East Asian Integration

With little obvious cultural compatibility and few historic linkages, the increasingly close relationship between the Arab monarchies of the Gulf Cooperation Council (GCC) and China, Japan and the other industrialized economies of East Asia is at first glance easy to explain: It is ostensibly a marriage of convenience based on massive Asian demand for hydrocarbon energy as population growth rapidly outstrips natural resources. Certainly, East Asia’s need for hydrocarbon energies cannot be underestimated, with over 50 percent of its crude oil and natural gas now being sourced from the big four Gulf providers: Saudi Arabia, Kuwait, the United Arab Emirates (Abu Dhabi) and Qatar.

Thirsty for energy

The energy trade between the Gulf and East Asia has trebled in value since 2000 and now stands at over $275 billion per year. This trajectory is likely to continue, with several major joint ventures between the two regions having recently been initiated. Notably, by the close of 2009 Japan will begin to store a portion of Abu Dhabi’s crude oil surpluses on its territory. This project, agreed between the Abu Dhabi National Oil Company and Nippon Oil, will benefit both parties; Abu Dhabi will still be able to sell its oil if the strategic Straits of Hormuz at the mouth of the Persian Gulf are closed in an emergency, while Japan will always be able to purchase oil at a preferential rate with lower transportation costs.

By 2010 Japan’s interests in Gulf energy will increase even further, when its fifth largest refining company, Showa Shell Sekiyu, begins operating solar plants in Saudi Arabia in cooperation with Saudi Arabia’s Aramco. If this venture proves successful, then the two parties may begin exporting their expertise to other Gulf states.

Similarly, China has been building up its stake in the Gulf energy economy, with its Sinopec refining company recently winning a $400 million contract to build five oil and gas rigs off the shore of Kuwait. These new facilities will boost Kuwait’s export capacity to over four million barrels per day, and it is expected that most of the increase will be purchased by China. By 2013, in a deal comparable to the Abu Dhabi-Japan agreement, China will also house a $13 billion oil storage and refinement facility for Kuwaiti oil in its heavily industrialized Guangdong province.

Elsewhere in East Asia, the Gulf energy industry connection is equally strong, although the trade flow runs in the opposite direction with cash rich Gulf states making sizeable sovereign wealth investments in Asian hydrocarbon companies that have access to local natural resources. Abu Dhabi’s Mubadala Development Corporation – an investment vehicle of the Emirates’ crown prince – has recently acquired Pearl Energies, an Indonesian exploration company that holds the major concession for developing Thailand’s Jasmine offshore gas field.

Significantly, both Japanese and Chinese hydrocarbon companies are now on the receiving end of major Gulf sovereign wealth injections. Abu Dhabi’s International Petroleum Investment Company has already purchased a 20 percent stake in Japan’s Cosmo Oil Consortium, while Aramco will soon take a 15 percent stake in Showa Shell Sekiyu. Given that both companies have vested interests in Gulf energy, with the former having signed a 20-year concession to exploit an Abu Dhabi reserve, this completes something of a Gulf-East Asia circle.  

Sovereign investors look East

Beyond oil, gas and other energy industries, Gulf sovereign wealth is flowing into other East Asian opportunities. Major investment agencies such as the Abu Dhabi Investments Authority and the Kuwait Investment Authority – both of which have traditionally favored investments in mature western markets – are now increasing their focus on emerging markets, and especially East Asia. In some cases the Gulf sovereign investors have over 30 percent of their portfolios in East Asia, with many fund managers citing the region’s more favorable and less politically sensitive investment climate as a reason for increased investment activity.

Further extending the relationship between the two regions has been the Gulf’s sourcing of labor from East Asia. For many years the Gulf states have imported service sector workers from the Philippines, with recent attention turning to construction. With South Asian labor proving increasingly costly and problematic due to improving economic conditions on the subcontinent, a number of the Gulf states – especially Oman and the UAE – have been turning to Chinese and Indonesian recruitment agents. Several major infrastructural projects in Dubai already have been completed using East Asian laborers.

Building a security web

But perhaps the most significant indication of the increasing complexity of the interaction between the Gulf and East Asia has been the former’s eagerness to diversify its security arrangements beyond the US umbrella. Since Britain’s departure from the Gulf in 1971, the smaller Gulf states have all joined Saudi Arabia in relying almost completely on US guarantees and – in the case of Qatar and Bahrain – have even permitted permanent US bases on their territory. However, with the aftermath of the 9/11 attacks, the accusations leveled by the US against various Gulf nationals, and the unpopular US invasion of Iraq in 2003, it has become increasingly difficult for the Gulf states to balance their regional alliances and Islamic legitimacy with such overt US military support.

Undoubtedly, certain East Asian states and China in particular are considered alternatives in this context. Although credible arrangements have yet to emerge with any of the Gulf states, there are nonetheless signs that the willingness exists, as security is now frequently discussed during bilateral visits. Several security-related joint ventures are now in the discussion stages, and a number of the Gulf states are beginning to consider Chinese arms manufacturers alongside their usual US, British and French suppliers.