Asia emerged as the 'top destination' for US grades in the first half of 2017. India recently received its first batch from America, and maintained that the supplies will increase. Photo: Reuters
Asia emerged as the 'top destination' for US grades in the first half of 2017. India recently received its first batch from America, and maintained that the supplies will increase. Photo: Reuters

Crises brewing in the Middle East could have major ramifications for energy security in Asia, including India and China. Saudi Arabia’s Crown Prince is currently opposed to Iran, and is being nudged and pushed by the US. Meanwhile, Riyadh and other regional allies, has taken an aggressive stance against Doha (Qatar), which is sliding close to Tehran. The US and Saudi wish to be close to Iraq, and there are internal tensions with the Kingdom.

To understand the possible scenarios, one needs to consider five emerging trends. First, several Middle East nations wish to increase crude supplies to Asia. The second shift: as demand rises within West Asia, it will have less oil to export. Third, most Asian nations hope to reduce their dependence on the Middle East, specifically Saudi Arabia. Fourth, China and India’s energy security has to be understood vis-a-vis all sources of energy, and not just crude and natural gas.

While politics, diplomacy, military, geopolitics and terrorism are bound to get enmeshed, with suppliers and buyers grappling with differing and ever-changing strategies to ensure their respective self-interest, let us consider a few predictions on Asia’s energy security dynamic.

From the Middle to East

According to one report, over two-thirds of Saudi oil is consumed by Asia. The figures are higher for the United Arab Emirates (96%) and Iran (86% to China, India, South Korea and Japan). It concluded that “Middle Eastern energy is Asia bound.”

Several factors will determine what happens over the next two decades. The report quoted earlier said that global energy demand would rise by 40% by 2035. Most of this growth will come from non-OECD nations –that is, developing countries. The numbers differ from 85% (US Energy Information Administration) to 96% (British Petroleum). As production in the Middle East increases by 30%, it will “continue to supply much of the increased demand”. But this trend may be blunted.

Internal consumption of crude by West Asian nations (including the Middle East) has shot up in the recent past. Thanks to both population growth, higher urbanization and industrial growth, Saudi Arabia and UAE have become mini-energy guzzlers, a trend that will only accentuate. Hence, over the next few decades, they, along with the other regional producers, will be able to export less or the same, at least in terms of the percentages of overall crude oil production.

This is why some experts feel that the Middle-Eastern stranglehold on ‘crude’ will ease in the future, as it has in the recent past. “The year 2012 was a turning point in oil flows between Asia, the Middle East, and the rest of the world…. The important point is from now onwards, Middle East surpluses will not support the growing Asian (demand) deficit, which will increasingly have to be met by supplies from other parts of the world,” says one of the forecasts.

Eager sellers & show-me buyers

The tensions between suppliers and buyers may lead to interesting developments. It could, for example, lead to interplay between eager and enthusiastic sellers in West Asia, and oil importers in the rest of Asia, which are equally keen to expand their crude basket. Talk to the two sides separately, and one can gauge the extreme differences in their predictions. Both sides are convinced that they will be proved correct over the next decade or two.

At a recent international conference, OPEC’s Secretary General, Mohammad Barkindo, hinted that Asia would continue to depend on the Middle East. “For the foreseeable future, we can count on the Asia Pacific to be the primary outlet for OPEC and Middle Eastern export barrels,” he said. He predicted that crude exports from West Asia would soar by over 50% in the next 25 years. He was supported by officials from the region’s oil-exporting nations.

Similarly, Iraq’s Minister Councilor for Energy Affairs, Dheyaa Jafar Hajam al-Musawi, said that his country, which sells half its oil exports to Asia, would increase the percentage to 80%. One has to remember that almost a third of Asian consumption is in the form of petro-products, which are supplied by Asian refineries (in India, South Korea and Singapore) that in turn import crude from the Middle East. So, the ‘crude’ linkages are complex and sophisticated.

At the same time, it’s evident that Asian consumers wish to decouple a bit from the Middle East. India has told OPEC it wants to reduce its dependency on its crude. And China has, over the years, managed to diversify its crude sources through a combination of decisions. Chang Jihak, senior executive vice president of Hyundai Oilbank, estimated that South Korea may reduce the Middle-Eastern share of oil imports from the current 85% to 70%.

Jihak said Asia had emerged as the “top destination” for US grades in the first half of 2017. India recently received its first batch from America and maintained that the supplies would increase. At current global crude prices, US oil is financially lucrative for its producers, and geopolitically appealing for the buyers. Asia’s growing dependence on America is likely to irk China and Russia, both of which wish to dull the capacity of the sole superpower.

All of these trends, predictions and estimates could turn out to be true. Things will depend on growth rates in production, plus supply and demand. For instance, if Asian consumption grows at a higher clip than the increase in production in the Middle East, Asia could buy a lesser percentage of its requirements from the latter.

New axis of energy security

Beijing possibly provides the best example of how Asian nations are trying to deal with their respective energy security issues. China has invested in oil and gas fields across the globe over decades to reduce its dependency on the Middle East, especially Saudi Arabia and its allies. At the core of Beijing’s strategy is the overriding priority to buy crude from nations that are not in bear-like grip of the US. In the recent past, this has left it with two attractive geopolitical options.

According to a recent report, “Russia and Iran are the only two major energy exporters outside the camp of the United States who (which) have significant enough oil and gas reserves to potentially satisfy all of China’s oil and gas import requirements on a sustainable basis.” For both Moscow and Beijing, which carry historical baggage of animosity, oil can still be a means for “mutual interdependence”. Russia can try to maintain a balance between supplies to Europe and China, and China can hedge its sources.

However, it is Iran which provides an “ideal hedge” for China because of the existing verbal and diplomatic war between Donald Trump’s America and Iran. In addition, Iran offers a land-based supply route via Pakistan. “China and Iran have no history of conflict, and China and Pakistan have been allies for over half a century,” Samir Tata noted in The Diplomat. The Iran-Pakistan pipeline is in place; China is keen to complete the Pakistan-China portion, but that will come with its own challenges due to the internal turmoil in Pakistan.

Thus, China-Russia-Iran-Pakistan could become a new energy supply axis in the near future. Couple this with China and Russia’s energy and other plans in central Asia, which both conflict and converge. China is enthusiastic about an oil pipeline with Kazakhstan. “The major attraction of this pipeline is that it would provide China with an oil supply route that avoids the sea-lanes dominated by the United States navy and passes through regions where China’s land power has the advantage,” a Rand report explained.

This does not imply that China will dump Saudi Arabia and its allies in the Middle East. But, as the Rand report claimed, it hopes to pursue a policy of “two imports and one export” in the region. The two imports, it elucidated, were oil imports and investments in China’s domestic oil sector. The export referred to China’s investments in the Middle East. All three elements have been implemented and in place for two decades.

There is another aspect to the energy vision. “Militarily, it is possible that China could use its arms sales to the Middle East to foster closer ties to oil-producing nations and possibly to decrease its oil import bill,” the Rand report said. China has exported weapons to Saudi Arabia, Iraq, Iran and Libya. As these nations battle and grapple with each other in various ways, it leaves doors open for China to sneak in or out.

Energy, not merely oil security

In the case of both India and China, crude is only one aspect of their overall energy security. Oil is a critical component, but one has to look at the larger picture. India has decided that even as it pursues multiple sources for crude, it will opt for newer energy sources, including renewables (solar and battery) and nuclear. At the same time, she will continue to depend on traditional sources like coal and hydro. It will be a case of multiple strategies woven into a whole.

The same is true with China. A recent study said: “Understanding the complexities of China’s energy strategy is difficult. China’s energy sector is of such scale and has undergone such a rapid period of transformation that it is possible to find data to support most views and perspectives which often conflict. Thus, a nuanced understanding must include a holistic view of the entire system, which includes both transport and stationary energy, as well as associated technologies and equipment.”

Hence, in a bid to truly understand China’s energy imagination, one has to look at several things at the same time. For example, as the above study claimed, it will enhance its coal-to-liquids capacity and build its strategic oil reserve. It will diversify its oil and gas sources. And it will use investments as a tool, and invite partners to partake in its high-growth economy. In the long run, it hopes to emerge as one of the leading exporters of energy technologies, like high-voltage transmission lines. And let’s not forget its interest in energy-related infrastructure.

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