Changing the geopolitics of oil: Growing trade interdependence between the Gulf and Asia

Changing the geopolitics of oil: Growing trade in...

The national oil companies of the GCC and Iraq are shifting gears and are turning their attention eastwards, where the bulk of their exports will be headed for years to come. Wanting to lock in that market, they are also interested in inward energy investments that do more than produce energy. Asian players can provide a more holistic investment package that addresses some of the pressing economic challenges the region faces. These emerging trends point to a closer and more strategic Gulf-Asia energy relationship – one in which we expect to see business and diplomacy increasingly intertwined.

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Impact of unconventional in North America

New production in North America is competing with Middle East exports; the OPEC Gulf exporters are also concerned about security of demand and markets.

Economic challenges loom

Trends affecting the energy industry in the Gulf include the structural weakness of its labor force and rising fiscal break-even prices. This economic strain impacts the national energy industry in two ways:

  1. To remedy the budget crunch -- pump more oil and gas
  2. The energy industry is called on to create more jobs for nationals and opportunities for the private sector.

Challenges of increasing production and addressing unemployment are explored. 

New players in the Gulf

We should expect a closer and stronger relationship between Asian NOCs and their Gulf counterparts. While there is a complementarity of objectives, it is still uncertain what shape these partnerships will take in the future.

Cross investments

To lock in demand from Asia, the Gulf exporting countries are investing in large-scale export refineries there and at home.  South Asian companies have been expressing interest in Gulf refineries and Gulf NOCs investing in downstream and marketing in Southeast Asia, with Southeast Asia emerging as the new investment frontier. There are a large number of cross investments between companies from GCC+Iraq and Asia. 

Bundled investments

In view of the interest in job creation and infrastructure development in the Gulf, we may see more bundled investments by Asian NOCs. Further, Asian NOCs are better designed and more experienced to make these investments in national development profitable and also partner with service companies and EPC providers from home to deliver integrated projects.

Mutual interest in upstream research

Both Gulf NOCs and Asian NOCs have interests in developing technologies for shale or finding solutions to environmental challenges. While there is competition between Asian and Gulf capitals to establish themselves as research hubs, collaboration on R&D projects could be beneficial.

Increased interdependence and emerging partnerships

Oil trade and investment between the Gulf and Asia are becoming mutually strategic and we expect business and diplomacy to be increasingly intertwined.

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