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China Forges Strategic Links with Gulf

Global Arab Network - Robert Bailey

Tuesday, 09 June 2009 14:57

Many believe that the growing urgency by Asian countries, particularly China, Japan, India and South Korea, to secure energy sources is beginning to shape profound changes in international relations, both economic and political.

There is mounting evidence that Asia’s increasingly influential role in the global economy and energy markets is already tilting the direction of the Gulf’s strategic policies with two thirds of GCC oil exports now heading eastwards.

Asian oil consumption of 23 million barrels per day now accounts for more than 30 per cent of total global oil production. This trend is set to continue with growth in demand for petroleum, particularly from the Far East, expected to rise nearly 50 per cent by 2010 and more than double by 2020.

A growing emphasis on the development of new alliances has been witnessed in the Saudi King Abdullah’s visit to China his first overseas destination after becoming King last August. Similarly, Prince Sultan, now Saudi crown prince, chose Japan for his first foreign tour since assuming office.

Riyadh is making a concerted effort to enhance relations with Asia. Japan is the Kingdom’s second largest trade partner and investor and the kingdom supplies about one- third of Japan’s energy needs. For its part the Japanese government is keen to encourage the trend.

For the giant integrated petrochemicals and refinery project at Rabigh, 200 kilometres from Jeddah, Japan’s Sumitomo is playing a leading part while Japan Bank for International Cooperation has a key financing role in the $9 billion project.

On the other side of the Gulf, Japan is also hoping progress can be made in its pursuit of oilfield development in Iran. In 2004, Tokyo struck a deal to allow a Japanese consortium rights to develop the Azadegan oil field.

However, it is the emergence of China that is focusing the attention of Gulf oil producing countries. A country of 1.5 billion people, it is now ranked the fifth largest economy and has become the factory of the world. As a result of its surging growth, China is buying increasing amounts of key industrial commodities not least oil.

China has been a net importer of oil since 2003. Its dependence on foreign oil supplies reached 40 per cent in 2004. From 2001-2004 China accounted for one third of global oil demand.

The International Energy Agency expects China’s crude imports to double to some four million b/d by 2010, roughly what the US imports now. However, some consider even this dramatic estimate to be far too conservative given China’s continuing robust economic performance.

For the last five years China has also accounted for almost 40 per cent of the growth in world oil consumption and is now the second biggest importer after the US. It is a moot point whether China’s phenomenal economic growth rate will continue. Those who suggest that it will predict a steady year-on-year increase in oil demand which could mean that within 20 years Chinese crude imports will exceed those of Europe.

It is not inconceivable that if China develops into a car owning society in the same way as already industrialised societies it would probably require the Middle East’s entire oil production.

China’s quest to strengthen economic and diplomatic relations with its major oil suppliers across central Asia, Africa, Latin America and the Middle East has been made urgent as its oil demand has soared 15 per cent in 18 months.

The Middle East provided 45 per cent of China’s total imported oil in 2004 while Africa contributed 29 per cent of China’s oil imports.

Not surprisingly Beijing is seeking to develop relations with the world’s main oil producers in Africa, the Middle East and especially the Gulf. Iran provides more than 15 per cent of Japan’s oil and is the country’s third largest supplier of crude.

Asia is already the GCC’s most important trading partner. Gulf countries’ exports to Asia, constitute more than half of the region’s total exports while imports from Asia account for nearly a third of the Gulf total imports.

Trade between China and the GCC has increased fifteen-fold since the early 1990s mainly due to increased oil consumption by China which is now the GCC’s second largest trade partner after the US.

Since the end of 1990s, China has signed hundreds of investment deals with Gulf countries. Observers see this as reflecting China’s neutral interest in the region. The only strategic interest for Beijing is access to oil supplies and not involvement let alone confrontation with the region’s political problems. For China its interest in the Middle East is purely economic.

A free-trade agreement with the GCC is currently under discussion. Meanwhile giant investments are pressing ahead. Last December, China and Kuwait signed a deal to build a $5 billion 200,000-400,000 b/d refinery in China’s Guangdong province.

China Petrochemical Corporation (Sinopec) is prospecting for gas in the Saudi Empty Quarter. A subsidiary, Sinochem, also has an agreement with Ras al-Khaimah to pump natural gas from an offshore field through its subsidiary Atlantis Norway Holdings. The deal is said by Sinochem to be “an important result of Sinochem’s strategy to expand into overseas upstream operations.”

Bahrain-based Shamil Bank is working with the international assets management arm of China’s state-owned CITIC group to develop Modaraba and other Islamic investment products in the Chinese real estate market. The latter has been growing 20 per cent annually in the last four years due to rapid urbanisation and commercial real estate demands.

The Middle East is becoming steadily more important to Beijing. Arab countries have become China’s biggest crude oil supplier. From January to November 2005, China imported some 50.52 million tons of crude oil from Arab countries. This accounted for 44 per cent of the country’s totals oil imports.

Saudi Arabia, Iran, Oman, Sudan and Yemen supply some 60 per cent of China’s oil a percentage that is steadily rising. In Oman, more than 80 per cent of the sultanate’s oil production is sold to the Far East, mainly China. In Sudan, China is the main shareholder of the consortium that is the biggest player in Sudan’s expanding oil industry.

Such has been the strategic imperative to gain access to crude supplies to fuel Chinese economic development that China’s state-owned oil trading companies have reportedly entered into deals at substantially discounted rates irrespective of profit margins, in countries such as Oman and Sudan, in order to secure long-term crude supplies.

Since relations with China are not burdened by any perceived political baggage Gulf states have enthusiastically adopted a look east programme to enhance oil exports to China and India and other Asian countries.

Former US ambassador to Saudi Arabia Charles W Freeman Jr, who is also a Chinese expert, has commented: “The Arabs see a partner who will buy their oil without demanding that they accept a foreign ideology, abandon their way of life, or make other choices they would rather avoid. They see a country that is far away and has no imperial agenda in their region, but which is internationally influential and likely in time to be militarily powerful.

It is Saudi Arabia, which supplies 17 per cent of China’s oil needs, that is the main focus for Beijing. In the first 11 months of 2005, Saudi Arabia supplied nearly 440,000 b/d of oil to China representing 17 per cent of the latter’s crude imports.

China and Saudi Arabia are laying the foundations for a strategic relationship that suggests changes to the traditional western tilt of Saudi foreign policy. This bourgeoning Sino-Saudi relationship has acquired momentum following King Abdullah’s state visit to China in January with a reciprocal visit to the Kingdom soon after by China’s President Hu Jintao in May.

Saudi foreign minister, Prince Saud al-Faisal, has stated that “China is one of the most important markets for Saudi oil and Saudi oil is one of the most important sources of energy for China.” He said the energy pact signed between the two countries during King Abdullah’s visit set the framework for further oil investments between each nations’ energy companies.

Both the Saudi and Chinese governments are seeking to use their expanding oil business as a basis for much broader economic and diplomatic cooperation. However, though Saudi Arabia is the main supplier of crude to China, it has been made clear that while the energy deal sets framework for investment in actuality this will be accomplished through the private sector.

Foundations are being laid. Saudi Aramco has sent dozens of its younger employees to China to attend high schools and universities in an effort to produce a cadre of Chinese speaking Saudi engineers. Aramco has already signed a deal with China’s Sinopec to build a refinery with Mobil in south-east China. Discussions are also being held on Saudi investment in a second refinery in north-east China.

Chinese investments in the Saudi petrochemical sector and in construction materials production are thought likely to follow. The untapped Saudi mining sector could be the next area for joint venture for co-operation.

One of five agreements signed by Saudi Arabia and China in January dealt with cooperation in oil, natural gas and mineral deposits. Other accords dealt with trade and technical cooperation, avoiding dual taxation, loans, vocational training as well as Saudi pledges to develop Aksu, a predominantly Muslim populated city in western China, with a Saudi Arabian Development Bank loan.

Beijing is looking to forge strategic relationships with others in the Gulf. Iran supplies China with about 13 per cent of its oil imports while Chinese companies have major oil investments in Iran and seem destined play an increasingly active participant in exploration, drilling, petrochemicals, pipelines and other upstream and downstream services related to Iran’s oil and gas sectors.

Discussions are ongoing over a multi-billion dollar deal with Iran to allow Sinopec to develop the Yadavaran oil field in southern Iran. These follow a memorandum of understanding in October 2004. The latter provides a framework pledging that Sinopec will develop the Yadavaran field in return for the purchase of 10 million tonnes of liquefied natural gas for the next 25 years.

Analysts believe the Yadavaran field could produce 300,000 b/d of oil. Sinopec would hold 51 per cent of the venture while Oil and Natural Gas Corporation of India would hold 29 per cent with the remainder spread among Iranian companies.

China-Iran commercial and trade links now transcend energy and cover a widening range of economic activities including dam construction, steel production, ship-building, transport and numerous other projects. More than 100 Chinese firms are said to be active in Iran involved in mining projects, ports and airport developments as well as oil and gas projects.

In view of this investment, observers believe that China has every incentive to help calm the confrontation between the US and Iran over Tehran’s nuclear development. Any uncertainties leading to higher energy prices and more costly premiums on transport and insurance bills for oil and gas shipments will hit China which relies mainly on third parties for its crude deliveries.

If a military standoff with Iran forces the closure of the Straits of Hormuz through which the bulk of Saudi and Gulf states’ oil production flows, Asia will be hit as hard as the US and Europe, according to Michael Vatikiotis research fellow at the Institute of Southeast Asian Studies in Singapore.

Mitigating the effects of any such disruption has led Beijing to provide major funding towards the $1 billion development of Gwandar Port in Pakistan’s Baluchistan province at the mouth of the Gulf, 400 kilometres from the Strait of Hormuz.

China which reportedly only possesses oil reserves of about 30 days, has also taken a far reaching and hugely expensive investment decision to create and operate a strategic petroleum reserve. Saudi Arabia is to play a key role in this. As part of the January Saudi-China agreement the two countries will build a large crude oil storage facility in China’s Hainan province.

Beijing sees storing oil forward in the market in which it is to be sold as the most effective way to protect against shortages that could be caused through exports being cut off, even temporarily, through war or political upheavals that could block the Straits of Hormuz, the Bab al Mandeb or the Suez Canal.

Plans are already under way to fill about 52 storage tanks in Zhenhai in Zhenjiang province creating a stock of some 4.1 million tonnes of oil by 2007. China has designated a total of four sites to provide the reserve stock.

The oil is likely to be stored in bond and sold only when the Chinese and Saudis agree. And because it will not have been sold, it will not count against Saudi Arabia’s OPEC quota. The Chinese meanwhile will have the cushion of an emergency oil supply on their territory and any attack on the reserve could also be deemed a hostile act against the oil’s supplier.

Global Arab Network

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