FTA to help diversify China's energy sources
By Jia Hepeng (China Business Weekly)
Updated: 2004-07-15 16:14

Impending free trade area (FTA) negotiations between China and the Gulf countries are expected to diversify China's oil imports and help Gulf nations reduce US dominance in the region.

But experts warn China must be very cautious if it wants to avoid strong resistance from the United States and its allies about the negotiation and implementation of the FTA deal.

Last Tuesday, China and the Gulf Co-operation Council (GCC) signed in Beijing the Framework of Economic, Trade, Investment and Technological Co-operation between China and the GCC. The two parties agreed to launch FTA talks in September.

The deal was signed during a four-day visit by a GCC delegation consisting of finance ministers from six GCC nations and headed by Kuwaiti Finance Minister, Mahmoud Al-Nouri, between July 4 and 7.

The GCC is the second trade bloc having agreed to launch FTA talks with China. In 2001, China and ASEAN (Association of Southeast Asian Nations) signed to launch free trade negotiations aimed at establishing the world's largest FTA in 2010.

"The visit of the GCC delegation and the signing of the framework treaty have been planned since early last year, but they were first delayed by the US-led war in Iraq and then postponed by SARS (severe acute respiratory syndrome). The turmoil in the Middle East and Gulf region also influenced the advance of the Sino-GCC co-operation," said Zhang Xiaoguang, a senior researcher with the Institute of West Asia and Africa under the Chinese Academy of Social Sciences.

Zhang is a major consultant to the Chinese Government on Middle East and Gulf region issues.

But Zhang told China Business Weekly the war in Iraq and the rising dominance of the United States also push the GCC to seek FTAs with other countries, including the European Union (EU), Japan and China.

The six GCC member states are Kuwait, the United Arab Emirates (UAE), Saudi Arabia, Bahrain, Oman and Qatar.

Last year, some GCC members, particularly Saudi Arabia, strongly opposed the United States' invasion of Iraq, forcing the United States to withdraw its troops from their countries.

With the military victory of the US troops in Iraq, US presence and dominance in the Gulf region increased rapidly. Gulf nations worry that they may be totally controlled by the United States who may take revenge for these countries' opposition to the war in Iraq, said Tang Zhichao, a research fellow with the Institute of Asia and Africa of the Beijing-based Chinese Academy of Contemporary International Relations.

Gulf countries have begun to open their relatively closed and monopolized oil prospecting and exploitation market in recent years. Russian, French and Chinese companies all obtained oil or gas exploitation contracts.

"They want to introduce new players to balance the United States in oil exploitation and diversify their oil exports," Tang told China Business Weekly.

In January, China Petrochemical Corporation (Sinopec) successfully bid for the exploitation rights to a natural gas field in southeastern Saudi Arabia. The project was the first public tender hosted by the Saudi Arabian Government for its natural gas field exploitation.

According to officials from both sides, the proposed China-GCC FTA would include tariff reductions, simplification of goods flows and facilitation of mutual investments.

The FTA will facilitate Chinese firms to purchase and exploit oil and natural gas from the Gulf countries which hold 45 per cent of the world's oil reserves and account for 20 per cent of oil production.

With its rapid economic growth, China has developed a growing appetite for energy, especially oil. The demand has far outpaced domestic supplies.

In 2003, China produced 169.31 million tons of petroleum and 34.12 billion cubic metres of natural gas, rising 1.5 per cent and 6.8 per cent year-on-year respectively.

Meanwhile, its oil imports grew 31.29 per cent to 91.13 million tons. Last year, China's domestic oil consumption rose 10.15 per cent more than in 2002 to 252.31 million tons.

In recent years, China has been talking with a number of global oil suppliers to diversify its oil sources to feed a booming economy.

"But the Middle East and Gulf region have an irreplaceable strategic position due to their high oil quality, easy transportation, and low oil exploitation costs," said Zhang.

During his talk with finance ministers of GCC nations on July 6, China's Commerce Minister Bo Xilai particularly stressed the importance of energy co-operation between China and the GCC.

Proposed programmes include sustainable oil supplies from the GCC to China, China opening its oil product market to GCC countries, and mutual exploitation.

With China's rising imports of oil from Gulf countries and exports of its manufactured goods to the region, trade volumes grew rapidly between China and the GCC.

Sino-GCC trade volume jumped to US$17 billion in 2003, an increase of 46 per cent year-on-year.

Zhang said that the proposed FTA brings not only more stable oil supplies to China, but also a huge market for Chinese manufacturers.

Gulf countries are rich and their consumption of Chinese goods is growing fast. Three of the six GCC nations - Qatar, UAE and Bahrain - pursue free trade policies in the region and GCC countries' domestic situation are relatively stable. An FTA with GCC nations will create several overseas bases for Chinese manufacturers to tap the vast Middle East market, Zhang said.

Lily Luo, a Chinese teacher living in Qatar, said that in Dubai and Qatar, there are several wholesale markets of Chinese goods.

"All of them have good businesses," Luo told China Business Weekly.

But despite the attractive picture, FTA efforts between China and GCC may still be challenged by a couple of factors.

Facing competition from Chinese oil firms, US companies and other Western players will not sit idly by. With their advantageous position, some Western companies may thwart oil deals which might otherwise be offered to Chinese competitors, Tang said.

Meanwhile, without the co-operation of US and European companies, Chinese companies may also have some technical and equipment difficulties entering the Gulf market. They should, therefore, concede some points to their competitors for survival, Tang added.

Compared with competitions between companies, a greater challenge for the advance of Sino-GCC FTA lies in how to harmonize politically with the United States, especially when China does not agree with the United States on certain issues, Zhang said.

As a free trade advocate, the US Government will not oppose China's FTA move in the region, but this has to take place on the precondition that China will not offend US interests. Therefore, China must be highly cautious in the region and not involved in political and military affairs in the Gulf and Middle East countries, Zhang said.

He also warned that GCC might be too loosely organized to reach comprehensive treaties with other countries.

Therefore, China must seek more negotiations with individual countries within the organization and any significant progress in Sino-GCC FTAs cannot be done without bilateral talks between China and individual Gulf countries, Zhang said.

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