OBOR and the future of energy trade

 By Criselda Diala-McBride

China is pouring hundreds of billions of dollars into recreating the Silk Road, through the “One Belt, One Road” (OBOR) initiative, which aims to facilitate trade worldwide. But as it finances the construction of railways, roads, bridges and pipelines in countries along the route, OBOR also has the potential to redraw the global energy map…

Asia’s economic juggernaut is flexing its financial muscles once again. In the coming years, China hopes to develop a global network that will facilitate trade and link the economies of various countries. The “One Belt, One Road” (OBOR) strategy is a reincarnation of the ancient Silk Road – arguably one of humankind’s first attempts at globalization.

But there’s more to OBOR than trade; it also has the potential to redraw the global energy map, disrupting the oil and gas sector and opening up opportunities for collaboration.

OBOR will seek to finance major infrastructure projects, from highways and railroads, to pipelines and LNG terminals. Overall, the initiative encompasses 65 countries, 4.4 billion people or around 70 percent of the global population, and about 55 percent of the world GDP. Through the program, China hopes to achieve an annual trade worth $2.5 trillion between the countries located along the OBOR corridor within the next 10 years.

To realize this highly ambitious project, China is not skimping on the funds. According to the European Parliamentary Research Service (EPRS), the country has already injected a hefty capital into various sources. These include “the $40 billion [Silk Road Fund (SRF)], the $20 billion China-ASEAN Investment Cooperation Fund, the $3 billion Investment Cooperation Fund between China and the CEE countries, China’s sovereign wealth fund ($746 billion) and its foreign exchange reserves ($3.19 trillion as of May 2016), which the country seeks to invest in higher-yielding assets than US Treasury Bonds”.

China has also led the creation of the Asian Infrastructure Investment Bank (AIIB), which has an initial capital of $100 billion. Of the 57 countries comprising the bank, China is the main shareholder, contributing $30 billion or a stake of 29.78 percent.

Source: Guardian Sri Lanka

Audrey Dubois-Hebert, analyst at energy consultancy FGE, said building up energy infrastructure is a main feature of the OBOR initiative, including in the areas of oil, gas, coal and electricity.

“The sector has either Chinese or China-led financial institutions financing these projects,” she said. OBOR, she added, consists of two main components: the land-based “Silk Road Economic Belt” and the sea-based “Maritime Silk Road.”

While there is no authoritative and definitive geographical definition for the Silk Road Economic Belt, she said it generally refers to the economic zone from China through Central Asia and Russia to Europe, through Central Asia and West Asia to the Arabian Gulf and the Mediterranean, and to Southeast Asia, South Asia, and the Indian Ocean.

“The geographical coverage of the Maritime Silk Road generally extends from Chinese ports through the South China Sea to the Indian Ocean with an extension to Europe, as well as the South China Sea to the South Pacific,” Dubois-Hebert added. “Since the launch of the OBOR initiative, the Chinese government has expanded this to include more provinces and cities inside China and countries around the world.”

Based on her analysis, some of the energy opportunities emerging from the OBOR strategy include:

Yamal LNG, Russia: SRF provided a $12 billion, 15-year loan to Novatek and acquired a 9.9 percent stake in the Russian company’s $27.5 billion, 16.5-million-tons-per-annum (mmtpa) Yamal LNG Project in December 2015. The lead shareholder is Novatek with a 50.1 percent share, followed by France’s Total and CNPC at 20 percent each. This follows two 15-year loans of $10.6 billion and $1.5 billion provided in April 2015, by the Export-Import Bank of China and the China Development Bank, respectively.

China-Central Asia Gas Pipeline, Line D, Central Asia: China signed intergovernmental agreements with Uzbekistan, Tajikistan and Kyrgyzstan in September 2013 to build the fourth line – a 1,000-km line with a transmission capacity of 30 billion cubic meters per annum (bcma) – at the estimated cost of $10 billion. Construction is reportedly on hold.

Gwadar-Nawabshal LNG Terminal and Pipeline, Pakistan: Part of the China-Pakistan Economic Corridor Scheme, the LNG terminal and pipeline project was signed in April 2015 for an estimated total value of $46 billion. The project, to build an LNG terminal in the Balochistan province and a gas pipeline between Iran and central Pakistan, was announced in October 2015.

Yanbu Refinery, Saudi Arabia: The joint-venture refinery project between Sinopec and Aramco became operational in January 2016. Although this is a commercial project between state-owned Saudi Aramco and China’s Sinopec, Saudi Arabia is one of the important countries identified by China on the OBOR routes.

Other Projects: China General Nuclear Power Corporation (CGN) acquired 13 gas-fired power projects in five countries along the OBOR (Malaysia, Egypt, Bangladesh, UAE, and Pakistan) from Edra Global Energy Bhd of Malaysia for $2.3 billion in March 2016. The acquisition raised CGN’s overseas installed capacity to 8.85 GW.

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For China, it makes sense to explore energy opportunities through OBOR as most of the countries along the route have a wealth of hydrocarbon resources, said Dubois-Hebert. This, combined with a high level of support within the Chinese government, will provide impetus for Chinese oil companies, particularly the national oil companies, to revive their overseas energy investment.

“Companies will receive support from the government and new funds, as well as enjoy strong economic initiatives (i.e. fast-growing consumption). However, Chinese oil companies need to have the financial strength to undertake energy investments at a time of low oil prices,” she commented. “As such, it will require time before the effects of the OBOR initiative are felt.”

SEE MORE: China’s renewables revolution by Nicholas Newman

about the author
Criselda Diala-McBride
Dubai-based journalist with 20 years of experience writing and editing finance, aviation, tourism, retail, technology, property and oil and gas articles for a range of print and online publications.