(EnergyAsia, July 9 2014, Wednesday) — North America’s energy boom notwithstanding, the US will remain engaged in the Middle East while China will grow increasingly dependent on the region for its oil and gas supplies, said consultant Deloitte Touche Tohmatsu Limited (DTTL).
In its 2014 Oil and Gas Reality Check report, Deloitte said the US’s transition from major oil importer to exporter is impacting the industry as well as the world’s political order involving the Middle East, Russia and China. North America’s energy boom will give rise to new sources of supply, increase competition, reshape the global geopolitical landscape, and create greater interdependencies among nations.
Citing the International Energy Agency (IEA), Deloitte said US dependence on Middle East crude supplies could fall to 3% by 2035 as its domestic energy production rises.
This shift, coupled with growing neo-isolationist sentiment after 12 years of war in the region, has led to speculation that the US may soon be able to extricate itself from the Middle East.
Helping this trend, the industry is diverting more Middle East crude oil to Asia from its traditional main markets in the US and Europe.
Deloitte said predictions of US disengagement from the Middle East are over stated.
“Given the fungibility of world oil markets, a disruption in Middle East oil supplies will reverberate back to the US domestic market regardless of whether the region remains a major source of crude imports or not,” it noted.
“The region’s volatility continues as the ‘new normal’ since the “Arab Spring”. With no clear alternative to the US military for maintaining the balance of power in the region and with important allies to protect, the US will remain engaged for the foreseeable future.”
Security, not just energy, remains a key US concern
US involvement in the region is embedded in a foreign policy agenda that extends beyond energy issues, said the Deloitte report which was published just before the Islamic State of Iraq and Syria (ISIS) launched its violent military conquest of large parts of both countries as part of a global campaign to launch an Islamic Caliphate.
The US is committed to counter-terrorism activities worldwide and, as a signatory to the Nuclear Non-Proliferation Treaty, is heavily invested in negotiations with Iran over its nuclear programme.
“In the context of these negotiations, rising US domestic production of oil and gas has provided a new diplomatic weapon in the form of energy-related sanctions against Iran. Energy importing countries have been able to reduce Iran’s crude oil exports to around one million b/d, denying the regime a critical source of revenue,” said Deloitte.
By curtailing demand for Iranian oil and boosting its own production, US policy has contributed to Saudi Arabia and Iraq raising output to help keep world prices stable.
Oil and gas sanctions against Iran, once the number two OPEC producer, would have been wholly unthinkable just a few years ago, said Deloitte.
The report concluded that the North American energy revolution, rather than decrease US interest in the region, may have increased its leverage to intervene in selected regional conflicts while increasing its bargaining power in diplomatic negotiations.
China’s growing vulnerability
In contrast to the US, Asia and China in particular have grown more dependent on Middle Eastern oil supplies.
After losing its position as a net crude exporter in 1992, China became the world’s second largest oil consumer at 6.4 million b/d 12 years later. This year, China will become the world’s largest crude oil importer, according to the EIA.
China, including Hong Kong, consumes 10.5 million b/d to account for 12% of world petroleum demand. By 2040, China’s oil imports will have risen to just under 18 million b/d.
China’s growing oil addiction is affecting its economy and making it depend on the Middle East for more than half its crude imports.
In 2008, just as the global financial crisis was starting, China reported a current account surplus of US$348.9 billion, according to the World Bank. Four years later, it had declined by a third to US$231.9 billion, mainly due to rising crude oil imports.
In 2010, China’s crude oil import bill of US$135 billion accounted for just under 9% of the country’s total imports of all goods and services. By 2012, it had risen 63% to US$220 billion or nearly 11% of total imports.
“China needs energy security in order to maintain its economic growth, which requires access to adequate, diverse, stable, and reasonably priced supplies. This, in turn, implies China has a vested interest in maintaining stability in the Middle East as well as in protecting the Strait of Malacca,” said Deloitte.
According to the EIA, Middle East oil exports to China are projected to rise from around 2.9 million b/d in 2011 to 6.7 million b/d in 2035 to account for 54% of the nation’s crude imports.
China’s reliance on supplies from the Middle East and North Africa requires regional stability and steady trading partners. Since the beginning of the Arab Spring in December 2010, the region has been wracked by domestic upheavals, revolution, and civil war. All of China’s major crude suppliers in the region are presently politically unstable except Saudi Arabia and Kuwait.
It remains to be seen whether Russia’s recently constructed East Siberia Ocean (ESPO) pipeline will become a long-term stable source of significant crude supplies to China.
China’s Middle East dilemma
If energy is the Achilles heel in China’s economic miracle, will it choose to become more directly involved in the Middle East politically, economically, or even militarily?
Some believe this option is unlikely since China has stuck to non-interference in the internal affairs of other countries as a key principle of its foreign policy. This policy has been tested by the enhanced US-led economic and trade sanctions against Iran.
In early 2012, the US expanded its sanctions to cover oil industry transactions involving Iran’s financial institutions. The European Union also enacted sanctions against oil and financial transactions as well as the provision of insurance to Iran and Iranian-owned companies critical to facilitating seaborne exports. The expanded action covered countries that did not comply with the Western-backed sanctions.
This put many oil importing countries in Asia in a difficult position, particularly China, since it was the largest consumer of Iran’s oil exports (22%) and it relied heavily on Iran for gasoline, said Deloitte.
If China wanted to be more assertive in the Middle East, this would have been a good opportunity to make a statement. Its state-owned companies had built up significant stakes in Iran’s oil and gas industry including CNOOC’s $16 billion investment in the North Pars gas field, Sinopec’s US$2 billion investment in the Yadavaran oilfield, and CNPC’s US$4.7 billion investment in the South Pars Gas field and a further US$1.75 billion investment in the North Azadegan oil field.
The Obama administration would have found it hard to impose secondary sanctions against China as it is the largest foreign holder of US government debt, and both countries enjoy deep commercial and financial relationships. Furthermore, after nearly three decades of sanctions, US efforts and threats have yielded mixed results, with most countries including allies continuing to trade with Iran.
Strangely this time, instead of defying the sanctions outright, China appear willing to comply by reducing its Iranian imports by 20% to obtain a US waiver.
China turned to Russia, Iraq and others in reducing its Iranian crude imports from over 550,000 b/d in 2011 to around 450,000 b/d in 2012.
Deloitte said China’s acquiescence to the new sanctions illustrates that rather than seeking a more assertive role in the region, it is deftly navigating the region’s crises to ensure it maintains a continuous stream of energy supplies.