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Asia and Saudi Vision 2030

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by September 3, 2016 Business

Saudi Arabia supplies Asia with nearly two of every three barrels of the Kingdom’s total crude oil exports, reflecting the profound shift in the balance of global oil markets. Tellingly, of Saudi Arabia’s top ten trade partners in 2015, seven were Asian countries (China, Japan, South Korea, India, Taiwan, Singapore and Thailand). Together, this accounted for more than two-thirds of the country’s trade with the world. China is Saudi Arabia’s top trade partner, while Japan is still the Kingdom’s biggest crude oil buyer in Asia.

However, Saudi officials are increasingly seeing the writing on the wall: China will soon become their largest customer and India could follow in the near future. Indeed, Asia is expected to account for much of the growing oil demand during the next two decades. The International Energy Agency (IEA) in its 2016 medium term oil market report (MTOMR) projects that oil demand is likely to increase from 94.4 million barrels per day (mb/d) in 2015 to 101.6 (mb/d) by 2021, an increase of 7.2 (mb/d). China is expected to account for an additional 2.5 (mb/d) by 2021, while the demand growth in the rest of Asia is projected at 2.8 (mb/d), with India and Indonesia cited as key drivers. In the long term, BP’s latest forecast predicts global liquids demand (oil, bio-fuels, and other liquids) to rise by 20 (mb/d), hitting 112 (mb/d) by 2035. Growth comes exclusively from emerging economies, with China and India accounting for over half of the increase.

In this context, state-owned Saudi Aramco set itself out as the backbone to the Saudi Deputy Crown Prince Mohammed bin Salman’s “Vision 2030.” The company, in its latest annual review, ambitiously envisaged its new role: “Saudi Aramco remained steadfast to its vision of becoming a top-tier, globally integrated energy and chemicals company. The company’s expansion further downstream, designed to add value to the resource base, continued to reap benefits by introducing new product slates, creating a more diversified industrial foundation, and generating high-quality jobs in the Kingdom.” Within this vision, there are three lines of response which Aramco is currently developing to strengthen the Kingdom’s position in global oil markets.

Saudi officials are increasingly seeing the writing on the wall: China will soon become their largest customer and India could follow in the near future.

Aramco is participating in oil processing and storage projects in Asia. These actions are to improve access to markets and protect Saudi Arabia’s oil shares in the region. Around 56 percent, or over 2.4 (mb/d), of Aramco’s overseas refining lies in three states only: China, Japan and South Korea. The company also plans to invest in new refineries to cement its position in countries including China, India, Indonesia, Malaysia and Vietnam. Additionally, Saudi Arabia is looking to renew/increase its crude oil storage capacity in Okinawa, in Japan’s southwest. Here, if Riyadh succeeds in reaching an agreement with Tokyo to renew the contract and increase the current storage capacity of almost 6.3 million barrels, it could further help cement its position in Asia. According to some reports, Aramco’s three-year contract with state-owned Japan Oil, Gas and Metals National Corporation is due to expire in December of this year.

Saudi Arabia also intends to invest in renewable energy as an option to counter rising oil consumption and diversify its energy mix. As part of “Vision 2030,” Saudi Arabia has set itself an initial target of generating 9.5 gigawatts of renewable energy. From the Saudi perspective, Asian countries would be very attractive partners to build such an industry with and they will be very useful to address a broad range of issues. Saudi Arabia needs to adopt advanced technologies, attract foreign investments and manufacturers, foster small and midsize businesses, create jobs and provide training in order to diversify the economy. Importantly, Saudi Arabia may keep its nuclear options open and China, Japan and South Korea may be important players in this area.

Last but not least, Saudi Arabia has identified energy efficiency as a key national priority. In 2015, Saudi Arabia’s oil demand averaged almost 3.9 (mb/d) making it the fifth-largest oil consumer in the world. In this area, Japan and South Korea could assist in improving efficiency and conserving energy consumption in Saudi Arabia. While China’s experience as the world leader in renewable energy may be very useful for the Kingdom’s program.

Not all is a rosy picture against this optimistic backdrop there remain several key issues which could pose a challenge to the growth of relations between Saudi Arabia and Asian countries. The major one is the uncertainty over China’s oil demand. From the Saudi perspective, the impact of any major Chinese economic slowdown could adversely affect oil demand. Additionally, the energy sector in several key Asian countries (China and India in particular) is not fully liberalized. Regulated prices remain a problem to Saudi Aramco and foreign investors.

There is also the possibility of increasing tensions over the rights of foreign workers in Saudi Arabia, as the latest crisis of stranded Asian workers in the Kingdom partially reflected. Meanwhile, the repression of Muslim minorities in some Asian countries could generate large public outcry inside the Kingdom and the Muslim world in general. Perhaps more importantly, as work in Saudi Arabia dries up due to low oil prices and cuts in spending by the government, remittances from migrant workers are declining, depriving several South Asian countries such as Nepal, Sri Lanka, Bangladesh, Pakistan and even India, of very vital economic and financial sources. Above all, Saudi Arabia is also facing fierce competition from oil producers within and outside OPEC. Although the Kingdom is increasing its crude oil exports, rivals such as Russia, Iraq and Iran have gone on the offensive to increase their share of Asian markets.

Source: Pakistan Observer

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