, 2019, pp. 35-45). The People’s Bank of China has signed more than RMB1.3 trillion swap agreements with the central banks of 21 countries along the Belt and Road. State-owned commercial banks such as Bank of China, Industrial and Commercial Bank of China, China Construction Bank, and Agricultural Bank of China,and policy banks such as the Export-Import Bank of China have issued loans totaling more than US$100 billion in countries along the Belt and Road. By the end of 2019, 11 Chinese banks had set up 79 tier-one branches in 29 countries along the Belt and Road, participated in more than 2,600 construction projects, and disbursed a total of more than US$200 billion in loans; the total size of bonds issued by Chinese financial institutions abroad is US$103.1 billion (Wen & Shen, 2019); loans to countries along the Belt and Road are concentrated in energy resources, with energy loans represented by oil and gas, electricity and mining accounting for 50 percent of the total project loans issued by China in countries along the Belt and Road. The energy investment structure has been continuously optimized, and green energy investment has become a mainstream direction for development. According to data from the American Enterprise Institute for Public Policy (AEI), China’s total energy investment in the countries along the Belt and Road was US$14.54 billion in 2014,with fossil energy accounting for 80.4 percent and renewable energy 19.6 percent; the total investment in 2019 was US$19.67 billion, with the share of fossil energy dropping to 56.1 percent and renewable energy rising to 43.9 percent.

People-to-people Bonds: The Social Roots of Energy Cooperation

Chinese energy enterprises are actively fulfilling their corporate social responsibility in promoting employment stability, protecting the environment, improving people’s livelihood, and localizing employees in countries participating in the BRI, and people in countries along the Belt and Road have a growing sense of identity regarding Chinese enterprises and projects. The cumulative investment of Chinese enterprises in wind power and photovoltaic projects in the countries along the Belt and Road exceeds 12.6GW, which can reduce CO2emissions from coal-fired power generation by about 5 million tons per year and is expected to reduce CO2emissions by 380 million tons if calculated based on the 25-year project life cycle of wind power and photovoltaic projects. By the end of 2018, PetroChina had brought more than US$150 billion in tax revenues to the local areas through oil and gas and related industry cooperation, creating over 100,000 local jobs and benefiting more than 3 million local people. PetroChina also set the promotion index for employee localization in the project contracts, taking the “localization rate of employees in resource-rich countries” as a Key Performance Indicator (KPI) of the project. The average localization rate of employees is 85 percent, the localization rate of the investment business is 92 percent, and the localization rate of employees in Kazakhstan and Indonesia exceeds 98 percent. From 2011 to 2018, Sinopec paid a total of US$16 billion in taxes and fees for the projects in the local areas, with a local employment rate of over 75 percent,and about 16,000 jobs were created on average every year. For example, over 6,700 people have been employed in the Atyrau refinery (Kazakhstan) modernization project. China National Offshore Oil Corporation (CNOOC) has created more than US$1 billion in local tax revenue and more than 160,000 jobs, with a staff localization rate of around 80 percent. China’s energy enterprises have continuously promoted people-to-people bonds in countries along the Belt and Road, deepening mutual trust among countries and facilitating the smooth implementation of projects (Ding & Zhou, 2019).

Policy Suggestions on Deepening Energy Cooperation between China and Countries along the Belt and Road

At present, due to the profound changes in world energy paradigms, coupled with“reverse globalization,” China, as the world’s largest oil and gas importer, will face more difficult energy development challenges than other countries and regions. Further deepening the “five cooperation priorities” of the BRI in the energy field between China and countries along the Belt and Road will be a major part of the success of ensuring China’s energy development. To this end, we put forward some suggestions.

Improve the Energy Policy Coordination Mechanisms

We should deepen the Belt and Road Energy Partnership (BREP) to speed up the improvements of rules and regulations to help energy cooperation move into the realm of concrete practice. We should pay attention to the use of existing bilateral and multilateral energy cooperation mechanisms, open consultation channels on major global and regional energy issues, formulate cooperation rules, thus coordinating the interests of participating countries, and enhancing the effectiveness of policy communications. We need to innovate the energy cooperation mechanisms, and establish the cooperation mechanisms of BRI Energy Club based on the SCO Energy Club. We should also cooperate on major energy projects, energy trade, and energy pricing to build a community with a shared destiny in energy cooperation (Mei, 2018). We need to strengthen policy coordination and interactions with the International Energy Organization, and actively participate in its process of reform, promote improvements for the global energy governance system, put forward China’s plan, and contribute Chinese wisdom to gradually enhance China’s voice in global energy governance. We need to carry out joint research, planning, and compilation of energy development, gather more points of convergence, and realize bilateral or multilateral synergy through cooperative development strategies (Chen & Che, 2018). We also need to participate in the formulation of international energy standards and promote mutual recognition of standards with cooperative countries to strengthen the integration of energy standards.

Broaden the Breadth of Energy Infrastructure Connectivity

We should expand oil and gas transportation channels based on the oil and gas channels currently being operated and planned, open potential routes and expand the scale of oil and gas pipeline interconnection channels based on strategic, technical, and economic needs to realize the diversification of oil and gas import channels and transportation modes, and improve the stability of energy transportation (Gao & Yang, 2016; Han, 2015).We should promote the global energy Internet to deeply connect with the BRI, cooperate with countries along the Belt and Road routes to develop their clean energy such as hydropower, wind power, and solar energy. We also need to advance the construction of cross-border power and transmission channels by means of building seven major power channels that cross six economic corridors, including the New Eurasian Land Bridge,The China-Central Asia-West Asia Economic Corridor, the China-Pakistan Economic Corridor, the Bangladesh-China-India-Myanmar Economic Corridor, the China-Mongolia-Russia Economic Corridor, and the China-Indochina Peninsula Economic Corridor. By doing so, countries along the Belt and Road routes will obtain clean and sustainable power protection. We should enhance the awareness of risk prevention in cross-border oil and gas channels, build a legal system for maintaining the oil and gas transmission channels, improve risk management and control mechanisms, and improve the benefit and risk-sharing mechanisms to jointly maintain the smooth flow of oil and gas through the transportation networks.

Facilitate Unimpeded Energy Trade

China is expected to constantly broaden the import channels of energy resources,accelerate the diversification of oil and gas imports, and improve the quality of China’s oil and gas import trade by relying on existing energy trade, consolidating stable countries for expanded energy trade, developing countries with energy trade potential, and paying attention to countries with declining energy trade (Qu, Luo & Hu, 2017, pp. 11-19). We will integrate and upgrade existing trade and investment agreements to build a trade and investment dispute settlement mechanism specifically designed for the region and widely recognized by countries along the Belt and Road. We will promote early agreement and entry into the Regional Comprehensive Economic Partnership (RCEP) and the China-GCC (Gulf Cooperation Council) Free Trade Agreement. To encourage countries along the Belt and Road to better share the dividends of energy trade liberalization, we need to reduce the non-tariff trade barriers of energy trade interconnections and boost customs clearance efficiency. Mergers and acquisitions and investments are encouraged to grow in the oil and gas enterprises in countries along the Belt and Road, while diversified oil and gas trade methods are expected to be adopted to expand the scale of oil and gas trades.We will accelerate the construction of regional oil and gas trade networks and new oil and gas trade pricing centers to drive the formation of a new oil and gas trading paradigm. We will further deepen the cooperation of upstream and downstream whole industrial chains related to energy trades, such as exploration and development, refining and chemical engineering, sales, pipelines, engineering technology, and equipment, with a view to jointly building a new platform for energy trade development which covers the functions of resource supplies, marketing networks, operations management and shared services.

Innovative Cooperation Mode of Energy Financial Integration

China is expected to deepen the hybrid financing cooperation between domestic energy enterprises and the Asian Infrastructure Investment Bank (AIIB), the Silk Road Fund, national financial institutions along the Belt and Road, and other multilateral financial institutions for the purpose of injecting robust funding into high-quality energy cooperation in the BRI. Financial institutions can be guided to provide more investments and financing products for energy industry cooperation and to develop and improve energy financial products such as energy bonds, energy stocks, energy derivatives, and energy insurance, thus building a broader financing platform for energy enterprises (Cheng, 2015;Yao, 2016). An energy financial trading center will be set up on a pilot basis in cities in the core areas of the countries along the Belt and Road to speed up the internationalization of the RMB, expand the use of RMB in cross-border energy trades and investments, and form an international energy RMB pricing, settlement and trading center (Han & Cheng, 2017).We will accelerate the layout of Chinese-funded financial institutions in countries along the Belt and Road for the purpose of forming a more diversified investment and financing service system. We will encourage combinations of development financing, policy-based financing, and commercial banking to carry out structured finance. The innovations of investments and financing modes should be made in the energy cooperation projects,including adopting “general contracting project+financial leasing” and “general contracting project+sale and leaseback+guarantee” instruments (Ma & Li, 2016). We will strengthen financial supervision cooperation among countries along the Belt and Road and construct BRI energy financial supervision mechanisms to jointly safeguard the stability of regional energy financial markets (Lv, 2019).

Lay a Solid Social Foundation for People-to-people Bonds in the Energy Field

People-to-people bonds in the fields of energy are the social foundation for deepening the understanding and mutual trust in the BRI energy strategy among countries along the Belt and Road (Zhang, Zhang & Zhang, 2017, pp. 119-122). China will enhance the inclusiveness of people-to-people bonds in the fields of energy and enhance the participation and sense of gain of different groups and strata in countries along the Belt and Road. We will focus on environmental protection issues during the construction and operation of energy projects, promote the development and utilization of clean energy and green transformations, transform the advantages of energy resources of countries along the Belt and Road into economic and social development advantages, and promote the achievements of energy cooperation to better benefit local people. To coordinate different types of relationships, we should coordinate the relationships between multiple subjects and consistent goals in terms of objects, the relationships between government leading and public participation in terms of mechanisms, and the relationships between inheriting history and constructing the future in terms of time, so we can maximize the synergy between energy and people’s hearts. We will uphold mutual benefits and harmonious developments, strictly abide by the regulations of project cooperation, adhere to green development and localized operational management, with the aim of realizing the coordination of enterprise investment interests with local social interests and environmental interests. It is important to pay attention to building positive images for our overseas enterprises, to establish good communication channels with the governments of countries along the Belt and Road and the local communities through project cooperation. We will also enhance the awareness of corporate social responsibility for sustainable development and build a community of human destiny with shared interests, shared responsibilities, and a shared future.