x Abu Dhabi, UAE Friday 21 July 2017

China is right market at right time for Gulf

Western markets for GCC oil are declining amid the economic slump and other concerns, so producers are looking to Beijing.

Oil-thirsty China has long sought stronger relations with the GCC.
Oil-thirsty China has long sought stronger relations with the GCC.

Western markets for GCC oil are declining amid the economic slump and other concerns, so producers are looking to Beijing to help secure their future. Oil-thirsty China has long sought stronger relations with the GCC. Now, for the first time, Gulf oil exporters need China's expanding energy market as much as China needs their crude. In the worst global downturn in decades, worldwide oil demand has fallen for the past two years. Next year, demand for crude from the Gulf may decline still further as Russia, the US and Brazil, among others, pump more oil.

The bleak outlook for their most valuable export has prompted Saudi Arabia, Kuwait and now the UAE to launch their most active campaigns in years towards Beijing, with official delegations shuttling between the capitals of China and various Gulf states. The Arab oil producers are seeking to secure larger slices of the world's fastest-growing major energy market, and to reduce their reliance on western demand because of mounting concerns over US and European determination to use less oil.

In a paper presented to the Organisation of Arab Petroleum Exporting Countries four months ago, Ibrahim al Muhanna, an adviser to the Saudi oil minister Ali Naimi, wrote of a "wave of hostility from some western countries under the guise of energy security, protecting the environment and fighting global warming". "As a result of the economic crisis and policies called for by the western states as far as lessening dependence on oil is concerned, demand for petroleum is not expected to grow at the same level as the last 10 years," he said. But "emerging economies such as China, India and Brazil, which are still enjoying strong economic growth despite the crisis, are expected to see this continue, pulling their oil demand up at the same time".

According to Al Troner, the managing director of the Houston-based Asia Pacific Energy Consulting, Gulf producers started realising several years ago that access to Chinese and, to a lesser extent, Indian energy markets would be key to their future ability to export more oil. Gal Luft, the executive director of the US-based Institute for the Analysis of Global Security, says Gulf oil producers are increasingly interested in shifting some of their exports from buyers in Europe and North America, where oil demand is falling, to emerging Asian markets. "The room for expansion in China and India is still huge, and Gulf oil producers understand that the growth engine is in Asia."

On the surface, selling more crude to China should not pose too great a problem for major Gulf exporters. If China's oil consumption were to continue increasing at the same rate as in the past decade, the country would need to triple crude imports to about 12 million barrels per day (bpd) by 2020, drawing level with or surpassing the US. But many other oil exporters have their eyes fixed on China, and 60 per cent of Chinese petroleum refineries are not configured to process the Gulf's sour crude.

China's own crude resources are "sweet", containing relatively little sulphur. Until the early 1990s, when it became a net oil importer, China built refineries exclusively to process domestic crude. Even after that, it sought to supplement refinery feedstock with supplies from other regions pumping sweet crude, including its neighbours in central Asia, and west African states such as Nigeria. Gulf producers, meanwhile, became major crude suppliers to the developed economies of Japan and South Korea, which had negligible domestic oil resources and tailored their refineries to process foreign crude. But now, Japanese oil demand is falling, while the South Korean energy market looks scarcely any better.

Gulf exporters have responded by cutting the premiums they have traditionally charged Asian customers for their crude, and by entering joint ventures to build refineries in China that can handle high-sulphur feedstock from the Gulf. To protect its biggest existing market for crude, Abu Dhabi National Oil Company (ADNOC) agreed in June to build a strategic oil storage facility in Japan. "There has been a growing pressure on Gulf oil exporters to make a choice on whether they want the highest profits or to retain their market share," Mr Troner says.

In China, Saudi Aramco, the Saudi national petroleum company, has teamed up with Sinopec, the Chinese state-controlled oil refiner, and the US oil company ExxonMobil to build a US$5 billion (Dh18.36bn) oil refinery in Fujian province. Last week, Kuwait Petroleum Company and Sinopec agreed to build a $9bn refinery in Guangdong province. The UAE does not yet have a refinery deal in China, but an official visit to Beijing last week by Sheikh Mohammed bin Zayed, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces, led to an agreement between ADNOC and China National Petroleum Corporation to work together on oil and petrochemicals projects. Those are likely to include building an oil storage facility in Singapore, which is set to become an oil distribution hub for the Asia-Pacific region.

There has also been a plethora of recent bilateral deals between China and various GCC states in other business sectors, including a Chinese joint venture with Aramco to explore for gas in Saudi Arabia, a contract for Sinoma International Engineering of Beijing to build cement plants in the kingdom, and deals for Huawei Technologies, the Chinese telecommunications equipment maker, to build and upgrade mobile networks in Saudi Arabia and the UAE.

And while Gulf states may have seemed politically indifferent to Beijing in the past, that is no longer the case. Part of the growing attraction, political analysts say, is that China has no interest in lecturing foreign governments over issues such as human rights and business transparency. But there are plenty of other oil exporters that are warming to Beijing for similar reasons, while also seeking a piece of China's energy market. They include countries such as Iran and Sudan, which the US has attempted to isolate. Even Russia, which has clashed with Beijing in the past, is now building oil export pipelines to China.

That will increase the pressure on the UAE and other Gulf states to forge closer ties with their venerable silk road trade partner. @Email:tcarlisle@thenational.ae