Friday, January 20, 2012

Unpopular autocracies like Saudi Arabia pivot towards Asia....

Unpopular autocracies like Saudi Arabia pivot towards Asia....
By Peter Lee

Saudi Arabia's future lies in Asia. That was the subtext of Chinese Premier Wen Jiabao's recent visit to Riyadh. That future might arrive a lot quicker than people think, if BP is to be believed.

BP's most recent energy outlook report predicts that the United States will become almost self-sufficient in energy by 2030, thanks to exploitation of its shale oil and gas resources.

Per The Guardian, this is a ''development with enormous geopolitical implications". [1]

Specifically, the geopolitical implication is that, if the United States does not need the Middle East for energy security, it will lose much of its motivation to meddle in the region, at least in the immense nation-destroying, budget-busting tradition of the Iraq wars.

Maybe, just maybe, the United States will wash its hands of the intractable Middle East and sail on to Asia in a search for the 21st century heart of wealth and power.

That's bad news for Israel and for Saudi Arabia, both of whom rely on United States backing to buttress their shaky fortunes in the region ... fortunes that have become more perilous with the advent of the Arab Spring, and the evaporation of local authoritarian and/or pro-US regimes that were quite happy to coexist with Israeli high-handedness and narrow Saudi autocracy.

It's also bad news for the European Union and Britain, both of whom rely on Middle East energy imports and - as the Libyan adventure demonstrated, 56 years after the humiliation of Suez - still lack the resources and capabilities to bully their way through their petrochallenges without significant US backup.

Maybe, the theory seems to be, a magic combination of US commitment to democracy promotion, human rights, nuclear non-proliferation, and loyalty to its allies will keep the Barack Obama administration's attention riveted on Iran and forestall the Middle East's slow slide into irrelevance, insofar as Washington is concerned.

So, as the United States extricates itself from Iraq - seemingly indifferent to the fact that the bloody ten-year occupation has birthed a pro-Iranian Shi'ite-based regime instead of the promised pro-American/pro-Israel/pro-Saudi proxy - considerable effort has been expended to keep the Iranian pot boiling.

Israel issues veiled warnings of its intent to attack Iran unilaterally; the EU and Britain wring its hands over Iran's alleged nuclear weaponization activities; the Gulf regimes raise the regional stakes by supporting Sunni militancy against Iranian allies in Iraq and Syria; and somebody murders an Iranian nuclear scientist.

To forestall one of Iran's local enemies from jumpstarting a conflict that drags in the United States, the Obama administration engages in theatrical displays of anti-Iranian rhetoric, sanctions resolve, and warship deployments meant to demonstrate that the US is driving the Iran agenda, instead of being driven by it ... while stubbornly forging ahead with America's Asian pivot and quietly reassuring skittish allies in Tokyo and South Korea that it really isn't going to crater the world economy for the sake of Iran's nuclear program.

Israel, with its powerful political, economic, military and diplomatic backing from the United States, a population apparently reconciled to its perceived role as a disliked occupying power, and the reassurance of an undeclared nuclear arsenal, can still be sanguine about its political fortunes.

Saudi Arabia, an autocracy that serves as the defender of a religion politically toxic in the United States - and, as the BP report indicates, facing displacement from the center of US economic and energy concerns - has to think about Plan B.

Plan B is Asia: India, China, South Korea and Japan.

China is perhaps already Saudi Arabia's largest customer, taking 1 million barrels per day (bpd - one-fifth of its requirement) and currently making up for the demand shortfall from economically straitened Europe. How China's surging demand and Saudi Arabia's maturing oil and gas industry will complement each other is a fraught and interesting question.

The details of Premier Wen's visit highlights Saudi Arabia's awkward 21st century transition from the world's indispensable guarantor of hydrocarbon supply to anxious oil and gas partner to Asia's surging economies.

The centerpiece of Wen's visit was the signature of an agreement for the China Petroleum & Chemical Corporation (Sinopec) to invest in an 400,000 bpd export refinery, known as YASREF (for" Yanbu Aramco Sinopec Refining Company"), in Saudi Arabia at Yanbu.

The Yanbu refinery is already under construction, and is slated for completion in 2014. The original foreign partner was ConocoPhillips, which pulled out in 2010.

ConocoPhillips pulled out because it was a) choked by debt from an acquisition binge and b) getting out of the refining business globally because it couldn't match the return from investing in production.

The reason the refinery - with an $8.5 billion price tag - has to be built is because crude from Saudi Arabia's current big play, the Manifa offshore field in the Persian Gulf, is too heavy and sulfur-laden to feed foreign refineries designed for sweet Saudi and Iranian crude.

The reason the refinery has to be built at Yanbu is because Yanbu is on the Red Sea, at the eastern terminus of the East-West Pipeline. The East-West pipeline, which has the capacity to move 4.8 million bpd or half of Saudi Arabia's current output, is a piece of security infrastructure meant to reduce Saudi Arabia's reliance on the Persian Gulf and Strait of Hormuz.

Another reason the refinery has to be built is that Saudi clout in regional and world affairs depends on it making up any shortfall in world output if, for instance, Iranian crude left the market. Indeed, in the wake of Hurricane Katrina and during the Libyan fracas, the Saudis apparently stepped up.

But increased supply of high-quality sweet crude to European refineries set up for Libyan crude was accompanied by accelerated production plans for Manifa, exacerbating long-held suspicions about the actual reserves - especially reserves of sweet crude - available to Saudi Arabia. As one analyst put it:
With Saudi producing 8.3 million barrels a day pre-Libyan disruptions, why would Saudi accelerate a heavy-oil development if they really had 4.2 million barrels per day of spare capacity? [2]
If an unpleasant scenario (World War III in the Gulf) crippled Iranian exports for an extended period of time, it looks like the Saudis could no longer assure an increased supply of sweet crude.

Perhaps refinery products (including diesel and gasoline from YASREF) would serve as an acceptable palliative. But it would also be an indication that Saudi Arabia's halcyon days as the indispensable marginal supplier are numbered. Riyadh's efforts to provide rationally for its future have unintended consequences.

The Yanbu refinery is a security play that further diminishes the importance of the Strait of Hormuz - and diminishes the need for Western vigilance to keep the waterway open. Bypassing the strait is a trend that has been going on for some time.

In addition to the East-West pipeline, Abu Dhabi is rushing completion of a $3.29 billion underwater pipeline from Abu Dhabi that will bypass the Strait of Hormuz and deliver 1.5 million bpd of crude to Fujairah (equivalent to about 10% of the supertanker traffic currently passing through Hormuz), on the other side of the strait on the Gulf of Oman. [3]

The Iranians have also been trying to avoid the Hormuz bottleneck by building the "Friendship" or "IPI" gas pipeline to Pakistan and India, thereby assisting Pakistan in solving its crippling energy shortages. The United States, with an unfortunate callousness, has labored mightily to block the pipeline and sustain Iranian reliance on crude tanker shipments by the easily blocked (by a US blockade as well as Iranian missiles) strait for its revenues....
Saudi focus on Mafina, together with Riyadh's professed desire to sustain crude prices at $100 a barrel, raise the question of whether production has actually peaked, and how cheap Saudi crude really is.

Much has been made of Riyadh's need for high oil revenues to buy off Saudi citizens with social programs and avert an Arab Spring-style rumpus in the kingdom. With oil at $100/barrel, the Saudi budget is now apparently running a healthy surplus.

However, high prices have also spurred the boom in North American oil production, largely through fracking of shales in North Dakota and in Canada, and threaten to remove Saudi Arabia from its central position.

To be sure, technological advances in oil production have opened up what were once economically unviable shale oil reserves.

However, these technological advances still involve significant costs: at the Bakken field, in the center of the US shale-oil boom, operators drill straight down more than two kilometers, then drill sideways for two kilometers, then cement in a casing, then blow little holes in the casing, then pump in a mixture of water, chemicals and ceramic beads at high pressure to fracture the shale and prop open the crevices, then pump the glop to the surface, separate out the oil, rinse and repeat.

Shale oil breakeven is still about $55/barrel.

If Saudi Arabia was still able to make a hole a few hundred meters in the ground and watch hundreds of thousands of barrels of sweet crude pump itself to the separation plant and crude terminal relying on the natural pressure generated by the geologic formation itself at a cost of a few pennies a barrel, we probably wouldn't be looking at an oil market increasingly driven by fracking ... or $100/barrel oil.

The establishment of an infrastructure to bypass Hormuz and export finished products in a high-price environment makes economic sense ... but in a way, Saudi Arabia is thereby contributing to its own marginalization in the Western security equation.

That implies a greater Saudi reliance on Asian markets - and on the governments of China, Japan and South Korea, all of whom have shown a marked unwillingness to follow US diktats on Iran sanctions and place their energy futures solely in the hands of Saudi Arabia.

So it is interesting to speculate who holds the whip hand in Sino-Saudi relations.

With a certain amount of satisfaction, the West perceives China groveling before the Middle East energy baron that holds its economic future in its hands.

The New York Times, in an analysis that reflected as much wishful thinking and spin as hard fact, titled its article "Middle East Trip Suggests Change in Policy by China" and cautiously interpreted Wen's visit to Saudi Arabia as a distancing from Iran - even though China had unequivocally stated its determination to defy US wishes and continue to buy oil from Iran (and is stepping up its imports from the recovering oil industry of Iraq). [4]

Indeed, Wen's public call for Saudi Arabia to permit Chinese investment in crude production inside Saudi Arabia - the financial sweet spot - was rebuffed.

However, Wen also announced an agreement on cooperation in the development and use of nuclear energy for peaceful purposes with Saudi Arabia that may be more significant in the long run.

Saudi Arabia has a somewhat plausible interest in nuclear energy. But it is currently pitching crude directly into its turbines to generate electric power; if nuclear energy is cheaper than that, then the kingdom's petroleum production straits are genuinely dire.

Saudi Arabia already has nuclear cooperation agreements in place with the United States and France, raising the question of why it would want an additional agreement with China. [5]

Saudi cooperation with China could be a harbinger of an Iran-style scenario: ostentatious interest in development of a civilian energy infrastructure, but holding the promise of a quick jump to enrichment and fabrication beyond the weaponization red lines - and reaffirmation of Saudi Arabia's central role in the Middle East, in Islam, and in the world.

In the dance of alliance and interest between Saudi Arabia and China, nuclear cooperation may have been a key component, a concession by China that elicited Saudi forbearance on Beijing's continued ties with Tehran.

It would also have served as a warning to the United States that Riyadh is not without recourse if it is forced to search for new, more enthusiastic security partners.

Saudi nuclearization is anathema to the United States.

Beyond Obama's noble (and Nobel-winning) motives for rolling back nuclear proliferation, there are hard geostrategic calculations at work.

The United States has kept its geopolitical primacy in Asia by forestalling initiatives by Japan, South Korea and Taiwan to go nuclear (in weaponry) and pursue independent foreign policies.

In the Middle East, on the other hand, Israel has the bomb and has graduated from plucky ally to dangerous, destabilizing and to some extent unwelcome partner.

One can safely assume that a nuclear Saudi Arabia - an insecure, opaque and ideologically-driven Islamist power that makes Pakistan look downright secular and transparent by comparison - would not be welcome to the United States.

It will be up to China to juggle the Saudi/Iran relationships delicately and dexterously. If it doesn't, trouble will probably not be long in coming.

If Saudi Arabia draws conspicuously close to China, look for the United States to miraculously and suddenly discover a strong and positive interest in supporting the democratic aspirations of the House of Saud's internal opponents (and indeed, in the plight of the kingdom's ill-treated Shi'ite minority and Shi'ite neighbors in Bahrain).

However, as the US gradually retreats from the Middle East, unpopular autocracies will crave new partners. And who is more familiar with dictatorships - or better equipped to prop up them up - than China?

Saudi Arabia's main claim to global indispensability is the assertion that, if the Iran situation blows up, Saudi Arabia will step forward, boost crude production, and make up the shortfall, thereby rescuing the tottering global economy.

Indeed, when Hurricane Katrina disrupted production in the Gulf of Mexico, and the Libyan imbroglio disrupted supplies to Europe, the Saudis did increase production and smooth out supply.

However, these were relatively brief hiccups, and there is growing suspicion that Saudi Arabia would have difficulty coming up with the wherewithal to keep world energy markets supplied.....

Shale oil and gas 'will make US self-sufficient', Guardian, Jan 18, 2012.
Kingdom steps up role in global energy security, Arab News, Apr 2, 2011.
Pipeline Avoids Strait of Hormuz, New York Times, Jan 11, 2012.
Middle East Trip Suggests Change in Policy by China, New York Times, Jan 13, 2012.
Saudi Arabia, France to conclude nuclear cooperation pact, IEEJ, January 2011.

Peter Lee writes on East and South Asian affairs and their intersection with US foreign policy.

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