With Asian economic powerhouses such as China and India aggressively hunting new sources of energy to fuel their expanding economies, new opportunities beckon for the oil- and gas-rich states of the Middle East.
Iran and Syria, under stiff international pressure and US sanctions, are strengthening their ties to the Far East and South Asia – eyeing up new markets for their oil and gas and hoping to win powerful new political allies in the process.
Saudi Arabia and other key Gulf states are also looking to lessen their reliance on the West by entering the booming markets of the East, a swing that could have geo-strategic implications for Western influence in the Middle East.
“I think we are in a very fluid transitional period not just in terms of energy factors but geo-political factors,” says John Calabrese, an energy specialist with Washington’s Middle East Institute. “I think every country is recalibrating its relations in order to try and, at least in the short term, achieve a better balance.”
Converging interests
The convergence of economic and political interests between Iran and Syria and Asia is evident from recent developments in the United Nations Security Council. Both Russia and China opposed a French-drafted resolution against Syria which demanded Damascus accept full diplomatic relations with Lebanon and demarcate the border between the two countries. Syria countered that diplomatic relations between two countries was a bilateral issue and not the affair of the UN, an argument that won the sympathy of Russia and China, two of the five permanent members of the Security Council.
Although the objection of Russia and China was insufficient to block the adoption of the resolution, it appeared to have thwarted a more strongly worded version proposed by the US.
Iran is also gaining political benefits from the lure of its enormous energy resources. Russia and China were the two most powerful hold-outs in the Security Council over a draft resolution that would oblige Iran to halt its uranium enrichment program. The draft, co-sponsored by Britain and France and backed by the US, the other three permanent member states, would come under Chapter 7 of the UN charter which allows for sanctions or even military action as a last resort.
“The reason we don’t think that Tehran will be hit by sanctions is because Russia and China won’t let that happen,” says Said Ghusayni, vice-president of Mitsui Bussan Commodities in London. “There will be a much more even playing field in the Security Council than when Saddam Hussein was causing problems.”
China is the world’s second largest consumer of petroleum products after the US and is the source of about 40 percent of world oil demand growth over the past four years, according to the US government’s Energy Information Administration. With worldwide oil production stretched to the limit and the price of a barrel of oil hitting near record highs, every drop counts if China is to sustain its high economic growth.
“Asia is the natural market for Middle East oil and gas,” says Hossein Ebneyousef, a consultant with the Washington-based International Petroleum Enterprises. Middle East oil fueled South Korea’s economic boom, but, according to Ebneyousef, what is relatively new is the phenomenal demand of other parts of Asia, China and India in particular. “Obviously the Persian Gulf region with its huge reserve space offers excellent opportunities for them.”
And excellent reciprocal opportunities for Middle East oil producers looking to diversify their markets and win greater political leverage.
“Here’s where it gets interesting,” says Calabrese, “because they run the risk – Syria, Iran and Sudan – of seeing the East as being not just their economic salvation but also their political salvation and I’m not totally sure about that. At the end of the day, the relationship with the US, particularly as far as China is concerned, means far more than the relationship with Iran.”
Washington concerned
Still, Washington remains concerned that its opponents in the Middle East will gain greater leverage through increased ties with Asian nations like China.
“Part of the problem is that some of the nations we rely on for oil have unstable governments, or agendas that are hostile to the United States,” President George Bush said in a speech to ethanol producers in Washington last month. “These countries know we need their oil, and that reduces our influence, our ability to keep the peace in some areas.”
Meanwhile, Chinese President Hu Jintao’s visit to Saudi Arabia in April, part of a whirlwind international tour of oil-producing states, resulted in multi-billion dollar deals not only in the energy sector but also defense and security, traditionally the preserve of US and European companies. Hu’s visit followed on from a trip to China and other Asian countries by Saudi King Abdullah in January, underlining Riyadh’s desire to foster stronger commercial and political links with Asia.
Oil production is also a vital component of the Syrian economy, generating almost 70 percent of its export revenues. But output has been in decline for a decade, dropping by just over 25% from over 600,000 barrels per day to 460,000 barrels per day. At the current rate, Syria could be a net oil importer within a decade, a stark fact that has galvanized the Syrian government to intensify oil exploration and production.
Two years ago, the Bush administration slapped limited sanctions on Damascus, banning the export of all American goods to Syria except for humanitarian supplies. Last month, Bush renewed the sanctions for another year. Although the sanctions regime does not prevent American companies from investing in Syria, the prohibition on importing US goods has an adverse impact on high-tech industries such as oil and gas which often rely on specialized equipment manufactured in the US. That, combined with the prospect of incurring the Bush administration’s ire, has spurred several American oil majors to reduce their investment profile in Syria or pull out of the country altogether. US oil giant ConocoPhilips withdrew from Syria in 2004 and Devon Energy left last year.
“The majority of Western companies are not interested in investing in Syria because an investor always calculates risk and any country that is under sanctions or could face sanctions is going to be regarded as a higher risk,” says Samir Saifan, a Syrian economist. “Naturally Syria will look for other sources, and they are China, India, Malaysia and other Asian countries.”
Enter Texas-based Marathon Oil, which had been locked into a long-running dispute with the Syrian government after discovering two oil and gas fields in central Syria in the 1980s. However, in early May, Marathon Oil signed a $127 million deal with the state-owned Syrian Petroleum Company, ending a freeze in the company’s activities in Syria. But this was not an American oil major investing in Syria. The agreement allows the company to sell its interests to a third party, allowing it to exit Syria altogether if it so wishes.
“That’s definitely one option,” says Scott Scheffler, a spokesman for Marathon Oil. “Part of the contract did review that as an option.”
With American companies departing, Russian and Asian companies are more than willing to fill the gap. Devon Energy sold its interests in Syria to Gulfsands, its partner in a joint exploration contract. Gulfsands then sold 50 percent of the project to SoyuzNefteGas, a Russian oil and gas company.
At the end of 2005, the Syrian oil ministry and the Russian Company for Investment Credit Line signed a memorandum of understanding for the construction of a $2.7 billion oil refinery and petrochemical complex in Deir ez-Zor in central Syria.
Normally competitors in the pursuit of fresh energy sources, an Indian oil and gas major teamed up with a Chinese rival to win in January a 37% stake in a Syrian oil and gas field in a $573 million deal with Petro-Canada, which said it was selling its share to reduce its political risk profile due to the prevailing political uncertainty in Syria.
Reduced American private presence
The reduction in American oil and gas majors is a trend reflected throughout the Middle East, a result of political pressure on US companies combined with the closed-door policy of many Arab oil producers toward foreign companies.
According to Ebneyousef, only about 4% of US oil giant Exxon’s total investments in the last few years have been allocated to the Middle East.
“And they know this region is rich [in energy reserves],” he says. “They know that they are not welcomed in certain parts [of the Middle East]. They know there is a closed-door policy existing, they know they don’t have the support of the US government, they know that sanctions exist. These are the factors and until and unless we see a major change, we have to expect China and India and others to take the lead.”
“We have to expect China and India to take the lead.”
The eagerness of Russia and Asian countries to invest in Syria is a source of irritation for Washington which is seeking to isolate and squeeze the Syrian regime. In response to the Indian-Chinese oil and gas deal with Petro-Canada, the Bush administration failed to convince the Indian government to reconsider. For its part, Delhi said it was a private sector transaction and therefore outside its remit, while Petro-Canada said that the deal was not a fresh investment in Syria but a sale of existing equity.
Asian interest in Iran’s energy reserves is also complicating US efforts to isolate Tehran. The US is attempting to persuade India and Pakistan to drop out of the proposed $7 billion Iran-Pakistan-India (IPI) gas pipeline linking Iran’s massive gas reserves, the second largest in the world, to India’s soaring economy. In April, the Bush administration reportedly made an unofficial offer to the Pakistani government to provide funding and security guarantees for an alternative $3 billion gas pipeline linking Turkmenistan, Afghanistan and Pakistan if Islamabad abandoned the IPI pipeline. The recent nuclear cooperation deal between the US and India was an attempt to woo New Delhi away from cooperating with Tehran.
But it could prove difficult for the US to undermine the strengthening economic ties between the Middle East and Asia, particularly as many analysts view the relationship as a perfect match.
“If you look at the future of the global energy market there are areas known to have substantial reserves and there are customers who are heavy hitters on the demand side, and they’re in Asia,” says Calabrese.
