The recent breakdown of trade negotiations between China and Japan has roused concerns in the two countries. Disagreement between the two sides on the quantity and price of China's crude oil export to Japan has led to a de facto suspension of the oil export to Japan early this year, which has been going on for some 30 years.

 

A halt of crude oil export to Japan once in history

 

There ever happened the suspension of crude oil export to Japan at the beginning of 1999. The reason lay in China's soaring demand for oil due to its boosted economy on fast track after putting into practice the reform and opening-up policy.

 

Since 1993, China turned into an oil importer from an exporter. By the end of 1998, China had been exporting its oil at a price 30 percent lower than its domestic market. In addition to this, Chinese state-run enterprises in this field were mostly suffering from bleeding losses. In 1999 China had to officially inform Japan that it would export zero crude oil to Japan as from February that year.

 

According to the extension terms agreed upon by the end of 2000, China was expected to export 3m tons to 4m tons of crude oil to Japan annually from 2001 to 2003. China and Japan discussed the issue of crude oil export for 2004-2005 by the end of last year. Remarkable disagreement began to appear between the two parties on the quantity and price of the crude oil trade.

 

Japanese media reported that Tokyo proposed an annual export of 1.85m tons of Chinese crude oil in 2004 and 2005. But Beijing quoted an annual supply of 500,000 tons at the most at per barrel price about US$6 higher than that in the world market. The difference over these questions between the two sides finally resulted in the suspension of China's 30-year crude oil exports to Japan from January this year.

 

China faces an insufficient supply for domestic needs

 

China has scarce oil resources endowment. Its oil output lags far behind the domestic needs as demanded by its economic development. Since 1993, China's oil import has been on the rise. Take last year for instance China imported nearly 100 m tons of oil to meet its domestic needs, a record high in history.

 

After China's WTO membership, China's oil policy and the price fluctuation of the world oil market combined to impact heavily on Chinese oil producers. Insiders said enterprises were not motivated as much as they had been before and the government has reduced the tax rebate for resources export including crude oil, making the crude oil exports no longer a lucrative trade for exporters.

 

Some analyses on the Japanese side hold that the crude oil output from China's Daqing Oilfield plummeted to 48.4 m tons last year, below 50m tons for the first time since 1975. Its annual output will be on a down slope in the future according to China's energy strategy and long-term production plan. For a long time, it will keep its yields at about 35m. tons a year. This plan means that Daqing will no longer be able to export its crude oil to Japan on the one hand and hardly can it supply crude oil to other areas of China.

 

Japan attributed China's reduction of its crude oil export to two reasons. One is that China's soaring domestic demand has made lowered availability for export. The other is that the disagreement on the price between the two sides has led to the breakdown of the trade talk.

 

There is another analysis. Although Daqing Oilfield yields less output and the price is a little bit lower than the domestic market, as a producer with an annual production capacity of about 48m tons, the export of 1.85m tons means only a drop in a bucket. China's reluctance to export its oil to Japan may be caused by the competition between the two sides for Russia's oil pipeline.

 

Daqing oil attractive to Japan

 

Japan is extremely hungry for energy resources. Over half of its energy, 52 percent, depends on oil. And it has nearly 100 percent dependence on imported oil. 88 percent of its total oil import is from the Middle East. To ensure its oil supply Japan has been trying hard to tap for more oil import channels to reduce its over dependence on the Middle East oil.

 

A boss from a Japanese oil trade firm said frankly that in Japan either the government or non-government all attached great importance to seeking for various channels for crude oil import. Anyway, Japan's domestic consumption of crude oil completely depends on imported oil.

 

Daqing Oilfield used to be the exporter to Japan and its oil quality is quite attractive to Japan. Two facts underlie Japan's choice of Daqing as its oil exporter according to Japanese insiders. One is that the relatively short distance between China and Japan saves shipping cost.

 

The other is that Daqing produces quality oil with low sulfur and high paraffin wax which condenses crude oil easily at normal temperature, making the shipment very easy. In addition, price of oil from China has been lower than or approximated to that of the international market. As a result, Japan found the oil from Daqing more attractive as compared with crude oil from any other regions.

 

Some Japanese firms hold on

 

Although the talks on Daqing's oil export to Japan have been fruitless so far, some Japanese firms will not give up and keep their contact with various parties in China to buy the quality crude oil from Daqing.

 

At the end of January, a non-governmental delegation comprised of major Japanese crude and produced oil traders visited Chinese officials of Ministry of Commerce in a bid to resume the oil export. Even after the setback, its backbone members still stay in China for further talks with China. Talks are still going on.

 

China's economic development has also whetted its appetite for energy, a report of Japanese media pointed out. This will effect more pressures on the shortage of energy supply in Asia. For better cooperation and development, it is necessary for Japan to step up its collaboration with China on promoting energy saving technologies and power generation equipment of high efficiency.

 

(People's Daily February 22, 2004)