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22-01-06, 23:10
Saudi-Chinese Relations: Energy First, but Not Last

Abdulaziz Sager, Arab News —

China neither has strong historical ties with no long-term strategic interests in the Gulf and Middle East. Yet, its relationship with the region has assumed dynamic proportions, chiefly due to its energy requirements to feed its thriving economy.

China is now the second largest oil importer in the world, accounting for 12 percent of the world’s energy consumption, with a third of its supply coming from abroad. The International Energy Agency (IEA) predicts that over the next 25 years, Chinese industry is expected to account for over 20 percent of growth in world energy demand. China currently imports 32 percent of its oil, a figure that is likely to double over the next five years. Its gas imports are projected to increase from zero in 2000 to 20-25 million cubic meters by 2010.

If it is energy that is forcing China to look toward the Gulf, it is oil again that is engaging the Gulf with China. For example, Iran and Saudi Arabia together now account for almost two-thirds of China’s Middle East oil imports. This coincides with the Gulf considering East as a preferred market and investment destination. The commercial aspect has also been enhanced as an indirect result of Sept.11, with the Gulf producers finding that the suspicion and scrutiny that greets Arabs in the West does not exist to the same degree in Asia.

But the partnership between China and the Gulf Cooperation Council (GCC) countries is mutually beneficial due to other reasons too. First, both have come to terms with the need for greater liberalization and are positioning themselves to take advantage of a globalized business environment.

Second, China has expanded into the oil services sector in the region by signing almost 3,000 contracts worth $2.7 billion in the GCC countries since 2001. China’s growing economic ties with the GCC countries have included a Framework Agreement on Economic, Trade, Investment, and Technological Cooperation in 2004 and negotiations for a China-GCC free trade zone.

Finally, China is scouting for nonenergy raw materials to feed its industries, thereby expanding its investment portfolio in the region. It is in this context that the visit to China of Custodian of Two Holy Mosques King Abdullah from Jan. 22-24 assumes significance. This is the first-ever trip to China by a Saudi king since the two countries established diplomatic links in 1990. More significantly, this will also be the first official visit to another country by King Abdullah since he ascended the throne.

Saudi Arabia is China’s No. 1 trading partner in the Middle East and is poised to maintain it. China hopes to increase bilateral trade with Saudi Arabia from about $15 billion in 2005 — up from $5 billion in 2002 — to $20 billion in 2010. The Kingdom shipped crude oil worth $4 billion to China in 2004. The Saudi share of Chinese oil imports is sure to grow, especially since Beijing aims to stockpile up to 100 million barrels of petroleum — one month’s consumption.

Topping the list of Chinese exports to the Kingdom are cars, textiles, processed and packaged foods, heavy industrial equipment and electrical products. Demand for cement is also high in Saudi Arabia with the government spending heavily on infrastructure projects.

Throughout the 1990s, Beijing cultivated its relationship with Saudi Arabia, which culminated in the 1999 Strategic Oil Cooperation Agreement. In return for opening their domestic market to Chinese investment and allowing China to pursue upstream oilfield activities in the Kingdom, the Saudi companies have begun participating in China’s downstream refining business. In doing so, China hopes to upgrade its refineries with Saudi finances. With the Saudi Arabian Investment Authority putting the Kingdom’s private sector investment abroad at about $5 billion annually, China Petroleum and Chemical Corp. (Sinopec) has held talks with Saudi Aramco for a stake in a $1.2-billion refinery in Qingdao. Saudi Aramco also joined hands with Sinopec in a $3.5-billion venture in Fujian province, which involves ExxonMobil too.

At the same time, Saudi Arabia plans to export LNG to China. As part of opening its potential holdings to private Chinese exploration, a contract to explore and produce natural gas in the Rub Al-Khali Basin in Saudi Arabia has been signed. Saudi officials desire to diversify their exports beyond oil, to include gas, bauxite and phosphates.

While some assert that the energy deals are simply a result of mutual economic interests, others argue that they stem from new strategies in both Riyadh and Beijing. In fact, Saudi motives combine economic with political purposes; Saudi Aramco now does almost half its business in Asia and has more offices there than anywhere else in the world. As part of this plan, Riyadh seeks to expand its share in China. Although it already supplies 17 percent of China’s oil imports, this is proportionally less than what Saudi Arabia sells to other Asian markets.

This does not mean that there are no potential problems that could negatively impact the relationship. For example, the two countries must consider the Xinjiang factor — the mineral-rich province is home to 7.2 million Uighurs, who are Muslims and have been subject to the government-led war against terror. Following the Chinese government’s harsh response to the 1997 Uighur riots, Saudi clerics called upon Riyadh to help Chinese Muslims financially and diplomatically. This kind of instability has necessitated improved Chinese relations with Muslim countries.

Another aspect of concern is the relationship between China and Iran. The two share a special affinity that is too close for comfort for the GCC countries given the lack of confidence between them and Iran.

China’s Iraq policy has been ambiguous from the GCC perspective. But in a break from the past, China has also engaged in hectic conflict resolution since the beginning of the Iraq crisis. In May 2004, China submitted to the United Nations Security Council an “unofficial document” offering revision of the US-UK draft resolution. Though its suggestion for the US-led multinational force to withdraw from Iraq by January 2005 was not adopted, the resolution and its emphasis on a larger UN role were in line with the region’s views.

The economic ties between GCC and China have also led to closer relations in the political and security fields. With both sides preferring a faster pace of economic rather than political reform, the priorities within the relationship are well calibrated. In this context, Chinese criticism of the US’ anti-terror campaign and democracy plans for the region are in sync with the governments of the GCC countries.

However, the chief advantage of China’s role in the region is its lack of political baggage. China’s agenda may well be dictated by economic interests and its ideological differences with the US. This can be substantiated by pointing to China’s success in simultaneously preserving good relations with both Israel and Iran. Since one of the commonalities between the two sides is the preference for a faster pace of economic reform compared to political change and because China has criticized the US’ anti-terror campaign and democracy plans — which too go well with the region’s beliefs — scope for better ties between the two sides remains unlimited.

— Abdulaziz Sager is the Chairman of the Gulf Research Center, Dubai.