JEDDAH, Saudi Arabia: The relationship between China and the Gulf countries can only go one way.
China’s future depends on the capacity of the Gulf Cooperation Council (GCC) to provide a steady flow of oil for the next decades, and the Gulf countries will not find an similar source of rising demand in the years to come.
The deal announced in mid-August between Kuwait Petroleum Corporation (KPC) and China’s China Petroleum and Chemical Corporation (Sinopec) to double the amount of daily exports constitutes a clear step in this direction.
More will come in Kuwait, Saudi Arabia, Qatar and the United Arab Emirates (UAE).
The new deal secures 300,000 barrels per day (bpd) of Kuwaiti oil for China over the next 10 years, almost twice the amount of the existing contract, which is about to expire.
Under the new agreement, more than 10 percent of the Kuwaiti production will be destined to China.
Additional increases are expected and the local media quoted KPC’s executives suggesting that exports would increase to between 500,000 and 800,000 bpd in three years.
Saudi Arabia is already the leading source of oil for China, exporting 1.2 million bpd, or about 20 percent of the Chinese imports of oil.
Over the last 12 months, the share of Qatar’s exports heading to China grew from 5.5 percent to 6.6 percent of the total, and also UAE saw an increase in exports to China albeit more modest.
Paradoxically, these two regions do not consider each other preferred partners. Given the large amounts that China buys from the GCC, the country has a sizable negotiating power and imposes tough conditions on its providers.
Kuwait, for instance, has been trying to gain access to the distribution business in the Chinese domestic fuel market.
With that idea in mind, an agreement between KPC and Sinopec to build a refinery in southern China was signed in 2004.
However, the process has been fraught with difficulties and at this stage there are doubts about the involvement of Kuwait in the project.
Chinese authorities are reluctant to open strategic markets to foreign investors, even to strategic partners.
Similarly, the GCC does not offer the best conditions for Chinese importers.
Traditionally, China favors agreements with oil producers that allow the country to enter in the equity structure of the oil firms, or to get involved directly in the production process.
Gulf countries, with nationalized industries, professional management and abundance of resources to invest in exploration, do not need to offer these conditions to their clients.
Furthermore, China’s energy strategy is based on diversification of suppliers, and the Gulf is already the source of a third of China’s imports.
Finally, stability is a central concern for China, and the Middle East is going through a complicated period of geopolitical instability.
However, in spite of all these caveats, the commercial links between them is bound to increase. China requires vast amounts of energy to facilitate the ongoing transition to a consumer-oriented economy.
Prepared by Francisco Quintana, head of research at Asiya Investments, an investment firm investing in Emerging Asia.