The Gulf's pivot to Asia

Published in MEED, 15 March 2017

King Salman’s tour through Malaysia, Indonesia and Brunei is the latest sign of how keen Gulf governments are to strengthen economic ties with Southeast Asia.

As he toured around five Southeast and East Asian countries in February and March, Saudi Arabia’s King Salman bin Abdulaziz al-Saud captured the attention of headline writers as much for the size of his retinue as for any deals signed or speeches made. In many ways, it was a return to the pre-austerity days, with the supply of five-star hotel rooms in the cities he visited drying up and locals gossiping about how many luxury cars were being hired and how much money was being spent by the 1,500 Saudis that formed the delegation.

But amid all the chatter, there was some serious business to be done too. Southeast Asia is a vital market for Saudi crude oil, a fact that is increasingly important as Riyadh battles for market share against US shale and the return of Iran to the international energy market.

That helps to explain the decision by Saudi Aramco to invest $7bn in the 300,000-barrel-a-day (b/d) Refinery & Petrochemical Integrated Development (Rapid) project being developed by Petroliam Nasional Berhad (Petronas) in Malaysia. Aramco will meet most of the crude feedstock requirements of the refinery, while Petronas will supply the natural gas, power and other utilities. The plant, which is due to be up and running by 2019, will produce gasoline, diesel and feedstock for an integrated petrochemicals complex, which will have a capacity of 3.5 million tonnes a year.

The agreement followed a deal announced with Indonesia’s PT Pertamina in December under which Saudi Arabia will pour $6bn into a similar project, the Cilacap refinery, giving Aramco a 45 per cent stake. Aramco has also held talks with PT Pertamina on an upgrade of the Bontang refinery, in the East Kalimantan region of Indonesia, although that currently seems less likely to go ahead.

Growth opportunities

Such deals help to ensure future demand for Saudi crude exports in the region and there was little surprise when Aramco CEO Amin Nasser said at the signing of the Rapid project that “the Southeast Asia region offers tremendous growth opportunities.”

Investment in oil and gas projects is the dominant theme in GCC involvement in southeast Asia and Riyadh is not the only one to get involved. Kuwait Petroleum International, the overseas arm of Kuwait Petroleum Corporation (KPC), owns a 35 per cent share in the 200,000-b/d Nghi Son refinery in Vietnam. Construction began in October 2013 and is now close to completion – the first deliveries of Kuwaiti crude are due to be made in May.

In January this year, another KPC subsidiary, Kuwait Foreign Petroleum Exploration Company (Kufpec), agreed to invest $900m in offshore oil assets in Thailand. The deal gives it a 22 per cent interest in the Bongkot gas and condensate field and other concessions in the Gulf of Thailand, previously owned by UK/Dutch Shell Group.

Abu Dhabi-based International Petroleum Investment Company (Ipic) also has interests in Southeast Asian oil and gas fields, through its wholly-owned Spanish subsidiary Compania Espanola de Petroleos (Cepsa). The latter owns Cayman Islands-registered Coastal Energy, which has onshore and offshore assets in Thailand and Malaysia.

Such deals may be the most significant aspect of Gulf-Southeast Asian relations these days, but there is activity in other sectors too. King Salman’s time in Malaysia also saw memorandums of understanding agreed in areas including scientific and education cooperation, labour, and trade and investment cooperation. When his delegation reached Indonesia, there were further deals agreed around health, housing, tourism, aviation and fishing.

“An important focus for Saudi officials on this trip, and in policymaking more generally, is to identify and expand markets for non-oil exports,” says Kristian Coates-Ulrichsen, fellow for the Middle East at Rice University’s Baker Institute.

Other Gulf investments in the region range from financial services to telecoms and real estate development. Examples include Qatar National Bank’s majority holding in QNB Indonesia and Kuwait Finance House (KFH)’s wholly owned subsidiary KFH Malaysia. Qatari telecoms firm Ooredoo won a mobile telecoms licence in Myanmar in 2013 and also has operations in Indonesia, Laos and Singapore.

Johor region

In the real estate arena, both KFH and Abu Dhabi-based Mubadala have invested in Medini, a project to create a new city of up to 300,000 people at the southern tip of peninsula Malaysia, just across the Straits of Johor from Singapore. Medini is part of a series of efforts to develop the Johor region – the Aramco-backed Rapid refinery is another important element. Indeed, those involved in Medini think the oil and gas project could have some benefits for their own scheme.

“The Aramco deal is good for us,” says Khairil Anwar Ahmad, CEO of Iskandar Investment Berhad, an offshoot of the state-owned Kazanah Nasional Berhad, which is driving the development of the region. “They’re investing in this big oil and gas and petrochemicals complex and it’s just next door, so we’re hoping that… there will be some spill-over to Medini as well. We’re hoping that we can attract some people looking for back office services, middle office support and things like that.”

As is evident from the above examples, a few countries in Southeast Asia have been the focus of much of Gulf activity in the region. Partly as a result of their cultural and religious affinity, but also because of their relatively large economies, Malaysia and Indonesia have drawn a lot of interest and investment.

At times this has been negative though, in particular the ongoing scandal around Malaysia’s sovereign wealth fund 1Malaysia Development Berhad (1MDB), which involves questionable payments to senior Malaysian politicians and their associates from a number of Gulf sources. The situation continues to cause difficulties for some Gulf businesses. In October last year, Abu Dhabi-owned Falcon Private Bank had its licence in Singapore stripped from it by the Monetary Authority of Singapore because of what the latter described as “serious failures in anti-money laundering controls” surrounding transactions associated with 1MDB.

Cambodia flights

Despite such difficulties, trade between the Gulf and SE Asia undoubtedly has the potential to expand much more. The steady growth of the big Gulf airlines’ route networks in the region could be an enabler for further development. The latest addition will come in July, when Emirates is due to start daily flights between Dubai and the Cambodian capital Phnom Penh. The airline says it expects garments and textiles to be a significant export in the future.

Until now, ties with Cambodia have mainly involved aid projects, such as the Cambodia-Kuwait Friendship Hospital, which opened in the southern Kandal province last year, although there has been the occasional commercial investment too. For example, in 2011 Kuwait’s Pima International formed a joint venture with India’s D&D Pattnaik to invest in exploration for gold and iron in Cambodia.

The relationship between the regions is not just about crude oil and money flowing from the Gulf into Southeast Asia though. Another central element is the supply of labour from South and Southeast Asia, without which the Gulf economies would cease to function. And as part of efforts to diversify their economies, Saudi Arabia and other Gulf countries are also keen to boost investment from Asia into their own markets. With that in mind, King Salman’s tour has also included conferences designed to attract investment from Asian businesses into Saudi Arabia.

The promise of more business opportunities is keeping locals keen. There is a tight battle being fought among Asian stock markets for the rights to host a listing of shares in Aramco, for example. Among those hoping for a cut of the action are the Singapore, Hong Kong and Tokyo bourses. In that at least, there is continuity with the long-term relationship between the Gulf and Southeast Asian regions. Coates-Ulrichsen says the past decade has seen the ties expand but “energy continues to form a linchpin of the relationship”.