China's Belt and Road Initiative: Risk Outlook China's Belt and Road Risk Outlook | Page 9

OIL STRATEGY
China's import dependence is large – 65-66% of its needs – and set to rise to as much as 80% by 2030
due to falling domestic production alongside economic growth. Energy investments are increasingly
important to ensure access to supply. These will take on greater salience this year as the oil market
tightens. Prices have edged above $70 a barrel as production has collapsed in Venezuela and demand
has beaten expectations. Growing security concerns over Chinese investments will prove an important
narrative for 2018 if China wants to further diversify its energy assets in the U.S. Chinese firms are
looking to reopen U.S. trading desks to capitalize on growing shale production as oil prices have risen.
Russia and Saudi Arabia compete to be th e largest provider of crude oil to China. In 2017, Russia took
the top spot, selling an average of about 1.19 million barrels a day through October. Rosneft’s rising
deliveries to China are straining existing infrastructure, which remains oriented towards Europe due to
Soviet legacies, and foreign investment is likely needed to meet domestic and Chinese demand longer-
term. Pipeline capacity from Mohe at the border of the two countries will enable further import growth
as Russia pivots its oil supplies eastward where markets are growing. Most recently, the Russia Direct
Investment Fund has approached Chinese banks and companies in search of investment to expand oil
pipeline capacity for Russia’s pipeline monopolist Transneft. 
Saudi Arabia has courted Chinese investment,
reportedly signing deals worth $60 billion with China in
late August 2017. The two countries are seeking to
ENERGY OUTLOOK
expand cooperation on industrial projects. As Saudi Chinese firms will continue to buy up assets to
Aramco transitions its revenue model to focusing on guarantee access to resources. Look for China’s
petrochemical projects and value-added parts of the
supply chain, China will be a focus to lock in market
share. Further, Saudi Arabia is looking to make up ground
on Russia and other resource-rich states to play a bigger
role on commodities markets. China’s steadfast support
of Riyadh amidst its current anti-corruption campaign is
partially aimed at turning memoranda of understanding
into bricks and mortar work on the ground.
commodities traders to deepen access to and
control of supplies in Russia and Central Asia.
while China’s petroleum sector hopes to draw in
Saudi investment and broadens its trading reach.
It’s also likely that China will begin seeking export
opportunities for nuclear power projects, a move
that would free up more oil for export in states like
Saudi Arabia. At the edges, China Inc will buy up
downstream projects in Eastern Europe and the
Balkans.
Changes in the geopolitical shape of the oil
China is now launching yuan-backed oil futures
markets - the potential for the U.S. to export
traded on the Shanghai International Energy Exchange. In
doing so, Beijing is carving out a space to have some
control over oil prices. Investors will likely be hesitant
given China frequently intervenes in the market and has
implemented strict capital controls, but the symbolism is
in keeping with the broader attempt to use BRI and
greater volumes in coming years - should be
watched closely as fears of a U.S.-China trade war
escalate. Oil trade would be a logical area of
cooperation between the two countries. Higher
prices seem set to sustain for a considerable part
of this year given stronger than expected demand.
Expect greater interest and appetite in upstream
investments from China’s oil majors so long as
related initiatives as scaffolding for alternative
these do not rely on long-term high price
projections like those in the Arctic’s offshore. 
multilateral institutions dominated by China. 
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