Saturday, August 11, 2012

China in the Arabian Gulf: Qatar


Introduction: China in the Persian Gulf, the past twenty years
The last decade has seen a major growth in China’s relationship with the oil rich Arab kingdoms west of the Persian Gulf.  On China’s part, this relationship is no doubt born out of their insatiable need for energy supplies.  Starting in 1993, when China became a net importer of energy, the Beijing government has adopted a “go out” strategy in its foreign policy, aiming to secure reliable energy and other resources abroad.  In an April 2011 study for the Washington Institute for Near East Policy, Christina Lin writes this has turned “historical routes into a modern grid of pipelines, roads, and railways for its energy supplies.” Lin continues:
This approach stems in part from Beijing’s fears of a U.S. blockade on maritime supplies in the event of hos­tilities over Taiwan. It also reflects the reality of rapidly growing Chinese energy demand.  An August 2010 report showed that China had become the world’s number-one energy consumer, surpassing the United States. In addition, the coun­try has enjoyed double-digit annual growth for most of the past decade, fueled not by consumer demand, but by energy-intensive heavy industry and infra­structure construction as well as growing demand in the transportation sector.[i]
In 1994, the Persian Gulf region supplied barely a quarter of China’s oil imports, all from Oman, with a majority of Chinese oil coming from Indonesia or from domestic productions.  However, by 2001 added oil from Saudi Arabia and Iran began to bring the gulf’s share of Chinese oil deliveries up to 50% of total imports, with Saudi Arabia being China’s largest supplier. [ii]  Since that time, China has become the Gulf’s largest energy customer, and a very important one as recessions slow the west and North America has begun to develop its own domestic shale gas production (replacing imports).  A report by Chris Zambellis lays out the stark new reality of China’s energy appetite in the Gulf:
In 2009, Saudi oil exports to the United States - for the first time in over 20 years - dropped below the 1 million barrels per day (bpd) mark. In contrast, Saudi oil exports to China during the same time frame surpassed 1 million bpd, almost twice the amount of oil exported by Saudi Arabia to China in 2008.  In June 2008, China surpassed Japan as Kuwait's top destination for oil exports. The UAE is another important source of oil for China, which has been the top importer of Omani oil for six years running. With around 10% of its LNG exports heading to China, Qatar has also emerged as an important source of Beijing's growing LNG needs amid stagnant demand in the United States.[iii]
One interesting facet of these energy relationships is that China now runs a trading deficit with the Gulf States, an unusual position for export-giant Beijing to be in.  Except for in the UAE, China is buying more Arab oil and gas than it is exporting goods and services to the Gulf, leaving a large surplus of Chinese payments in Dubai and Doha.    For Beijing, their most recent strategy, which will be explored below, is to make sure that those payments are made in the Chinese national currency, the Renminbi, also known as the Yuan.

Qatar
During this time, the state of Qatar has emerged as in important player in the Gulf across a multitude of matters. Ruled since independence in 1971 by the al-Thani monarchy, Qatar’s capital of Doha now has international heft on matters of Middle East diplomacy, the petrochemical trade, U.S. military posture, international media, and Western intellectual influence in the Arab world.  And in terms of energy reserves, ever important for determining pecking order in the region, Qatar has the world’s third largest supply of natural gas, sharing with Iran territorial rights to a giant offshore deposit, known as North Field in Qatar’s portion and South Pars in Iran’s.  The North Field has turned Qatar’s small population of 800,000 into the wealthiest citizens on earth per capita.

Historically, Qatar has always been under the domain and guidance of the West, whether that be the London Colonial Office or Washington D.C.  Since the 1991 Gulf War, the al-Thanis have eagerly worked with the Pentagon to establishing military bases on the Gulf peninsula. Starting in 1996 the al-Udied airbase was constructed for a Qatari airforce that did not exist, and upon completion was leased out to the Pentagon.  In 2001, the U.S. very quietly began building up al-Udied as a U.S. base, prepositioning materials and handing out construction contracts.  In a March 2001 Department of Defense report to Congress titled “Allied Contributions to the Common Defense,” it was written:
Since November 1995, Bahrain and Qatar have both hosted several Air Expeditionary Force deployments in support of Operation SOUTHERN WATCH, and the United States Air Force recently established a limited prepositioning facility at Qatar’s Al-Udeid Airbase and is investigating moving to the airfield. Qatar also hosts prepositioned U.S. Army assets at As-Saliyah.[iv]
It is important to note the date of this statement, as al-Udeid airbase is often described as being opened as a result of post 9/11 U.S. policy, with the first soldiers flying into a dusty desert airstrip in late September.  However, the above statement and a number of contracts handed out before the September terrorist attacks make clear that the Bush administration was planning a U.S. base at Al-Udeid (and regime change in Iraq) from the moment it took office.[v]  Al-Udeid remained a “secret” base until its buildup became too big to hide in the spring of 2002, when Vice President Cheney made a well-publicized visit to the base.  


During and after the 2003 invasion of Iraq, Qatar took over from Saudi Arabia as the Pentagon’s main basing partner in the Gulf.  Al-Udeid was transformed into the regional air command for Central Command, and Central Command’s forward headquarters are headquartered in the state as well.  With the U.S. Navy’s Fifth Fleet based at the small island of Bahrain, just off Qatar’s western coast, the area is now stuffed to the gills with U.S. servicemen, fighter jets, and warships.

Besides the close U.S. military ties, Qatar has also encouraged a number of prominent U.S. think-tanks and universities to open branches in Qatar.  The Council of Foreign Relations, Georgetown University’s School for Foreign Services, and the Brookings Institute are just some of the institutions to open Doha centers in the past decade.

This combination of U.S. military and intellectual influence should give Washington significant control over Qatari policy.  On the one hand, such close relations allow for political conspiracy and backroom deals.  And on the other, such a proliferation of American institutions create a socialization process among the Qatari military and intellectual elite, making the viewpoint of Washington D.C. an important consideration in any decision-making process. 

However in the past 5 years, China has begun to form a strong and long-term economic relationship with Qatar, based on gas imports, infrastructure investments, and financial deals.  Most recently, Qatar and China have begun to use local currencies in their trade, at the expense of the U.S. dollar.  This essay will examine the growing China-Qatar relationship.  Part II will examine if Qatar’s new relationship with China is affecting its foreign policy and relationship with the West, especially concerning the recent turmoil in Syria.

China and Qatar’s Energy Relationship
The current China-Qatar relationship can be traced back to April 2008, when Beijing announced a 25-year gas deal with Qatar, the world’s largest exporter of Liquefied Natural Gas (LNG) and holder of the third largest reserves.  Under the agreement, the state owned Qatargas would deliver 2 million tons of LNG per year to the China National Offshore Oil Company (CNOOC) and 3 million tons per year to PetroChina, a subsidiary of the Chinese National Petroleum Company (CNPC).  Months later, Qatar Petroleum International announced that it was partnering with Royal Dutch Shell and PetroChina to build a refinery and petrochemical plant at Taizhou, in China’s coastal Zheijing province.  QPI and Shell would each control a quarter of the shares, and PetroChina slightly over half of the shares in what was thought to be a $10 billion project.[vi] 

This combination of import contract and refinery is the blueprint for China’s relationship with major energy exporters like Saudi Arabia, Kuwait, Russia and Venezuela.  However as of January 2012, only the Saudi Aramco partnered refinery in Fujian is operational.  Out of the remaining projects, the Qatari project is thought to be farthest along, although the price tag has now increased to $12.6bn.[vii]

With a long term Chinese partnership secure, Qatar has more than doubled their gas capacity since 2009, investing in three of the worlds largest LNG plants and reaching 77 million tons as of 2011.  In perspective, global capacity of LNG in 2011 was 270 million tons according to the International Energy Agency.[viii]  China’s gas appetite has matched Qatar’s growth.  In November 2009, only one month after China begun receiving its first LNG shipments from Qatar, it was announced that starting in 2013 CNOOC would buy an additional 5m tons of gas, and PetroChina an additional 2m tons, bringing China’s total import bill from Qatar to 12m tons a year.  SinoPec, another Chinese mega-corp, was also said to be in talks with Qatar.  Imports at this level move China past Japan as Qatar’s largest energy customer.  Speaking at a Qatargas office being opened in Beijing at the time, Qatar’s oil minister Abdulla al-Atiya stated, “China is the centre today of the new LNG compass.”[ix] 

Reifying these bold pronouncements, however, has been a slow ordeal.  In 2010, only 1.2 million tons were delivered to CNOOC, and none to PetroChina.  For PetroChina, the holdup is due to the stalled refinery deal as discussed above.  Meanwhile, as of July 2011 the agreement for an additional 7m tons had yet to be finalized, with talks still ongoing.[x]  This is largely due to the booming international growth in shale gas production, which is being ramped up in Australia and the U.S, and thus creating a complicated and high-stakes world market.

But it is important to remember that China has a long-term view, and all of the above has taken place within the first three years of a 25-year binding agreement.  Even if upgrades to this relationship have not yet been finalized, that is the direction they are heading in and it is safe to assume that they will, as both Qatar and China have a lot to gain from a long-term energy partnership

Infrastructure Investment
Flush with new gas profits, Qatar has made major infrastructure investments in the energy and transportation sectors, a national project accelerated by Qatar being awarded the 2022 World Cup.  Chinese companies have taken advantage of this investment boom and poured money into the Gulf peninsula. 

Most important to Beijing are two oil and gas exploration concessions awarded to CNOOC and Petrochina in 2009 and 2010.  CNOOC, China’s largest producer of offshore oil came to the party first, signing a 25-year exploration deal in August 2009 for Qatar’s block BC.  Notably, this was the first exploration contract, known as an “exploration and production sharing agreement” (EPSA), that Qatar has ever awarded to an Asian company.  Under the agreement, CNOOC promised to dig three wells and invest $100 million in the project over the next five years.[xi] 

PetroChina quickly followed their rival and the following spring announced a 30-year partnership with Shell oil to explore an 8,000 square km field known as Block D. Shell, which has worked in Qatar since the 1950s, controls 75% of shares and PetroChina 25%.  In celebrating the deal, Mr. Zhao Dong, the CFO of PetroChina, succinctly described the general scope of Beijing’s overall foreign energy policy:
We already enjoy a relationship with Qatar Petroleum and Shell and I am delighted that this cooperation is now extending to work within Qatar itself. China is an important downstream market and PetroChina is keen to build upstream partnerships with major resource holders like Qatar.[xii] 

The exploration contracts have continued to accumulate in the current year.  Less than one month ago PetroChina has acquired a 40% stake in the EPSA for Qatar’s Block 4, buying in to a concession owned by the Paris based GDF Suez.  Block 4 is large-2,500 sq km—and borders the North Field, one of the world’s most plentiful offshore gas deposits. 

Chinese companies have also made inroads into other large Qatari economic sectors.  In 2011, China Harbour won an $879 million contract to build the first phase of a second deep-water port at Qatar’s southern industrial city of Mesaieed.  China Harbour plans to dig a 50 ft deep trench, quays, and wave barriers, the beginnings of a $5.5bn project. [xiii]  The Mesaieed deepwater port is being touted as one of a number of multi-billion dollar transportation projects being constructed in anticipation of the 2022 World Cup, including a new railway and metro system, a new airport, and a bridge to the neighboring island-state of Bahrain.  In the retail sector, it was also announced in 2011 that China’s Dragon Mart would open up a giant shopping mall in Doha for Chinese products.  For comparison, the Dragon Mart in Dubai is 1.2 km long and houses 2,800 stores and growing.[xiv] 

Qatar’s major airline, Qatar Airways, joined into the game as well, and became one of three major Gulf air carriers (along with the Dubai based Emirates and Etihad) to offer flights to the new, burgeoning industrial centers of inland China, some of the first international airlines to do so.  In 2011, Qatar Airways began offering non-stop flights to Chongqing, the western Chinese center for automotive production and “worlds largest municipality” with a population of 28 million.  While the flights currently run 3 days a week, the plan is to make them a daily affair.  Emirates Air began flying similar routes to Urumqi and Chengdu.  The companies also increased the frequency of flights to the metropolis of Beijing and Shanghai.  As of 2011, Qatar Airways offered 35 flights a week to mainland China.[xv]

Finance Investment
Perhaps more important than the infrastructure projects is the growing cooperation between China and Qatar in banking and finance.  China’s first Gulf region bank opened in Qatar in 2008, a Doha branch of Industrial and Commercial Bank of China, the world largest bank by market value.[xvi]  The following year, Qatar opened a government investment office in Beijing to help streamline the growing trade between the two states.[xvii]  This has led to a Qatari investment in two of the three largest Chinese banks, which have all held IPO’s in the past decade: a $3.5 billion stake in the Agricultural Bank of China, and a stake bought from Bank of America in the Chinese Construction Bank.[xviii]

2012: The Gradual Breakup of the Petro-Dollar
A 6-day visit to the region by Chinese Prime Minister Wen Jaibo in January 2012 made clear that Beijing’s relations with the Gulf are growing stronger still.  Jaibo’s first stop was the Emirates, where a three-year currency-exchange agreement was finalized in Dubai, injecting 35bn, or $5.5bn U.S., of the Chinese renminbi (also known as yuan) into the dizzying maelstrom of Gulf wealth.  The ramifications of this deal were bluntly put by Reuters: “Beijing's long-term ambition is to unseat the dollar as the dominant unit of international settlement for cross-border trade in goods and services, especially now that China is the world's single largest exporting nation and the second largest importer.”[xix]  China, however, was not done poking holes in the deflating bubble that is the Western oil empire, for when Jaibo spoke that week at the World Future Energy Summit in Abu Dhabi, he proposed the creation of “an international body that is mandated to determine the price of oil and which would regulate the policies of the entire supply chain involving the supplier countries, the consumers and even the transit countries.”[xx]

The Qatari capital of Doha was next on the Prime Minster’s agenda.  He finalized the agreement for the refinery at Taizhou, and solidified the ­long-term gas partnership between China and Qatar.  Jaibo then dropped a bombshell, stating:
In order to address investment issues, we [China and Qatar] need financial support. Therefore, we reached another agreement, a cooperation agreement linking finance with investment. Qatar also proposed the use of local currency in trade settlement and even a specific ratio. I think this proposal can be studied.[xxi]
Jaibo’s mention of “local currency” no doubt turned heads in Washington and Houston.  Qatar, the nerve center of the Pentagon’s Middle East military network, was now planning to be flush with oil-slicked yuan.  One wonders how soon it will be before the Department of Defense accepts the Chinese currency in return for the last year’s line of Lockheed Martin products.

Joking aside, this is the new reality where the U.S. dollar is now longer necessary for China (or Japan or Germany) to secure petroleum imports, as has been the global paradigm since the 1970s.  In turn, Qatar and its Gulf ilk will have no dollar holdings to store and invest in New York banks or return to the Pentagon in exchange for year after year of weapons purchases.  This was the game Henry Kissinger called “recycling the petrodollars,” which Kissinger secretly set up with Saudi Arabia during the Nixon and Ford administrations.  As a United States bankrupt from the Vietnam War had to remove itself in 1971 from the gold standard, as enshrined in the post WWII Bretton Woods Agreement, a new “oil standard” was set up where OPEC states, under the order of Saudi Arabia, would only sell petroleum in exchange for dollars.  This necessitated that the U.S. currency would still flow around the globe as the reserve currency of choice, especially for major oil importers like Japan and Germany. And for developing states that couldn’t meet their bills, a common scenario after the 400% rise in the cost of petroleum that took place in 1973, known as the “oil shocks,” this meant austere loans of U.S. dollars from the World Bank and IMF. 

Accordingly, the major oil exporters in the Gulf became unimaginably flush in U.S. currency, and as obedient vassals (per the parlance of Zbignew Bryzinski) they put it right back into American hands., into accounts at Chase Manhattan Bank and palatial mansions in Texas, missile systems from Raytheon and endowed professorships at USC.  As it stands today, there is a major Saudi investment in Citibank, News Corporation, and the Carlyle Group, to name a few prominent examples.  The strategy was put best by ____ in Paddy Choffesy’s film Network: “The Arabs have taken millions of dollars out of this country, and now they must put it back.”

But the breakup of the petro-dollar has begun, as China is now the destination du jour for Gulf oil-wealth.  Earlier this summer, the Qatari Sovereign Wealth Fund applied for a license to invest $5 billion into the Chinese economy.[xxii]  An investment of this level would signal a paradigm shift, as China had previously placed a cap of $1 billion on such investments.  In what can only help grease the wheels of the People’s bureaucracy, less than a month later PetroChina was sold a 40% share in Qatar’s 2,500 square km Block 4 Natural Gas field.[xxiii]

Part II will focus on how this economic relationship has affected Qatar’s foreign policy.


[i] “The New Silk Road: China’s Energy Strategy in the Greater Middle East,” Christina Lin, Washington Institute for Near East Policy, Policy Focus #109: April 2011.
[ii] “String of Pearl’s: Meeting the Challenge of China’s Rising Powers across the Littoral,” Christopher J. Pehrson, U.S. Army: Strategic Studies Institute, July 2006, pg. 6.
[iii] “China builds up role in the Gulf,” Chris Zambelis, Asia Times Online, Sept. 29th 2010, pg. 2. (http://www.atimes.com/atimes/China_Business/LI29Cb02.html)
[iv] “Allied Contributions to the Common Defense: A report to Congress by the Secretary of Defense,” Donald Rumsfeld, March 2001. (http://www.dod.gov/pubs/allied_contrib2001/index.htm)
[v] “Iraqfact: “Secret” Airbase for Iraq War started prior to 9-11” Oct. 5th, 2005 (http://iraqfact.blogspot.com/2005/10/secret-air-base-for-iraq-war-started.html)
[vi] “Qatar, Shell sign China refinery, petchem deal,” ArabianBusiness.com, June 24th, 2008. http://www.arabianbusiness.com/qatar-shell-sign-china-refinery-petchem-deal-47753.html; “CNPC to form joint venture with Qatar Petroleum, Shell,” Global Times, October 13th, 2011. http://www.globaltimes.cn/NEWS/tabid/99/ID/679192/CNPC-to-form-joint-venture-with-Qatar-Petroleum-Shell.aspx
[vii] “China, Qatar to push for $12.6bn refinery complex,” Reuters, January 20th, 2012. http://gulfnews.com/business/investment/china-qatar-to-push-for-12-6b-refinery-complex-1.968359
[viii] “LNG’s Looming Glut has Qatar Sealing 20-year Asia Deals,” Bloomberg, March 7th, 2012. http://www.bloomberg.com/news/2012-03-07/lng-glut-risk-spurs-qatar-s-20-year-export-deals-to-asia.html; “Qatar eyes china as big new LNG volumes come online,” ArabianBusiness.com, October 27th, 2009. http://www.arabianbusiness.com/qatar-eyes-china-as-big-new-lng-volumes-come-online-11454.html
[ix] “Qatar to boost LNG exports to China,” ArabianBusiness.com, November 14th, 2009. http://www.arabianbusiness.com/qatar-boost-lng-exports-china-10898.html; “China set to be Qatar’s top gas buyer,” Financial Times, May 18th, 2010. http://www.ft.com/cms/s/0/817864be-6290-11df-991f-00144feab49a.html#axzz23BpeK4Wk; “Qatar Discusses LNG supply with Sinopec,” The Wall St. Journal, Jan. 18th. 2011. http://online.wsj.com/article/SB10001424052748703954004576089461168921214.html
[x] “Qatar talks on LNG supplies ‘making slow progress’,” Dow Jones Newswire, July 1st, 2011. http://www.gulf-times.com/site/topics/article.asp?cu_no=2&item_no=444158&version=1&template_id=48&parent_id=28
[xi] “Total Purchases 25% of Qatari Hydrocarbon Exploration License from Cnooc,” Bloomberg, May 30th, 2011. (http://www.bloomberg.com/news/2011-05-29/total-acquires-25-of-qatar-license-from-cnooc-to-explore-for-hydrocarbons.html); “China awarded first Abu Dhabi oil rig deal,” Tamsin Carslile, The National, September 24th, 2009. http://www.thenational.ae/business/energy/china-awarded-first-abu-dhabi-oil-rig-deal
[xii] “Qatar Petroleum, Shell, Petrochina Ink New Exploration and Production Sharing Agreement,” Oil and Gas Eurasia, April 2010, Issue 4.  (http://www.oilandgaseurasia.com/articles/p/117/article/1188/)
[xiii] “Qatar, China Harbour to Sign $879 Million Contract, QNA says,” Robert Tuttle, Bloomberg, March 10th, 2011.  http://www.bloomberg.com/news/2011-03-10/qatar-china-harbour-to-sign-879-million-contract-qna-says-1-.html
[xiv] “China’s Dragon Mart set to enter Qatar retail market,” ArabianBusiness.com, November 4th, 2011. (http://www.arabianbusiness.com/china-s-dragon-mart-set-enter-qatar-retail-market-428722.html).
[xv] “Airline in UAE, Qatar expand reach into China,” Ivan Gale, The National, Aug. 16th, 2011. (http://www.thenational.ae/business/aviation/airlines-in-uae-qatar-expand-reach-finto-china); “Qatar Airways to Increase Chonqing-Doha Flight Frequency,” Global Times, December 13th, 2011. (http://www.globaltimes.cn/NEWS/tabid/99/ID/688219/Qatar-Airways-to-Increase-Chongqing-Doha-Flight-Frequency.aspx)
[xvi] “Boost to Chinese presence in Qatar,” China Daily, November 1tth, 2011. (http://www.chinadaily.com.cn/bizchina/2010-11/11/content_11535252.htm)
[xvii] “Qatar set to open China office for investments,” ArabianBuiness.com, July 6th, 2009. (http://www.arabianbusiness.com/qatar-set-open-china-office-for-investments-16303.html)
[xviii] “AgBank says Qatar to remain long term investor,” Reuters, July 15th 2011. (http://www.arabianbusiness.com/agbank-says-qatar-remain-long-term-investor-410561.html);  “Gulf wealth funds eye stake in China’s CCB,” ArabianBusiness.com, August 11th, 2011 (http://www.arabianbusiness.com/gulf-wealth-funds-eye-stake-in-china-s-ccb-415237.html)
[xix] “China, UAE sign $5.54bn currency swap deal,” Reuters, January 17th, 2012. (http://www.arabianbusiness.com/china-uae-sign-5-54bn-currency-swap-deal-441097.html)
[xx] “Sheikhs fall in love with renminbi,” M.K. Bhadrakumar, Asia Times Online, Jan. 24th, 2012. (http://www.atimes.com/atimes/Middle_East/NA24Ak03.html).
[xxi] Bhadrakumar, Asia Times Online, Jan. 24th, 2012.
[xxii] “Qatar seeks US $5bn China investment quota,” Arabian Business, June 25th, 2012. (http://www.arabianbusiness.com/qatar-seeks-us-5bn-china-investment-quota-report-463295.html)
[xxiii] “PetroChina gets 40% share of Qtar offshore block,” Reuters, July 25th, 2012. (http://www.arabianbusiness.com/petrochina-gets-40-share-of-qatar-offshore-block-467354.html

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