Tuesday, November 22, 2011

China and the Gulf: Learning from a Lab Rat: Part Two

In my previous blog, I cited the old chestnut: What’s the difference between a laboratory rat and a human being? Answer: The lab rat finally ceases scurrying through a maze when he realizes there is no cheese at the end. Human beings, on the other hand, never stop trying.
Confronted with the maze that is the Arabian Gulf, the Chinese are the lab rats. To make that point, in the previous blog, I discussed how China, while resisting calls for sanctions against Iran for its alleged nuclear weapons program, has actually benefited from those sanctions: Iranian oil becoming more important to China than Saudi’s oil is to the United States.
China’s activities in the Gulf, however, are not restricted to Iran. Just as American troops and bases have spread along the Gulf, so have China’s businessmen, eager to exploit the vital resources that the U.S. military is thoughtfully protecting.
The surprising twist is that the Gulf is far more vital to China than to the United States. China gets 58% of its oil from the region. Estimates are that by 2015, that dependence will soar to 70% .  [By comparison, the U.S. gets only18.2% from the Gulf. ]
Another irony: while China has developed close ties with America’s prime enemy in the region, Iran, Beijing has been even more successful in wooing Washington’s major Arab ally in the Gulf , the Saudis.

Mao’s revolutionary China decried the Saudis and the feudal sheikdoms of the Gulf. But that’s then and now’s now. The Saudis currently provide China with 20% of its crude oil imports—and Saudi leaders have assured Beijing they will furnish all the crude China will need over the coming decades.

China has also offered to sell the Saudis intercontinental ballistic missiles. But in deference to Washington, the Saudis have so far turned down such proposals. Meanwhile, business is booming: China’s annual trade with Saudi Arabia totals $60 billion, the Saudis selling not just petroleum but chemicals for China’s surging manufacturing sector.
The Saudi’s new found ties with China, also enable Riyadh to pay less heed to  annoying calls out of Washington for democratic reforms—an issue that never bothers the Chinese.
Iraq’s relations with China represent another bitter paradox: You’d think that America’s huge sacrifice of treasure and blood in Iraq would have brought the U.S. some benefit--the inside track, for instance on the development of Iraq’s massive petroleum reserves. That’s what Dick Cheney and his friends were supposedly after. But in Iraq, as in Iran, the Chinese have been willing to take risks few American firms were willing or able to take.
As a result, China winds up as one of the largest oil beneficiaries of the Iraq War.
In fact, the first major deal for oil exploration signed by the new Iraqi government with foreigners  was with a couple of Chinese companies: a 23 year agreement for $3 billion in 2008 to pump oil from the Al Adhab field.  In 2009 PetroChina teamed up with Britain’s BP to win a 20 year contract to boost output from Iraq’s largest oil field, Rumaila—the only contract awarded in Iraq’s first post Saddam auction of oil licenses.
Earlier this year, Iraq President Maliki journeyed to China hoping to convince  more Chinese companies to invest in Iraq—in everything from energy, oil, transport, housing, telecommunication and agriculture.  He even welcomed Chinese military aid.

With China’s commercial successes in mind, it might be instructive to compare the size of China’s Embassy in Baghdad with the sprawling American compound, the largest U.S. Embassy in the world, staffed by 16,000 employees,  protected in turn by an army of  5,000 “independent contractors”. 
Beijing however, would probably favor a continued U.S. combat presence in Iraq. Many of the Chinese companies now operating there are afraid to expand further because of the on-going danger of terrorist attacks.
Not that the Chinese are uninterested in strategic facilities of their own.
China has contributed $200 million to construct a deep-sea port in the Baluchistan Province of Pakistan, only 250 miles from the key Strait of Hormuz.  Nearby is the port of Salalah in Oman, where Chinese navy escort force now dock to resupply; not to mention the Chinese warships that have docked in Abu Dhabi.                                            

But there’s no way the Chinese military presence will ever challenge the U.S. in the Gulf. Nor is there any evidence they want to. The hulking American bases have their own obvious downside: Remember, it was the huge inflow of American “infidel” troops into Saudi Arabia in 1990 following Saddam’s invasion of Kuwait, that provoked Osama Bin Laden’s outrage and provided him with thousands of similarly inflamed recruits.
Concern about continued opposition to U.S. troops in Saudi lay behind the decision to move the American centre of operations to nearby Qatar. As a result, since the drawdown in Iraq, the vast new air base of Al Udeid in Qatar has become a lynchpin for the U.S. buildup in the Gulf. 
But Qatar also boasts the third-largest reserves of gas in the world, and the Chinese are thus very present. 
In May 2010, CNPC  (the China National Petroleum Corporation) signed a 30-year deal for gas exploration and production in Qatar. That was just for starters. CNPC, Shell and Qatar have also put together a joint venture to build a 10 billion dollar petrochemical complex in Eastern China.
Nearby Abu Dhabi also has huge oil reserves, and in 2009 a Chinese firm for the first time won a service contract to supply oil rigs for onshore drilling. The deal came after a visit to China by Sheikh Mohammed bin Zayed, Crown Prince of Abu Dhabi. The goal: to foster strategic co-operation with Beijing. The Crown Prince was also Deputy Supreme Commander of the UAE Armed Forces.
Oil-rich Kuwait, of course, was the country that the U.S. went to war to “save” in 1991 after Saddam’s troops invaded. In 2009, a Chinese state-controlled oil company, Sinopec, won a $140m contract to supply drilling rigs to the Kuwait Oil Company after Kuwait promised to export 500,000 barrels per day of oil to China by 2015. Kuwait Oil and Sinopec have also agreed to build a $9 billion oil refinery in China.
But it’s not just oil. Trade between China and the Gulf is a two-way affair. In 2009, the same year that China became the largest importer of oil from the Gulf, it also passed the United as the largest single importer to the region.
Remarkably, there are now more Middle Eastern visitors to Yiwu, a city in China that houses tens of thousands of retailers, than there are to the entire United States. Cross-border investment from the Middle East in Chinese financial institutions also represents a new mode of exchange. By 2020 annual trade between China and the Gulf will top $350 billion,
And perhaps that’s how things will continue to go: a strange symbiosis: American bases and Chinese markets.

Or maybe not. As  Jon B. Alterman at the Centre for Strategic and International Studies observes  “there is something inherently unstable about a region that relies on the West for security and the East for prosperity.”

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