Huge energy needs spur China into growing presence in Gulf

Jan 13, 2005 01:00 AM

Lured by the world's largest oil reserves and markets considered too risky by some Western companies, China is quickly becoming a major economic player in the Gulf, making deals in transportation and technology, showcasing its consumer goods and shoring up agreements to meet its colossal energy needs.
"The current state of business ties between China and the Gulf states is definitely growing, with an interest from both sides to expand ties," said Christian Koch, program director at the Gulf Research Centre, an independent institute based in the United Arab Emirates. "Oil is certainly the most central aspect to the relations, but ties should not be seen exclusively through that prism."

Trade between China and the six rich countries of the Gulf Cooperation Council the United Arab Emirates, Saudi Arabia, Bahrain, Kuwait, Qatar and Oman was expected to reach $ 20 bn in 2004, up from $ 16.9 bn in 2003, according to China's National Bureau of Statistics. And trade between China and Iran is expected to have totalled $ 7 bn in 2004, up from $ 5.6 bn in 2003, according to the Iran-China Chamber of Commerce, which was established in 2000.
The marked increase in business has been both "in scale and scope," said John Calabrese, an editor at The Middle East Journal, a scholarly quarterly in Washington, who wrote his doctoral thesis on relations between China and the Middle East.

With China and the Gulf states in talks since last summer to hammer out a free-trade agreement, that trend is not likely to reverse any time soon. The surge in wheeling and dealing, however, hardly represents a triumph of free enterprise. The trade mostly amounts to state-owned Chinese and Gulf companies pairing up to get oil and natural gas to China, and state-owned Chinese consumer and technology companies exporting their wares to the Gulf.
Recently, Chinese icons have begun appearing on the sandy dunes of the Middle East. In December, for instance, officials in Dubai inaugurated the Dragon Mart, a 150,000-square-meter, or 37-acre, shopping mall built in the shape of a dragon and heralded as a showcase for Chinese products.

China has been on a crude oil buying spree since 1993, when its explosive economic growth turned it into a net importer of oil. But in the last few years, analysts say, the country has realized it must vie more aggressively and have a greater physical presence in the region to gain access to the Middle East's diminishing reserves at a time of increasing competition for them.
"They realize they can't just buy crude," Calabrese said. "They've got to play ball now in producer countries and develop refining capacity in the region."

And there was a lot of ball-playing last year. In one of the biggest deals in a busy year, the China Petroleum & Chemical Corp., known as Sinopec, signed a $ 300 mm deal in March to develop natural gas resources in Saudi Arabia near the Ghawar field. The deal raised eyebrows for its high risk and potentially low returns.
But Colin Lothian, senioranalyst for the Middle East at the energy consultancy Wood Mackenzie in Edinburgh, Scotland, said it put China in a good position for the future.
"It's a political deal," he said. "It's about forming relations with Saudi Arabia in order to secure China's long-term energy needs so when they do come looking for crude they'll be viewed favourably."

Across the Gulf in Iran, Sinopec agreed to buy 250 mm tons of natural gas over 30 years, to jump-start the country's stalling natural gas industry. In exchange, Iran will export 150,000 bpd of crude to China after Sinopec has developed the Yadavaran oilfield in a package deal worth $ 70 bn.
Also in Iran, Zhuhai Zhenrong, a Chinese oil-trading firm, signed a 25-year natural gas deal in March worth $ 20 bn. And the China National Petroleum Corp. bought the Iranian subsidiary of Sheer Energy of Canada, giving the Chinese company a 49 % stake in the Masjed-i-Suleiman oil field in a seven-year deal worth $ 121 mm.

According to Amy Myers Jaffe, a fellow at theJames A. Baker III Institute for Public Policy at Rice University in Houston, "The Chinese companies have a policy of trying to find oil and gas deals where they don't have to compete with the US oil companies.”
"They tend toward countries where the US has sanctions like Sudan, Iran and Iraq," she added.

China has been active in Iraq despite security woes there, though it now imports no more than 4 mm barrels of Iraqi oil a month. In September, Sinopec signed a $ 15 mm deal to build oil storage facilities in Basra, while China National Petroleum continues to make noises about a memorandum of understanding it received from Saddam Hussein to develop Iraq's al-Ahdab oilfield. China has long had ties to the Middle East, often marketing weapons to regimes that Washington abhorred as well as selling its cheap consumer goods.
In the 1980s, China's main exports to the Middle East were "plastic fly swatters and Silkworm missiles," Calabrese said. "Though it had an interest in penetrating the Middle East economically, it didn't have the ability."

China's non-petroleum businesses in the Gulf now go much deeper. FiberHome Communication Technology, a Chinese maker of equipment for fiber-optic networks, won a contract to help build a broadband network in Iran, while Hisense Electric, a state-owned television maker, has built a factory there. Iran is also home to the first assembly plant outside China for Chery Automobile. Built last year, the plant is on track to turn out as many as 50,000 cars a year in partnership with an Iranian company, Sanabad Khodro Tus.
Few experts think the Chinese can subvert the United States' dominant economic position in the region, at least not anytime soon. Trade between the United States and Saudi Arabia alone totalled $ 22 bn in 2003, up from $ 18 bn in 2002, according to reports by the Saudi Embassy in Washington.

Source: International Herald Tribune
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