China: the GCC's new reliable trade partner
The relationship between China and the Gulf Cooperation Council (GCC) countries can only go one way. China’s future depends on the capacity of the 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 Corp, or KPC, and China’s 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 UAE. The new deal secures 300,000 barrels per day of Kuwaiti oil for China over the next ten years, almost twice the amount of the existing contract, which is about to expire.
nder the new agreement more than 10 per cent 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 per cent of the Chinese imports of oil. Over the last 12 months the share of Qatar’s exports heading to China grew from 5.5 to6.6 per cent of the total. Also, the 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 sizeable 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 favours 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 states, with nationalised 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 parts of the Middle East are 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. Oil deposits are already at full capacity and the ambitious plans to tap its large shale gas deposits are proving unrealistic. Last month the government acknowledged this reality by revising down its targets of shale and coal seam gas for 2020 from 160 billion cubic metres to just 60. So, imported oil will remain the main solution to growing energy needs. Competition to supply China is fierce; Saudi Arabia is expected to lose share of Chinese imports in 2014 as other exporters like Iraq, Kazakhstan and Russia have been offering better conditions.
But, as the International Energy Agency forecasts in its latest energy outlook, global supply will be weak in the next decade. Many fields are close to exhaustion, others are becoming increasingly expensive to operate, and the geopolitical situation in a number of producers is deteriorating. Despite China’s reluctance, no other region in the world offers the combination of spare capacity and political stability that the Gulf countries have.
By: Francisco Quintana
The write is head of research at Asiya Investments, an investment firm investing in emerging Asia