After the first oil price war launched by the Saudis against the then-nascent U.S. shale sector in 2014, Washington took the view that the Kingdom had broken the core 1945 agreement made between the two countries and that consequently, the U.S. needed to begin to reduce its dependence on Saudi oil imports down to insignificant levels over time. This view was reinforced when the Saudis launched another oil price war in 2020, again principally aimed at damaging the U.S. shale sector, that was only ended with the direct threat from former President Donald Trump to Saudi Crown Prince Mohammed bin Salman (MbS) that unless Saudi stopped the oil price war then the U.S. would withdraw its military support for the country in general, and the ruling Al-Saud family in particular. Given this backdrop, it is unsurprising that the U.S.’s new cornerstone strategy to counter growing Chinese influence in the Middle East’s oil and gas sector appears to barely involve Saudi Arabia at all.
The new strategy is centered on putting into place a series of U.S.-brokered deals between its key representative in the Middle East, Israel, and as many Arab states as possible. The overt purpose of this alliance is to counter the increasing power of Iran in the region, about which both Israel and many Arab states share a profound concern, but more than that the alliance will act as a bulwark for the U.S, against the increase of influence of China especially in the Middle East, and wielded in the first instance through Iran. So far this alliance has been able to strike cooperation deals – formally, ‘relationship normalisation’ deals – with the UAE and Bahrain in the Middle East (and also with Morocco) but hopes are high in Washington that this roster will be expanded shortly to include such regular U.S. allies as Kuwait and others. The U.S. view on the Saudis being a part of this new alliance at some point is a function of the broader view in the White House before Trump lost the election, which was: “We’re not going to put up with any more crap from the Saudis”. More specifically, the U.S. will be happy enough to have the Saudis as part of the U.S.-Israel-Arab states alliance should it wish to join (MbS is thought to be personally in favour of it) but it will not ‘put up with any crap’ from Saudi as the price to get it to join. With or without Saudi Arabia formally being part of the U.S. alliance it can continue to act as the principal lightning rod for Iran’s attacks against U.S. influence in the region.
Given its huge economic growth potential even from its currently high base – and the corollary lift to its oil and gas demand that this will bring – India is being touted by the U.S. as a viable counterpoint to China’s enormous demand for energy products in the future. Specifically, according to a recent major report from the IEA, India’s energy consumption is expected to nearly double as its gross domestic product expands to an estimated US$8.6 trillion by 2040 under its current national policy scenario (the equivalent of adding another economy the size of Japan to the world economy in less than 20 years). Particularly of note to Middle Eastern hydrocarbons producers will be the projection that India’s oil demand is expected to rise to at least 8.7 million barrels per day (bpd) in 2040 from about 5 million bpd in 2019, while its natural gas needs are projected to more than triple to 201 billion cubic metres.
In this precise context, last week saw comments from India’s Oil Minister, Dharmendra Pradhan, that he and the chief executive officer of the Abu Dhabi National Oil Co (ADNOC), Sultan Al Jaber, had discussed ways to strengthen energy cooperation “in the hydrocarbon sector and beyond” between the two countries. This co-operation has already grown extremely quickly after the relationship normalisation deal was signed by the UAE on 15 September last year. ADNOC is being seen by the U.S. as a key oil supplier in the new Middle East order, with plans to swiftly increase its crude oil production by around 1 million barrels per day (bpd) to at least 5 million bpd by 2030 at the latest, and to increase its gas output as well. Further weight was added to this joint effort with the recent award by the UAE of a second major oil and gas exploration block concession to the U.S.’s Occidental. The U.S., for its part, was extremely supportive of ensuring India’s compliance as an end-buyer for any oil that ADNOC might produce with India approving a proposal that allows ADNOC to become the only overseas company entitled to hold and store India’s vitally-important strategic petroleum reserves (SPR) and to export oil from the SPR if there is no domestic demand for it. In addition to this, the UAE has become a partner in an Indian joint venture to build a 1.2 million bpd refinery and petrochemical complex on the country’s west coast. Related: The 3 Nations Vying For Global LNG Dominance
At the same time that India is looking to expand its imports of oil from the UAE, and to extend its cooperation further with ADNOC, it is seeking to cut oil imports from Saudi Arabia, various sources in India’s oil sector commented last week. According to these reports, the Indian Oil Corporation, Bharat Petroleum Corporation, Hindustan Petroleum Corporation, as well as Mangalore Refinery and Petrochemicals and other state refiners, are preparing to lift about 10.8 million barrels in May compared to the average state refiners’ take of 14.7-14.8 million barrels of Saudi oil per month. This is in line with Oil Minister Pradhan’s repeated criticism of Saudi Arabia’s additional oil production cuts to the OPEC+ cuts being a key cause for the recent spikes in oil prices that have negatively affected India’s budget.
This move away from Saudi oil and towards oil from the UAE follows the displacement of Saudi Arabia from the number two oil supplier position to India by the UAE’s sponsor in the Arab States alliance – the U.S. itself. Specifically, oil industry figures for February showed that the total volume of India’s crude oil imports from the U.S. overtook those from Saudi Arabia in the month, with the U.S. moving from number five to number two in the supply table. US crude imports jumping to the second spot in February, from fifth in 2020. This change in supplier rankings was partly a deliberate move by India to signal its displeasure with Saudi over its surprise voluntary oil production cuts and partly due to refiners targeting different oil grades in anticipation of higher gasoline demand, according to local analysts. Even before this switch, according to industry data, U.S. crude imports to India stood at 12.69 million metric tons in 2020, up nearly 29 per cent from a year earlier. In February, though, inflows from the U.S. was 2.11 million metric ton, around 32 per cent higher than the 1.61 million metric tons from Saudi Arabia.
By Simon Watkins for Oilprice.com
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