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China to buy larger share of GCC exports

DUBAI, September 1, 2014

Gulf Co-operation Council (GCC) export to China is growing in Saudi Arabia, Qatar, UAE and Oman and is set to increase in Kuwait next year, according to an expert.

A deal announced in mid-August between Kuwait Petroleum Corp (KPC) and China’s Sinopec to double the amount of daily exports constitutes a clear step in this direction, said Francisco Quintana, head of research at Asiya Investments, an investment firm investing in Emerging Asia.

The new deal will secure 300,000 barrels per day (bpd) of Kuwaiti oil for China over the next ten year, almost twice the amount of the existing contract, which is about to expire.

Under the new agreement, more than 10 per cent of the Kuwaiti production will be set aside to China, with an additional increase expected and the local media quoting KPC’s executives as suggesting that exports would increase to between 500,000 and 800,000 bpd in three years.

Saudi Arabia is the the leading source of oil for China, exporting 1.2 million bpd, about 20 per cent of the Chinese imports of oil.

Meanwhile, Qatar’s exports heading to China grew from 5.5 per cent to 6.6 per cent of the told over the last 12 months, while UAE also saw a more modest increase in exports.

Paradoxically, these two regions do not consider each other preferred partners. China has a sizeable negotiating power, given the large amounts that it buys from the GCC, 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. 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 remain 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 countries, 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 the Middle East is going through a complicated period of geopolitical instability.

In spite of all these caveats, the commercial links between China and the Gulf is bound to increase, said Quintana.

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.

Its government revised down its targets of shale and coal seam gas for 2020 from 160 billion-cu-m to just 60, acknowledging this reality. This will keep imported oil as the main solution to growing energy needs.

Meanwhile, the competition to supply China is fierce, with exporters like Iraq, Kazakhstan and Russia offering better conditions, which is likely to cause Saudi Arabia to lose share of Chinese imports this year, he said.

However, as the International Energy Agency has forecast 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, he added. - TradeArabia News Service




Tags: export | China | Kuwait | GCC | increase |

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