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Energy Silk Road grows
The new relationship the Middle East has with China and India has led to the rebirth of the Silk Road analogy: Chinese silk and Indian spices have been replaced by modern energy investment into the Gulf.
Commentators are forecasting that this century will belong to Asia, with China and India at the forefront. The Middle East has started to prioritise energy supply towards Asia and away from the traditional western markets. This coincides with Asia's surging demand for oil, as well as a need to ease carbon emissions resulting from dependence on coal.
"Only two years ago companies in China and India would conduct their business with the Middle East over the phone," said Kenneth Borda, CEO of Deutsche Bank in the Middle East and North Africa.
"But today these companies often start their road show with a visit to Dubai, Riyadh or Kuwait."
Moreover, China and India are preoccupied with obtaining energy security to guarantee their growth. Without foreign energy supplies they cannot maintain growth rates, currently approaching 10% per year.
"China and India are the most important markets in the world simply because of their growth potential," said Sultan bin Sulayem, UAE chairman of Dubai World.
Noting that for the first time, Asia surpassed North America in 2004-2005 as the foremost oil consuming region in the world, Jeroen Van Der Veer, CEO of Royal Dutch Shell, forecasts energy consumption will increase globally by 50% in the next 25 years. Much of this growth will be seen in China and India.
Daniel Yergin, co-founder and chairman of Cambridge Energy Research Associates, referred to this phenomenon as the ‘Asian Phoenix' and said Asia will continue to account for the lion's share of the global economy.
The Chinese economy is heavily export and trade oriented. According to the China-Arab World CEO Guide, China was responsible for 40% of the growth in world oil demand between 2000 and 2004. Demand is rising quickly and consumption could increase tenfold in absolute terms over the next three decades. At the same time, domestic crude oil production has stagnated. The resulting level of imports and investments in the Middle East has made China one of the most significant players in the world oil market.
"China's trade with the Arab world has grown tenfold over the past decade to US $51.3 billion - about 40% of which is oil related," said Tang Jiaxuan, state counsellor of China. "Trade volumes between the two sides could double to as much as US $100 billion by 2010 by facilitating the free flow of goods, capital, technology and services."
At the same time, China's existing oil fields are approaching the end of their usefulness; technologies are outdated and the country's newly acquired reserves are expensive to extract.
"We're working on increasing efficiency of the supply chain between these two countries and the Gulf," said Mohammed Alshaya, CEO of Alshaya Retail.
"We hope to see a joint venture in refineries in China and India because these countries are growing markets for Gulf oil. There are also opportunities to develop joint ventures with respect to tankers and pipelines."
Iraq is keen to encourage Chinese companies to invest in its oil fields. This is part of Iraq's attempt to double its daily production to six million barrels per day by 2012, according to Hussain al-Shahristani, Iraq's oil minister.
"Iraq will significantly increase its oil production in the next few years and China will significantly raise its imports. That's why the two countries will need to work closely together," said al-Shahristani at a press conference in Beijing.
China National Petroleum Corporation (CNPC), the country's largest oil producer, is said to be willing to pay millions of extra dollars to secure the exploration rights for Iraq's Ahdab oil field under a deal Beijing signed during Saddam Hussein's regime. CNPC has also recently held talks with National Iranian Oil Company (NIOC) to develop the giant Kish gas field in the Gulf. Kuwait has invited Chinese firms to participate in a US $8.5 billion project to boost crude oil output from its northern fields.
Beijing had been thought to be out of the running for major contracts in post-war Iraq, with the best deals going to the US and its allies. But the upsurge in violence has made the country less attractive to investors in the west.
Beijing clearly recognises that as domestic demand for oil grows, so must its dependence on the Middle East. It is exploring pipeline plans to cut the time and cost of sea journeys, stepping up its diplomatic engagement and promoting investment where there are still assets it can afford.
"China [is] investing in more peripheral Middle East countries like Yemen, Oman, the UAE and Syria," said Gavin Thompson, a Beijing-based consultant at energy analysts, Wood Mackenzie.
China and India have also endeavoured to improve their relations with Saudi Arabia, the world's largest oil exporter. In 2004 Saudi Arabia and China decided to hold regular political consultations and China's state oil company, Sinopec, signed a deal to explore gas in Saudi Arabia's vast Rub al Khali. Saudi Arabia accounts for about 17% of China's imported oil.
India has emerged as the kingdom's fourth-largest destination for oil exports. Riyadh is the largest supplier of oil to India. India, like China is reshaping its diplomacy to serve energy requirements as its booming economy also needs new supplies of oil to ensure continued growth.
Reliance, a private Indian energy firm, has invested in a refinery and petrochemicals project in Saudi Arabia, while the Oil and Natural Gas Corporation, India's state-owned energy firm, will engage the kingdom as its equity partner for a refinery project in the Indian state of Andhra Pradesh.
January's visit of the Saudi monarch, Abdullah bin Abdul Aziz al-Saud, to India saw the signing of the ‘Delhi Declaration', a wide-ranging call for Indo-Saudi partnerships in the critical energy sector, as well as major investments in the petroleum sector.
As with China, India sees significant investment opportunities in Iran. The Gas Authority of India has signed a 30-year deal with the National Iranian Gas Export Corporation for the transfer of up to 7.5 million tonnes of LNG to India per year. The deal, worth an estimated US $50 billion, will also entail Indian involvement in the development of Iranian gas fields. In addition, Indian officials are discussing the construction of a US $3 billion natural gas pipeline from Iran to India, via Pakistan. If completed, the pipeline would provide both countries with a substantial supply of gas.
"It is clear India and Iran are two countries that complement each other in the field of oil and gas. While Iran has vast reserves of oil and gas, India is forever energy hungry and both can provide each other's needs," said Annamalai Chidambaram Muthiah, president of the Federation of Indian Chambers of Commerce and Industry.
But for all the investment opportunities in the Middle East, India and China have approached with caution, wary of the fluctuating energy prices, which are pivotal to their domestic stability. Indian and Chinese firms are no longer willing to pay large premiums to secure oil supplies, yet they do not have the technical expertise that Western firms use to woo producers. At the same time, Middle Eastern countries are worrying less about finding outlets for their oil all the time global demand is booming, prices hit near peaks and export refineries continue to set up across the region. While both sides have established numerous preliminary deals, few of them have gone beyond the initial phases.
"The relationship between China and India and the Middle East is still unbalanced. China and India need the Gulf more than the Gulf needs China and India, because of their reliance on energy," said Borda. "The challenge is to bring greater parity to the relationship."
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