Year of the Dragon for Gulf oil and gas producers - Andrew White

Just as the eurozone crisis is deepening and European states are turning to the world’s richest countries for assistance, the Middle East region’s oil-rich states are increasingly forming alliances with China. ANDREW WHITE

It has been four long years since Saudi Arabia’s King Abdullah urged US General David Petraeus to ‘cut the head off the snake’, and destroy Iran’s then-nascent nuclear programme. And while the executioner’s axe still hovers amid escalating tensions over the pariah state’s nuclear ambitions, Saudi and its five GCC partners – the UAE, Qatar, Kuwait, Bahrain and Oman – have spent the intervening years working busily to help bring Iran to its knees.

Iranian banks have been shuttered, Iranian businessmen blacklisted and Iranian traders turned away at Gulf ports. And if that wasn’t enough to worry the accountants in Tehran, the Gulf is now moving in on the one income stream Iran and its leaders simply cannot do without: oil. China, the world’s second largest economy, continues to import large quantities of oil from Iran, even as warships stalk the Strait of Hormuz. But over the course of six days in January, observers were left in no doubt as to the priorities of Chinese Premier Wen Jiabao and his counterparts in the Gulf. Jiabao signed more than a dozen agreements across a broad range of sectors including energy, trade, infrastructure and finance, with the Saudi, UAE and Qatari governments, in a whirlwind tour, which confirmed that 2012 really is the Year of the Dragon for Gulf oil and gas producers.

Sino-Saudi wealth and power

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China is the world’s second-largest importer of oil after the US, and at the moment 51per cent of these imports come from the Middle East, according to Chinese customs data. China is also Iran’s biggest oil customer; around 11 per cent of the country’s total oil imports come from Iran, and China is expected to be the biggest beneficiary of US and European sanctions on Iran’s oil sales, as it will be able to demand discounts and better terms on Iranian crude. Nevertheless, Beijing is looking for a buffer against the potential interruption of Iranian supplies, as well as long-term access to crude from other Middle East sources. It’s a strategy Gulf policy-makers are happy to support, and one that will alarm Iran as well as remind Washington that Middle East oil is not the exclusive preserve of the West.

Saudi is already China’s biggest source of imported oil, followed by Angola and then Iran, and barely had Jiabao set foot on Saudi soil before it was announced that oil giant Saudi Aramco had finalised an agreement with Chinese companies to develop a 400,000 barrel per day (bpd) refinery in Yanbu, on the kingdom’s Red Sea coast. The Premier then spent much of his remaining time in Riyadh pressing Saudi leaders to open the kingdom’s huge oil and gas resources to expanded Chinese investment, which if granted would guarantee China an uninterrupted supply of oil from the Middle East. According to the Chinese, bilateral trade between the two countries amounted to US$58.5bn in the first 11 months of 2011 – a figure that would soar were China granted access to the Saudi energy sector.

On the second leg of his Middle East mission, Jiabao was sealing deals in the UAE, a country with which China is developing ever more sophisticated trade and investment ties. On the face of it, the strategic pact between Abu Dhabi National Oil Company (ADNOC) and China National Petroleum Corporation (CNPC) will see the two state-owned firms collaborating on technical studies in underdeveloped areas of the UAE. But the ADNOC-CNPC deal could mean so much more: for the UAE it represents a reaffirmation of its long-term strategic partnership with the largest of the fast-rising Asian economic powers, while China is about to be invited into an exclusive club that will guarantee it gets the oil it needs to fuel future growth.

 


 

  ‘Abu Dhabi aims to invest US$60bn over the next few years in a bid to boost the country’s oil production capacity from 2.7m to 3.5m barrels per day, and now UAE policy-makers are looking to the East to stump up cash that is thin on the ground in the US and particularly the eurozone.'


 

The UAE’s oil sector is unusual by international standards, in that it allows producers to acquire equity stakes in return for providing much of the required investment, and accepting relatively tight profit margins. In the past, Western oil giants including Shell, Total, BP and ExxonMobil have ploughed billions of dollars into UAE oilfields, piping away trillions of dollars worth of the black stuff by way of reward. But the days of the all-Western cabals are numbered: Abu Dhabi has said it aims to invest US$60bn over the next few years in a bid to boost the country’s oil production capacity from 2.7m to 3.5m bpd, and now UAE policy-makers are looking to the East to stump up cash that is thin on the ground in the US and particularly the eurozone.

Shifting sands

In January, the UAE’s Supreme Petroleum Council, the country’s highest authority on energy policy, said that it would put concessions for onshore oilfields up for tender when they come up for renewal in 2014. The rights are currently in the pocket of a consortium comprising five Western oil majors, but Beijing will no doubt hope that its ADNOC link puts it in an advantageous position when the old concession is carved up and the bidding begins anew. ‘China isn’t coming to the UAE just to help out,’ says one seasoned observer with close ties to ADNOC, and first-hand experience of petroleum politics in the UAE. ‘All the usual foreign players are lining up to tender for the new concessions, but now China is making sure to position itself near the front of the queue.’

Finally, Jiabao made his way to Doha where he talked natural gas with Qatari leaders. He offered the services of Chinese firms in the field of downstream oil product processing, a sector into which Qatar is looking to invest serious money and one which could elevate China into the position of invaluable infrastructure partner. The two countries have already agreed to build a refinery in China’s eastern Zhejiang Province, and have signed a deal under which Qatar will deliver three million tonnes of Liquefied Natural Gas to China per annum, for the next 25 years.

As he left Middle East soil having become the first Chinese premier to visit Saudi Arabia in 21 years, and the first ever to visit the UAE or Qatar, Jiabao will have reflected on a job well done. And the warm reception that will have prompted palpitations in Iran, suggests too that the oilmen of the Gulf are at least as interested in courting Eastern advances, as they are those of their old Western allies.