US energy diplomacy in the Gulf region

OMID SHOKRI KALEHSAR
Published 29.08.2019 00:06

Energy always plays an important role in U.S. foreign policy. By following a policy of energy security at home and in the American hemisphere, President Donald Trump's administration can increase opportunities for itself aboard. One of the Trump administration's goals from renewed sanctions against the Iran energy sector is to create an opportunity to help the U.S. energy industry with the imposition of the right policy. Finding a new market for U.S. liquefied natural gas (LNG) and also U.S. oil may be a benefit of the U.S. sanctions against Iran.

The shale gas boom gives an opportunity for the U.S. to become one of the world's leading condensate exporters. By 2018 America shipped 3 million barrels of liquid hydrocarbon abroad per day.

South Korea, as one of Iran's oil buyers, imports about 70% of Iran oil as condensate, and according to the Iranian Ministry of Oil, Iran supplies 50% of South Korea's condensate.

During the Obama administration, the U.S. was unable to export such an amount of condensate, and now the U.S. could be the supplier of condensate for South Korea. The U.S. is now due a shale boom and could be able to export condensate to South Korea and reduce South Korea's dependence on Iranian condensate.

Trump's energy policy, sanctions

The U.S. plans to be an energy superpower soon and is looking to increase its share of the world energy market. The U.S. is not interested in China's presence in the Gulf Cooperation Council (GCC).

The Middle East and the GCC are areas of concern for Chinese politicians as it imports a significant portion of its oil from the Middle East. China has been working on major projects such as "One Belt, One Road" as well as a maritime silk route to increase its role, and the operation of the project should increase China's role in regional and global equations.

The new Silk Road project is a plan to invest in the infrastructure of more than 60 countries and develop two commercial routes – the Silk Road Belt and the Silk Road for the Sea, which China presented in 2013.

The U.S. will be able to negatively effect Chinese economic growth with control of energy transit routes along which China imports oil and gas. The U.S. is interested in increasing its share of China and India's energy markets, as they are the world's largest energy consumers. The U.S. will be in competition with the GCC or other suppliers for India and China. According political scientist Joseph Nye, estimates show that if oil prices decline and contraction policies are adopted by major oil exporters like Saudi Arabia, such as in July 2014, shale oil production will face a major challenge in the long run, although not in the short to medium term.

In this context, Nye, referring to the problems of other countries, such as Argentina, China or European countries says: "America is not involved with extractive constraints. The U.S. economy can benefit from these changes in energy supplies in thousands of ways. Hundreds of thousands of jobs have already been created, some of them in less developed areas."

Oil exports lifting constraints

George Baker, after approving the abolition of the 40-year ban on crude oil exports in December 2015, revealed the overarching goal behind the strategy and said: "Now that we have planed the ground, the United States finally has the opportunity to fulfill the potential of the country as a superpower of energy. To implement this strategy, the Trump government has placed its domination of the global energy market on its agenda. That is why Trump, in line with the great plans of oil cartels for the early realization of this strategy, has adopted a policy of withdrawal and the establishment of a war in the Middle East."

Middle East economic partners

In terms of economy in the Gulf States, Asia is now their largest economic partner and is expected to remain the largest consumer of conventional energy in the coming decades. These conventional oil and gas resources are the backbone of the Gulf economies and their main source of income.

In 1990, indicators showed that the world's three major economies, the United States, Europe and Japan, accounted for about 45% of total Gulf oil and gas exports, but after only two decades this fell to 23%. The continuation of this process is expected with America's energy independence and its transformation into an energy exporter.

In addition, it will affect long-term gas sale contracts where gas prices are valued based on the value of the oil price. With the increase in natural gas produced in the world, the structure of these contracts will be pressured because the diversification of suppliers in the customer market will seek to end gas pricing based on oil prices and short-term and flexible agreements.

For example, Qatar's Asian gas customers, which now buy more than half of Qatar's LNG exports at around $7-5 per million BTUs, are seeking gas imports from North America to secure higher energy supplies. Japan and India have signed an agreement on this.

Undoubtedly, new shale gas resources and their exploitation will negatively affect old gas exporters in the Gulf region, such as Qatar and Iran, which will also increase pressure on oil prices. However, it seems unlikely that the role of conventional energy will be significantly affected in the next two decades due to the growing demand of developing economies, especially in Asia (particularly China) and has not changed its sources of fuel to unconventional shale or new energy sources, such as wind and solar energy, and their dependence on conventional energy sources will continue.

Shale gas boom

A large percentage of consumed gas (about 46%) in the United States is directly fed to the petrochemical industry and refineries. For example, ethylene production, a key element in the production of plastics and many petrochemicals, is used in two types of feed.

First, naphtha is directly produced from crude oil and then natural gas. Therefore, natural gas will have a significant impact on the petrochemical industry by significantly bringing down the prices of petroleum products in the petrochemical industry.

This prediction shows that the production capacity of a variety of U.S. polymer products will increase to the boiling point in the market. Certainly, with the entry of American petrochemical products into market countries, Iran, Saudi Arabia and Qatar should define and implement new policies to reduce prices and maintain their markets and should place this category in their energy diplomacy with special sensitivity.

Natural gas and LNG exports

Due to the shale gas boom, the new supplier of gas will have a negative impact on the leading exporters of conventional natural gas in the region, such as Qatar and Iran, and also lead to increased pressure to lower the price of oil.

However, it is likely that the major role of conventional energy will be affected in the global economy during the next two decades by broad growth in demand from the developing economies, especially in Asia, (China). Most Asian countries would not easily shift to unconventional energy sources such as shale gas, or renewable energy.

The occurrence of the shale revolution has led to a decline in the power of conventional energy producers, including the Organization of the Petroleum Exporting Countries (OPEC), and its traditional role as the regulator of global oil prices, which, according to most oil analysts, is the main reason for the recent fall in prices.

Indeed, this highly dependent OPEC budget has greatly reduced its strength and initiative to expel rival oil, shale. Therefore, according to the above, the necessity of adopting policies based on the realities of the existing global energy market in countries such as Iran is important in the domestic and international arena.

Over the coming years, American energy independence will change the global geopolitics that the Middle East is most sensitive to. Some predictions suggest that America's interest in oil supplies in the Middle East will diminish with the increasing energy independence of the United States. Of course, this depends on the importance of oil in U.S. foreign policy.

It seems that the shale gas boom and U.S. LNG exports will affect Qatar more than other GCC members. Qatar focused on a diversified portfolio, particularly in diverting volumes to Asia, and benefits from high spot prices.

Iran will not be able to increase production and increase oil exports without foreign investment and technology. A decrease in foreign exchange earnings will directly affect Iran's economic situation.

In the United States, petrochemicals traditionally depended on oil-rich naphtha, and at times the cost of oil has been high. The U.S. petrochemical industry was expected to face a major challenge over the long term due to high costs, to the point where companies such as Dow were expected to transfer more investment to the Middle East, but the situation with shale gas significantly changed. In the meantime, the price of natural gas was the first thing that was affected, and natural gas prices fell by 68%.

In 2012, natural gas prices in the United States were one of the lowest natural gas prices in the world. This drop in the price of total manufacturing costs in the United States to lower levels than Latin America, Europe, and even China made U.S. petrochemicals superior to many petrochemical markets around the world.

The petrochemical industry has changed due to the lower price of petrochemical feeds due to shale gas extraction. The indirect effects of shale gas extraction on the Gulf countries should be addressed with regard to the economy of the manufacturing sectors of the chemical and petrochemical industries affected.

With the development of shale gas, similar petrochemical plants in the United States will have cheaper feeds, which can increase their competitive strength and see off or suppress competing manufacturing companies in the Gulf.

* Washington-based senior energy security analyst, currently serving as a visiting research scholar in the Schar School of Policy and Government at George Mason University

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