Asia and Gulf states need to deepen energy relationship

Gulf and Asian governments need to focus on crafting relationships that navigate the dangerous waters of current Middle East political turmoil.

An oil tanker is anchored offshore on April 15, 2006 near Zhoushan, China. China's surging appetite for energy is rattling Washington and aggravating an already intense rivalry with neighboring Japan over access to oil and gas supplies, adding to tensions in an already volatile region. (AP Photo/Eugene Hoshiko)
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In Dubai's Al Barsha district, a large Chinese centre processes seismic data for oil companies. Days after an oil tanker is hijacked in the Gulf of Aden, the Indian warship Tabar sinks a Somali pirate vessel. In Abu Dhabi, the Japanese energy minister, Yukio Edano, discusses the renewal of oil concessions.

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These represent three aspects of the growing energy relationship between Asian countries and the Gulf.

The next decade will bring major changes to trade flows and to the Gulf's energy sector.

Yet, though Asia is by far the most important destination for the Gulf's exports of oil, and now gas, the energy relationship is surprisingly shallow. In a world of flexible, liquid markets, does that matter?

In 1991, China was still a net exporter of oil. By 2009, it had overtaken Japan as the world's second-largest importer.

Imports meet three quarters of Asia's oil demand, and that will increase to 90 per cent by 2030, the vast bulk of it from the Middle East.

The surge in Asian demand was the key factor driving oil prices to unprecedented heights in the past decade.

This reality has led to much talk about a "scramble for resources" between Asian and western countries. Yet this is a gross oversimplification.

The developed economies of Asia, such as Japan, South Korea and Taiwan, often enjoy long-standing relationships with the Gulf, but their demand is rising only slowly, if at all. Japan today uses less oil than it did in 1972.

Conversely, the new "tigers", China, India and smaller states such as Vietnam and Thailand, are growing explosively, but so far their stake in Gulf energy is small.

Although Asian countries are in a sense competing with the West for Middle Eastern oil and gas, they also have common interests in stable, preferably low prices and uninterrupted supply - and their most serious competitors are each other.

In 2006, India and China signed an agreement to bid jointly for energy assets to avoid overpaying. But this seems to have lapsed, as the Chinese conclude the Indian companies are not as serious opposition as they had assumed.

Conversely, the trading relationship in energy between Asia and the Gulf is symbiotic.

Broadly speaking, the Gulf exports oil and gas (and energy-intensive products such as aluminium and petrochemicals) to Asia, and imports in return manufactured goods, food and labour.

Every dollar increase in the oil price brings the Gulf countries about US$7 billion (Dh25.71bn) a year in increased revenue from Asian importers.

Despite the importance of the Gulf to Asia, and the fears of some commentators about China and India locking up resources, the Asian stake in regional oil is small. The production of oil and gas in the Gulf is dominated by the national oil companies such as the Abu Dhabi National Oil Company and Saudi Aramco, with the assistance of big western companies such as Shell, ExxonMobil, BP and Total.

The Japanese concessions in Abu Dhabi are important, and South Korea has secured three large areas for exploration.

Chinese and Indian companies have negotiated for projects in Iran. But they have avoided big commitments because of the tough terms on offer, and their caution over tangling with Washington on sanctions imposed against Tehran.

Asian companies have been most successful in Iraq, where they have stakes in projects planned to yield 7 million barrels of oil per day, enough to cover all of China's and South Korea's imports. Yet even here, western partners play a major role, and Asian companies operate only 5 out of 15 major fields.

One of the leading players, Petronas, represents an oil-exporting country - Malaysia - and is therefore very different from the usual stereotype of the energy-hungry consumer. And though state companies from India, the third-largest oil consumer in Asia, have oddly not managed to win any projects in Iraq, this does not stop the subcontinent from receiving a tenth of its oil imports from the country.

Instead of being overly concerned about direct stakes in oilfields and contracts in the Gulf, Asian countries would do better to work towards improving their own technical and commercial offerings. They could do so in the areas of liquefied natural gas and unconventional gas, for example.

Combined with low-cost operations, such improvements can give Asian countries the ability to chip away at the enduring dominance of the western companies.

Attention to their own domestic energy sectors - removing subsidies, dismantling monopolies and encouraging private-sector oil and gas investment - would help to slake their energy thirst.

And Gulf and Asian governments need to focus on crafting relationships that navigate the dangerous waters of current Middle East political turmoil.

Market-based systems, transparency and multilateral organisations bring more security than bilateral deals or affiliations with specific governments.

In these ways, the multifaceted Asia-Gulf relationship, of enormous importance for all involved throughout the next century, can continue to deepen and grow beyond the simple export and import of hydrocarbons.

Robin Mills is an energy economist based in Dubai and is author of The Myth of the Oil Crisis and Capturing Carbon