New era in energy relations between China and Middle East

Chinese companies are broadening their footprint across the region, channelling billions of US dollars into sectors such as energy and commodities.

Above, LNG containers at the Yangkou port in Nantong. Shipments of liquefied natural gas have increased significantly since China became a net natural gas importer for the first time in 2007. congjun / Imaginechina
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China has stepped up its engagement in the Middle East over the past decade as the Asian giant seeks to safeguard and diversify crucial energy and commodities needed for long-term economic growth. From developing some of the world’s biggest oilfields in Iraq to constructing a large-scale refinery in Saudi Arabia, Chinese companies are broadening their footprint across the region, channelling billions of US dollars into sectors such as energy and commodities.

The energy needs of China and the Middle East are closely intertwined. On an industry level, it paves the way for a new breed of Chinese energy companies — characterised no longer by low-cost and substandard quality and service offerings but by considerably upgraded technological, human and financial capabilities — to play a much greater role in a sector that in the past was almost exclusively dominated by western firms, in particular international oil companies.

On a political level, China's deepening engagement in the Middle East provides the world's second-largest economy with long-term access to strategic hydrocarbons and other raw materials, while at the same time opening up downstream opportunities for producing countries seeking to cement relationships with their customers and ensure long-term demand security. It is also strengthening bilateral relations between regional governments and China, thus adding a new strategic dimension to the region's political dynamics that may have greater weighting in the aftermath of the Arab Spring.

China's increasingly competitive posture in the region's energy sector was highlighted most recently by the April announcement that state-owned China National Petroleum Corp (CNPC) had agreed to a landmark deal with Abu Dhabi's government granting it access to produce and export crude oil from several onshore and offshore fields in the emirate. The contract, the first of its kind for a Chinese company in the UAE, reflects China's desire to ensure security and reliability of its internationally sourced energy and raw material supplies. To this end, the oil, gas and commodity sectors have become the most critical aspect to China's relationship with the region.

Saudi Arabia, the Middle East’s biggest economy, has been the largest supplier of crude oil to China, accounting for 19 per cent of China’s 5.6 million-barrel-per-day imports last year, according to the US energy information administration.

The trend will not end any time soon. China, which last September became the world’s largest net importer of crude oil and other liquids, is projected by the EIA to consume more than twice as much energy as the US and more than three times as much as India by 2040. It is driven by a mix of steady economic growth and rapidly rising petroleum demand that outpaces production growth in the Asian country, whose population will rise to about 1.38 billion by next year from an estimated 1.34 billion in 2010.

Shipments of liquefied natural gas have also increased significantly since China became a net natural gas importer for the first time in 2007. According to the EIA, the country now consumes about 6 per cent of the global LNG trade and ranks as the world’s third-biggest LNG importer. Future demand for the clean-burning fuel will rise further, driven by the need to alleviate high pollution resulting from China’s heavy coal use.

As a result, China has sought to diversify its import sources geographically and entered into long-term LNG supply contracts with Qatar, Yemen and Oman, as well as Egypt, Algeria and Nigeria, which together accounted for more than 42 per cent of total LNG imports last year. In addition, gas will be piped in from Russia from 2018. These deals will be expanded on in the future, certainly in light of the government’s recent announcement that it severely cut its outlook for shale gas production by 2020 after it emerged that developing the resource will be more complex and costlier than previously expected.

Once reflected in trade along the old Silk Road, the historic ties between China and the Middle East are again flourishing. Trade between China and the energy-rich GCC states in particular has jumped. China-GCC trade rose to US$155 billion in 2012 from a total trade volume of $12bn in 2003. China is now the GCC’s largest trading partner after the US, while Saudi Arabia has been China’s largest trading partner in western Asia and Africa over the past 10 years. At the same time, the GCC countries as a group have become the largest oil supplier to China, meeting about 35 per cent of its total crude oil requirements in 2012.

China has also stepped up its regional investments in sectors such as energy, metals and infrastructure. According to the Heritage Foundation’s figures of China’s worldwide investments between the years 2005 to 2013, the country’s companies invested a total $48.8bn in various sectors across the Middle East-East Africa region. Iraq accounted for the largest share of Chinese investments during the period, with $10.1bn channelled into oil projects in the country, ahead of Iran, Egypt, Mozambique and Saudi Arabia.

As China’s economy keeps expanding, its dependence on energy imports will continue and more Chinese investments are likely to be directed at the Middle East energy sector. While these investments are based on commercial considerations, they clearly serve a broader strategic interest. On the one hand, outward investments by Chinese national oil companies are a way of building and deepening strategic relationships with oil and gas-producing countries as a means of ensuring energy security; on the other, they also represent an opportunity to build up technical know-how and develop human skills through entering into partnerships with companies such as Saudi Aramco or BP.

Moreover, Chinese oil companies’ partnerships with or acquisitions of other industry players are enabling them to develop expertise in previously unchartered territory such as deepwater or unconventionals. To this end, China National Offshore Oil Corporation last year spent $15bn on the Canadian upstream oil and gas firm Nexen, whose business includes oil sand and shale gas plays.

As Chinese companies are positioning themselves to play a greater role in the global energy sector, including in the Middle East, China’s outbound energy investments are expected to be increasingly counterbalanced by investments from the likes of Saudi Aramco and Kuwait Petroleum, both of which are already involved one way or another in downstream projects in the Asian giant. For energy producers in the Middle East this symbiosis will be essential in their strategy to secure long-term demand security, in particular for their heavy crude grades, amid an increasingly energy-independent US and rising energy export flows out of North America.

The new era of an old relationship between China and the Middle East may have just been rekindled.

Sean Evers is the managing partner at Gulf Intelligence

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