The Arab Gulf states in the Asian energy market: is the Russia-Ukraine war a game changer?

ABSTRACT

The Arab Gulf states and Russia have traditionally been major suppliers of hydrocarbons to the energy-poor countries of Asia. This article considers the extent to which engagement by the Arab Gulf states in the Asian energy market is likely to be significantly impacted by the Russia-Ukraine war, which began in February 2022. On the one hand, the war is likely to increase the intensity of Russia engagement with Asia and to recalibrate relations with certain Asian partners, with implications for the Gulf states. On the other hand, Asia as theatre of competition for energy suppliers – and the Gulf states as the dominant oil and gas suppliers for the region – has roots in pre-2022 trends and is unlikely to change. The qualitative analysis, supported by extensive use of diverse secondary datasets on the energy trade, concludes that for the Gulf states, the Russia-Ukraine war is less an exogenous, sudden, and “critical juncture” event than an acceleration of existing trends in the Asian energy market.

KEYWORDS:

• Asia-GCC
• Russia-Ukraine war
• oil
• gas
• energy
• fossil fuels

Introduction

It has been well over 600 days since Russia invaded Ukraine in February 2022. The human catastrophe has been compounded by repercussions on food, financial markets, trade routes, inter-state alignments, media management, climate change and defense planning among other policy concerns. With regard to the energy market – the subject of this article –the war is typically framed as a “critical juncture” moment whereby policy change takes the form of a sudden and radical shift rather than a gradual and incremental process. The war, for example, has been described by major stakeholders in the global energy system as “the biggest transformation in the energy markets probably since 1973” (Northam 2022) and a “global game-changer in terms of the energy transition” (Stevens 2022) that is “likely to have a persistent effect on the future path of the global energy system” (BP 2023, 23). It is causing an “unprecedented energy shock” (IEA 2022d, 3), has prompted “sweeping shifts in Asian oil flows” (S&P 2023), and been responsible for “a period of extraordinary turbulence for energy markets, especially for natural gas” (WEF 2022). More broadly, the war “has clearly changed the very notion of energy security … to a large extent, energy security will now be determined by how quickly countries manage the shift to a low-carbon economy” (49security 2022) instead of conventional notions of energy availability and affordability.

The foregoing examples, with italics added, highlight the war as a turning point in creating enduring changes, irrespective of whether they are stable or volatile, to the architecture of the energy system. In so doing, they align with Collier and Collier’s classic criteria of a “critical juncture” as “a period of significant change … hypothesized to produce distinct legacies” (1991, 29) and reinforce Mahoney’s view that “these junctures are ‘critical’ because once an option is selected, it becomes progressively more difficult to return to the initial point when multiple alternatives were still available” (2001, 6–7).

This article, however, offers a contrarian perspective through an empirical case study of Arab Gulf states in Asian energy markets.¹ It eschews considerations of the relevance of theoretical approaches in the policy studies literature – which in any case is ably tackled by other contributors to this Special Issue – in favour of an empirical case study of Arab Gulf states in Asian energy markets pre- and post- the “critical juncture” of February 2022. Scholarly analyses on the war’s impact on energy markets have, not surprisingly, focused on changes to Europe’s energy architecture with far less attention devoted to its impact in Asia.² The article finds that for the Gulf states, while the Russia-Ukraine war has resulted in short-term challenges to its hitherto dominant position in Asia’s energy market, overall the war is less an exogenous, sudden, and “critical juncture” event than an acceleration of previous path-dependent or existing trends in the Asian energy market.

The case selection of the Arab Gulf states in Asia is warranted due to their symbiotic energy relationship (Rutledge and Polyzos 2023). As major net hydrocarbon exporters, the Gulf states play a significant role in supplying the energy that fuels economic growth and declines in poverty rates across Asia and the Pacific, where fossil fuels are the source of 85% of energy consumption (IRENA n.d.). In 2019, almost 60% of crude oil and a quarter of liquefied natural gas (LNG) in Asia were sourced from the Middle East, much of it from the Gulf states (Reuters 2020a). The Gulf states are also major investors in projects to reduce import dependence and bills by increasing indigenous crude oil and petrochemical production in Asia. For example, Mubadala Petroleum from the United Arab Emirates (UAE) is the second-largest producer of crude oil in Thailand, Kuwait has a 35.1% stake in Vietnam’s largest oil refinery, and Saudi Arabia owns stakes in refineries and petrochemical complexes in China.

At the same time, Asia is projected to dominate global energy consumption in contrast to stagnating demand in developed countries due to future population growth, newly prosperous middle class with spending power, higher energy intensity rates, slow pace of transport electrification, and higher economic growth rates among other factors (McKinsey 2020; OPEC 2022b). Consequently, Asia is expected to remain the destination for over 80% of crude oil exports from the Middle East, primarily the Gulf states, between now and 2045 (OPEC 2022b, 236 figure 6.6). Likewise, gas demand in Asia is forecast to grow by over 13% between 2021 and 2030 compared to a decline of 18% in Europe; the large 23% rise in gas demand in Africa by 2030 looks less impressive since volumes there will be far smaller than in Asia (IEA 2022d, 372 table 8.2).

The point is that energy demand from Asia will underwrite, to some extent, future economic prospects in the Gulf where growth continues to be tied to the hydrocarbon sector. Hydrocarbon revenues accounted for between 65% and almost 90% of total government revenues in 2019 in all Gulf countries except the UAE (40%) (Oxford Economics 2021). Exports of hydrocarbon comprise over 70% of total exports in all Gulf countries in 2019 except in Bahrain (30%) and the UAE (20%) (ibid). Despite serious efforts at diversification, including investments to grow the higher value-added petrochemical and refining industry, the performance of the hydrocarbon sector, much more than the non-oil sector, continues to drive much of the GDP growth (World Bank 2021, 14 and 15) in what has been called the “persistent petrostates” of the Gulf (Bordoff and O'Sullivan 2022, 70). Hence the warm reception by the Gulf to the promise by Chinese President Xi Jinping that “China will continue to import a large amount of crude oil from the GCC countries, expand imports of liquefied natural gas” (Gambrell 2022) even as it imports record volumes of Iranian and Russian oil.

The remainder of the article proceeds as follows. Section 1 presents an overview of the Gulf states as key suppliers in the Asian energy market prior to 2022 and compares this to Russia, the other major supplier in Asia. It provides a baseline for our subsequent assessment of the extent to which the Russia-Ukraine war is a game changer for the Gulf states’ energy engagement with Asia. Section 2 follows with an examination of what is changing or has changed for the Gulf states as a result of the war while Section 3 addresses the trends that have stayed relatively constant despite the war. Taking into account the analysis in the two previous sections, the concluding section presents several policy recommendations for the Gulf states on protecting and even advancing their energy-led engagement with Asia.

Arab Gulf states and Asian energy dynamics before 2022

A triangle energy relationship has long existed between Asia and its two largest energy suppliers – the Arab Gulf states and Russia. Prior to 2022, four features defined the relationship.

First, the Gulf states were more important than Russia as suppliers of hydrocarbons to Asia. The former provided nearly five times more crude oil, almost four times more gas, and one-and-a-half times more refined petroleum products to Asia than Russia (see Figures 1–3). Coal was the only exception (Figure 4) – the Gulf states do not export the commodity unlike Russia, the third largest coal exporter country in the world, which exported more of its coal to Asia (55.3%) than Europe (35.2%).

Figure 1. Crude oil exports from Russia and the Gulf, 2021 (in millions of tons).

Note: Data here is for the three Gulf states of Saudi Arabia, the UAE, and Kuwait. Source: BP Statistical Review of World Energy, June 2022.

Figure 2. Natural gas (pipeline and LNG) exports by Russia and the the Gulf, 2021 (in billions of cubic metres).

Note: Data here is for the three Gulf states of Qatar, the UAE, and Oman. Source: BP Statistical Review of World Energy, June 2022.

Figure 3. Refined petroleum exports by Russia and the Gulf, 2021 (in millions of tons).

Note: Data here is for the six GCC states. Source: Chatham House (2021), “resourcetrade.earth”, https://resourcetrade.earth/.

Figure 4. Coal exports by Russia, 2021. (in exajoules).

Source: BP Statistical Review of World Energy, June 2022.

Second, there was significantly more Russian crossover in Asian markets, where the Gulf states dominate, than Gulf presence in European markets, where Russia was pre-eminent. In other words, the Gulf states were almost singularly focused on Asia while the discrepancy between Russia’s hydrocarbon exports to European and Asian markets is much less stark. For instance, 77.1% of Saudi Arabia’s crude oil exports ended up in Asia in 2021 but only 8.3% was directed to Europe; in the case of the UAE, Asia accounted for 98.2% of all its oil exports and Europe only 0.7% (OPEC 2022a). As for Qatar, while Europe accounted for 15% of its LNG sales in 2021, Asia with a share of nearly 80% was still its most dominant market (S&P 2022). By comparison, while Europe received 52.6% of Russia’s total crude oil exports, Asia was not too far behind at 37.3% (Figure 1).

Third, Russia was much more of a one-stop shop for Asia’s overall energy needs relative to the Gulf states, with coal providing nearly half of Asia’s energy supply, while oil (24%), gas (11.5%), nuclear (2.7%) and renewables comprised the rest (IEA 2022a). Apart from a major supplier of fossil fuels, Russia was also the region’s largest extra-regional source of nuclear energy. Its state-owned corporation, Rosatom, was building and/or providing fuel for nuclear power stations in China, Bangladesh, and India. In contrast, there is no coal or nuclear export industry in the Gulf.

Fourth, at a country level, China was the key theatre of competition for oil and gas suppliers from Russia and the Gulf. Russia’s significance as a source of imported oil (crude and petroleum) for China doubled from 7% to 15.1% between 2010 and 2019 partly due to oil-for-loans deals with China in the wake of post-Crimea sanctions; Saudi Arabia’s share remained around 14–16% during that period (Resourcetrade.earth). Consequently, they took turns as China’s top and second largest supplier of imported oil. As for gas, Russia had been playing catch up with Qatar but finally surpassed it in 2021. In 2019, Russia accounted for less than 5% of China’s gas imports but its share rose to almost 10% in 2021 thanks to initial flows from the first dedicated Russia-China gas pipeline known Power of Siberia; Qatar’s corresponding share was 7% (EIA 2022).

Changes to Asian energy markets since 2022

The Russia-Ukraine war intensified an energy conflict between Russia and Europe that began in 2005 but escalated during the last quarter of 2021, resulting in higher than average prices for gas in Europe prior to the invasion. A range of weapons have been deployed including self-sanctions, sabotage of gas pipelines, financial sanctions, release of oil from strategic reserves, price caps, restrictions on shipping insurance, and perhaps most significantly a ban on European imports of Russian seaborne crude and petroleum products. The resulting recalibration of import and export decisions has been underlined by a couple of rather dramatic changes in global energy flows, including in Asia.

Increase in Russian oil exports to Asia

Russia has, by necessity, re-directed even more of its energy flows to Asia because its hydrocarbons are shunned in Europe. Its crude oil exports to non-EU and non-G7 countries in Asia increased from 24.01% in May 2021 to 50.3% in May 2022 and 71.06% a year later (Figure 5). Indeed, it is striking that while oil shipments to the EU have trickled to 141 million tonnes per day as at mid-October 2023 from 950 million tonnes before the war, shipments to China, India, and Turkey have increased to 1124 million tonnes per day from 442 million tonnes before the war (CREA 2023a). Pakistan, which received its first ever shipment of Russian crude in June 2023, announced its intention for Russian crude to make up two-thirds of its oil imports going forward; the target, however, is unlikely to be met given limitations on yuan and hard currency availability as well as on refinery capacity to process Russian crude. Petroleum products from Russia that traditionally sold to Europe are also flowing mostly to Asia, especially after the EU import ban on such products from 5 February 2023. For example, during the first five months of 2023, Asia accounted for 50–60% of Russian residual fuel oil exports used by power stations and ships, a marked increase over the region’s 18–25% share during the same period in 2022 (Vortexa 2023).³ Going forward, developing countries in Asia such as Pakistan and Bangladesh priced out of LNG that fuel their power plants by Europe are expected to turn increasingly to Russian fuel oil or coal for their power plants, particularly given the attractive discounts on offer.

Figure 5. Russian seaborne crude oil exports by region (% of total seaborne crude oil exports).

Source: Bruegel (2023), Russian crude oil tracker.

In short, Asia as a recipient of the majority of Russia’s oil sales, in contrast to the pre-2022 situation, is likely to be permanent for several reasons. One is that sanctions once imposed tend to be sticky and difficult to remove. Indeed, there is unusually strong consensus among political and business leaders in Europe to never again be as energy dependent on Russia (EEAS 2022; European Commission 2023b) and European public opinion continues to strongly back EU policies on Russia (European Commission 2023a). Except for small volumes of Russian LNG and reblended or relabeled oil of Russian origin, Russia is highly unlikely to ever regain its energy dominance in Europe regardless of the outcome of its war. Asia is therefore the only large-scale outlet for Russian hydrocarbons. Moreover, some Asian countries will continue to purchase Russian energy as they feel the risk of secondary sanctions by EU/G7 is minimal. India, for example, has been encouraged by the US to leverage the EU/G7-imposed price cap to seek deeper discounts to further reduce Russia’s earnings from fossil fuels and by implication impair its ability to finance the Russia-Ukraine war. Japan’s purchase of oil from the Sakhalin-2 project has been exempted from the EU/G7 price cap on Russian oil until March 2024; the original deadline of September 2023 was recently extended. As for China, it is probably too significant geopolitically and geoeconomically to sanction effectively and will hence continue to purchase Russian energy.

The seemingly permanent increase in Russian oil exports to Asia has affected the market share of the Gulf states in Asia, especially in the two largest importers, China and India (discussed later). China has imported record volumes of crude from Russia since the start of the war, facilitating Russia’s rise as the country’s top supplier for the first half of 2023 with an average of 2.12 million barrel per day (bpd) versus the kingdom’s 1.87 million bpd (Ingram 2023b). At the same time, China has also increased its imports of Saudi oil, albeit by a smaller margin than Russian oil, in order to stockpile the commodity ahead of expected higher oil prices in the second half of 2023. Other Gulf states like Oman and to a lesser extent, the UAE, have seen a decline in their market shares for oil in China (Lin and McMillan 2023) since they are re-directing some crude oil sales to Europe (Ingram 2023a).

Nevertheless, leaders in the Gulf states are not unduly worried by Russia’s heightened presence for various reasons. They appear willing to cede some market share to Russia in Asia because new opportunities in Europe for non-Russian sources of hydrocarbons have opened up for them (Sim 2023a). Iraq is a case in point. With discounted Russian oil flooding into its main Asian market, India, Iraq reduced prices for its export grades to Europe by more than the likes of Gulf peers Saudi Arabia and Kuwait (MEES 2023b). As a result, Iraqi crude exports to Europe increased by a sizeable 38% over the previous year to reach 717,000 bpd in 2022, the highest figure since 2018. This was accompanied by a corresponding fall in crude exports to Asia to 61.5% of Iraq’s total exports in 2022 from 63.2% in 2019 (Figure 6).

Figure 6. Crude oil exports of selected Arab Gulf countries to Asia (% of total crude oil exports).

Source: OPEC (2022a), Annual Statistical Bulletin.

Furthermore, Gulf leaders perceive Russia’s inroads in Asia as a form of “side-payment” to keep Russia in OPEC+, a key intragovernmental platform to manage oil production among member states of the Organization for Petroleum Exporting Countries (OPEC) and other non-OPEC major producers led by Russia. This is because even with the loss of oil production due to sanctions – estimated to be between 0.85 and 1.4 million bpd during the first quarter of 2023 (Ingram 2022) – and voluntary output cuts, Russia will still be the second-largest producer within OPEC+ by far. Therefore, should oil prices nosedive in the future, Russia’s cooperation to stabilize prices is essential.

Finally, Gulf leaders tend to view the price cap as a political instrument with a short shelf life relative to what they see as the fundamentals of the oil market as underlined by OPEC’s optimistic World Oil Outlook (OPEC 2023). As discussed in later sections of this article, although price sensitive importers like India and China were expected to binge on discounted Russian oil, these consumers face infrastructural, contractual, and geopolitical limitations to sustaining this appetite for Russian oil in the medium and long run. At the same time, enforcement of the price cap is commercially impractical and Russia is too significant as an oil exporter to be properly sanctioned unlike Venezuela or Iran (Imsirovic and Cahill 2023).

For these reasons, Gulf states like Saudi Arabia and the UAE have resisted from an all-out price war to undercut Russia’s inroads into Asia.

Recalibration of bilateral energy relations

In addition to increasing the share of Russian hydrocarbon exports in Asia, the Russia-Ukraine war is also resulting in the recalibration of certain sets of Russia-Asia energy relations which may impact the Gulf states. The cases of India and Japan illustrate this particularly well.

India has procured over $36 billion worth of fossil fuels, mainly oil and coal, from Russia since the start of the war and is the third largest purchaser globally behind China and Turkey (CREA 2023b). From less than 3% historically, crude oil imports from Russia have surged thanks to attractive discounts on offer and accounted for around one-fifth of India’s crude imports in 2022. According to an Indian state bank, India’s purchases from Russia reduced its 2022 oil import bill by around $5 billion (BBC 2023). 2023 has seen more of the same including a corresponding cut in imports from all Arab Gulf suppliers, whose market share stood at just 41.8% in the second quarter of 2023. This is the lowest level in well over a decade and a far cry from the 61% market share on average in the three years prior to 2022 (MEES 2022; 2023a).

As noted previously, Gulf states like Iraq are not unduly alarmed by the loss of market share in Asia, including India. Their “take or pay” term contracts for oil with India (and other customers) provide some level of protection from demand changes since shipments of oil can only be re-scheduled within the duration of the contract but not cancelled entirely. What this means is that cheaper Russian oil will not completely displace oil from the Gulf states without India suffering huge penalties financially and in terms of the wider bilateral relationships. Riyadh and Abu Dhabi also believe they are well-placed to be the “last men standing” in the global oil market given the cost effectiveness and low emissions level of their oil in a carbon-constrained future. Indeed, the production costs of a barrel of oil in Saudi Arabia is $17 compared to over $40 for Russian oil (MT 2019) while the average carbon intensity of oil production in Russia is one-third to 50% higher than in all Gulf countries except Iraq (Masnadi 2018). In addition, the widely-predicted long-term decline of Russia’s oil industry even prior to the current round of Western sanctions (Henderson and Grushevenko 2019; Mitrova, Grushevenko, and Malov 2018; IEA 2021), structural problems such as high freight costs and voyage times between Indian and Russian ports, payment issues largely related to the use of the rupee, and refinery configurations that limit the amount of Russia oil that can be used as feedstock, all challenge the long-term sustainability of the Russia-Indian oil trade. Finally, at a more strategic level, Russia’s post-2022 “no limits” relationship with China is a source of discomfort to some policy elites in India given the long-standing enmity between the two largest Asian powers (Bala 2023; Lalwani and Jacob 2023); a growth in such sentiments could also limit the closer Russia-Indian energy ties and benefit Gulf-India exchanges.

The Russia-Japan energy relationship is also changing, albeit less perceptibly and rapidly than the Russia-India one. Pre-invasion, Russia supplied 9% of Japan’s gas imports (fifth largest supplier), 10.5% of coal imports (third largest supplier), and 3.6% of crude oil imports (fifth largest supplier) in 2021 (BP 2022). Its significance lay in the fact that it offered a non-Middle East source of fossil fuels for a country that had suffered from the Arab oil embargo of the 1970s and which was still hugely dependent on oil and gas suppliers from the Gulf. In turn, Japanese companies have played a crucial role in the development of Sakhalin-2, Russia’s first LNG plant, as investors (22.5% of the project) and offtakers (60% of the gas is delivered to Japan); consequently, Japan accounts for just under one-fifth of total Russian LNG exports. The mutual interdependence explained why, despite being labelled by Russia as an “unfriendly” country due to G7 related sanctions, Japan was allowed to retain its stake in Sakhalin-2 unlike foreign partners in the project.

Nevertheless, change is afoot, none of which is advantageous to Russia. For over a decade, Japan has been fashioning a more robust foreign policy that leverages on its alliance with Western partners partly to counter the perceived threat from China, as underlined by its initiation of and participation in the Quadrilateral Security Dialogue (Koga 2021). In this regard, Russia’s ever closer ties with China is likely to strain Russia-Japan relations, including energy ties. For instance, in line with action taken by its G7 partners, Japan announced a ban on Russian coal imports in April 2022 and the gradual phasing out of Russian oil imports. As a result, coal imports from Russia have fallen to around 2% in 2022. Japan’s ban on Russian coal has also left the latter unable to take advantage of Japan’s intention to diversify away from imports from its top supplier, Australia, as a result of Canberra’s Domestic Gas Security Mechanism that restricts LNG exports on short notice – and hence threatens LNG import predictability for Japan – should a domestic gas shortage occur.

Another source of change stems from Japan’s Strategic Energy Plan. Released in 2021, it envisions a larger role for nuclear energy and a correspondingly smaller role for LNG in 2030 (20% of the country’s energy mix) compared to 2020 (37%). While this is bad news for all LNG exporters, it is much worse for Russia given the relative absence of strategy, financing, and available pool of offtakers with which to attract new investments from Japan into its nascent Arctic LNG projects. Japan will also shy away from offering its liquefaction technology as an alternative to Western technology for fear of future secondary sanctions (Chyong et al. 2023).

Oil and LNG exporters from the Gulf stand to benefit from changes in Russia-Japan ties. As noted earlier, Gulf oil will continue to be sought after in Asia particularly in Japan, where a carbon levy will be introduced from around 2028/29 on fossil fuel importers such as refiners, trading houses and electricity utilities. Lower-emissions Gulf hydrocarbons are hence likely to become more attractive, including LNG from Abu Dhabi’s forthcoming Ruwais plant which will be powered by nuclear and solar energy. In comparison, decarbonizing the hydrocarbon sector is not a priority in Russia: the share of greenhouse gas emissions coming from the oil and gas industry in Russia is nearly twice as high as the global average, the industry’s methane emissions are highest in the world in volume terms, and the industry’s upstream methane emissions intensity is almost three times higher than in Saudi Arabia (Grushevenko et al. 2021; IEA 2022c). Admittedly, Japan’s imports from Qatar have declined precipitously as a result of expiry of long-term contracts in 2021. The former is, however, engaged in negotiations for new long-term supply deals. These should see Qatar regain its position among Japan’s top three LNG suppliers, especially in view of the re-direction of much of US LNG from Tokyo and the rest of Asia to Europe over the medium term as well as Japan’s wariness over Australia’s new LNG export rules.

What has not changed in Asian energy markets

Asia remains the key theatre of energy competition

Despite the significant increase since the start of the war in exports of oil from the Arab Gulf to Europe (Sim 2023a) and the conclusion of several multi-year LNG deals between companies from the Gulf and Europe – namely Qatar and Germany, Oman and Spain, Oman and France, and the UAE and France – Asia, not Europe, will remain the key theatre of energy competition between the Gulf states and Russia. This is consistent with the pre-2022 trend highlighted at the beginning of the article. The effects of the Russia-Ukraine war simply reinforce long-term energy trends in Asia as the world’s centre of gravity for demand growth in fossil fuels. In the case of Europe, by contrast, the war has only served to galvanize already robust efforts to electrify transport and industry, as well as scale-up renewable energy uptake. These efforts are in addition to the structural decline in Europe’s demand for fossil fuels – associated with demographics and energy efficiency policies – long before the war.

A granular fuel-by-fuel breakdown suggests that Gulf dominance of Asia’s oil market – which pre-date the war – is unlikely to be imperilled. Gulf states have long focused on Asia primarily in terms of energy exports (Figure 6), a prime example being the UAE which has consistently directed over 95% of its oil and gas exports to Asia. Labour flows and engagements in sub-contracting, non-oil trade, renewable energy financing, tourism flows, and cultural exchanges have followed in energy’s wake, resulting in an institutionalized, multi-layered, and enduring web of interactions which have “Asianized” the Gulf (Funabashi 1993; Janardhan 2020; Ehteshami 2015). These contrast with the relatively recent energy ties between Russia and Asia as well as the latter’s wariness over Russia’s repeated weaponizing energy in its relations with Europe, Poland, Bulgaria, Bosnia and Herzegovina, and the Ukraine. Indeed, India’s largest refiner, the Indian Oil Corporation, was at pains to point out the company’s commitment to long-term oil and gas supply relationships even as it increased oil imports from Russia as a response to a short-term price-driven opportunity (The Benny 2023). Asian energy markets are also keenly aware that Gulf oil and gas companies are investing heavily in greenfield and brownfield assets to raise production levels (IEA 2023, 68; Rystad 2023) in order to urgently monetize what is regarded as the world’s last oil boom; they are also expanding their fleet of ships, instead of solely relying on charters, to transport the additional volumes of oil and LNG (Mirza 2021; Reuters 2020b). The Gulf states are therefore capable of meeting Asia’s future energy demands. The contrast with Russia’s financial, legal, and technological constraints – which have been worsened by the war – is stark.

The Gulf’s current dominance in Asia’s gas market should also be unchanged over the next ten years. To date, no major shift in the flow of Russian gas from its traditional market, Europe, to Asia has taken place for two main reasons. First, there is neither an EU prohibition against imports of Russian LNG nor a ban against its exports by the Russian government; consequently, the EU continues to receive around 45% of all Russian LNG (Bruegel 2023). Efforts to re-direct this volume to buyers in Asia will only take place should one or both of these conditions change. In any case, the volumes for re-direction amount to around 14 million tonnes and constitute only a minor portion of Asia’s gas market size. Second, there are no Russian gas pipelines to Asia, except for one to China, as a result of the Soviet Union and then Russia’s laser focus on Europe. According to one estimate (IEA 2022b, 88), it would take Russia at least a decade to build the infrastructure to raise its gas supplies to Asia to a level close to its pre-2022 level of pipeline and LNG exports to the EU – assuming it can access financing and technology (for LNG) at a time when sanctions make this unlikely. In contrast, increased availability of LNG supplies from 2026 thanks to new projects coming online especially in Qatar but also in the U.S., Australia and Mozambique should result in an extended supply glut and a return to the lower global prices for gas in general, which will blunt Russia’s ability to make further inroads into gas markets in India, Japan, and China. The July 2023 agreement between the UAE’s state-owned gas entity and the Indian Oil Corporation on a 14-year LNG supply deal is a case in point.

Turning to the coal market, Asia will continue to be the market of choice for Russia, as was the case pre-2022. Asia is likely to continue relying on coal-fired power plants for decades. Much of its fleet of operational coal plants was built in the last 10 years compared to those in the US/Europe that are 40–50 old and approaching the natural end of their useful life spans. The lack of climate finance to phase out these coal plants or to build clean energy infrastructure, the absence of or low carbon price in many countries, as well as the significance for local employment (Indonesia and India) and the steel industry (China and South Korea) all mitigate against a swift transition away from coal, even if there had been no war and no discounted Russian coal. What the war has done is to accelerate the volumes of coal bought from Russia by its existing Asian customers (except Japan, see earlier discussion). Russia’s hold on coal in Asia is most likely to impact LNG exporters like Qatar since it reduces the incentive for rapid coal-to-gas switching, which in any case was already limited by the factors noted above. Even in countries where the share of coal is set to decline, gas exporters from the Gulf may not automatically benefit: in Japan, for example, gas is projected to play a reduced role in the power mix amidst a coal-to-nuclear switch (The Economist 2022).

China as key battleground state

At a country level, China will remain the main site of contention between the Gulf states and Russia, particularly over crude oil sales. Russia is likely to re-capture the top spot in 2023 and 2024 as long as generous discounts prevail. However, in the medium to long term, the Gulf states – not Russia – are expected to prevail in China’s oil and gas market. There are several key reasons for this.

First, the Gulf states have the feedstock to support China’s plans to reduce its petrochemical imports in favour of self-sufficiency and consequently, grow its high value-added chemical business. Alluding to Saudi Aramco’s mandate to expand oil production capacity by 1 million bpd to 13 million bpd by 2027, its Chief Executive noted that “ensuring the continuing security of China’s energy needs remains our highest priority – not just for the next five years but for the next 50 and beyond” (Nasser 2021).

Second, the Gulf states also have the financial resources to co-invest in this growing sector. Saudi Aramco’s recent final investment decision to acquire a 10% stake in an existing refinery in China plus to co-own and build a new petrochemical complex in China – while guaranteeing over 600,000 bpd of crude oil to these projects – underline the kingdom’s value to Beijing, and vice versa in terms of protecting Saudi Arabia’s market share there. The expected long-term decline in Russia’s oil production output and its financial constraints hardly make for an ideal partner for China.

Third, there appears to be little appetite for a second iteration of the “oil-for-loans” deal during the late 2000s when China provided loans and pre-financing to Russia to be repaid in the form of future oil deliveries (Meidan 2016). Russia had built up sizeable hard currency reserves and savings over the past decade and while these are being slowly depleted by the war, Russia is far from the dire conditions of 2009. Already political vulnerable from the Wagner episode in July 2023, the optics of going cap-in-hand again to Beijing would only reinforce Moscow’s “junior partner” status in the Sino-Russia relationship.

Turning to gas, China has demurred from taking a final decision on the construction of a dedicated gas pipeline (known as Power of Siberia 2) to redirect western Siberian gas from Europe to China, despite heavy pressure from Russia. Among the many reasons for Beijing’s non-committal stance is the fact that together with the existing smaller capacity Power of Siberia 1 originating in Russia, the two pipelines would present the latter with control over 44% of China’s imported gas needs by 2030 (Fickling 2021). This high level of dependence and vulnerability does not sit well for a country that has long practiced a well-diversified gas and oil import strategy. The gas exporting Gulf states no doubt concur, with Doha recently concluding two 27-year LNG deals with Chinese companies, the industry’s longest-ever supply pacts.

India’s rising fossil fuel exports from Russia, highlighted earlier in the article, begs the question of India supplanting China as the theatre of competition between Arab Gulf and Russian energy suppliers. One reason to believe this is not a game changer for the Gulf states lies in the discrepancies in import volume. China is simply a bigger – and hence more attractive – customer: it imports twice as much crude and petroleum products compared to India; it also imports four to five times more gas than India (Energy Institute 2023). Moreover, India’s coal-to-gas switch is making only slow progress compared to China’s low carbon ambitions. For instance, China has made more progress than India since 2012 according to the World Economic Forum’s Energy Transition Index (2023) and is exceeding the regional average in Asia. Another has to do with the limited potential for Russia to advance other forms of energy engagement with India. In the case of nuclear energy, India has a largely indigenous nuclear power programme today although Russian technology has been instrumental in building and operating Kudankulam, the country’s largest nuclear power plant. For example, buoyed by the successful commercial operations of its first indigenous nuclear power plant, the Indian government approved the installation of 10 new, indigenous reactors in April 2023. There does not appear to be significant room for Russia to leverage its world-class nuclear export programme to increase its energy profile in India, unlike in neighbouring Bangladesh.

Broadening of Gulf energy diplomacy in Asia

The post-2022 changes in Asia’s energy landscape as a result of the war also encompass those in the renewable energy sector. Unlike Europe which has intensified the transition to renewable energy sources as a consequence of the war, as underlined by a recent legal provision that increases the bloc’s renewable energy target from 32% by 2030 to 42.5%, the jury is still out on whether the war will retard or accelerate the transition in Asia during the next decade. Regardless of the pace, the war is unlikely to jettison the pre-2022 uptick in renewable engagements by some Gulf states in Asia. One example is Oman’s participation in 2019, through the Vietnam-Oman Investment company, in a 141 megawatt solar plant in Long An province in Vietnam. Another example is the acquisition, also in 2019, by the UAE’s Masdar of a stake in India’s Hero Future Energies, which aims to expand its solar energy portfolio in India to 5 gigawatts (GW) of installed capacity; it marked Masdar’s first contribution to clean energy in India.

With its ambitious target of a renewable energy share of 23% in the country’s power mix by 2025, up from a current share of 14%, dramatic growth in demand for air conditioning and hence electricity driven by a large middle-class and rising temperatures, as well as recent reforms to improve investment climate, Indonesia has been the focus of Saudi and UAE efforts (Wahyuni and Ardiansyah 2022). Prior to 2022, Masdar was already constructing Indonesia’s first solar power plant with a local partner and was considering a proposal to develop up to 1.2 GW of solar capacity in Indonesia for export via undersea cables to Singapore since the latter has a limited land area to scale up solar power generation. The momentum has continued into 2023 with its investment in a unit of Indonesia's state energy firm that produces geothermal energy and the creation of a joint venture, Solar Radiance, with a local partner to provide renewable energy solutions for rapidly growing industrial and commercial sectors in Indonesia. Not to be outdone, Saudi Arabia’s Acwa Power made its initial foray into the country when it won a tender in March 2022 for two floating solar plants; it is since mulling building a hydroelectricity plant to support the production of green hydrogen for a fertilizer facility in Indonesia.

Both Masdar and Acwa Power have publicly announced plans to massively scale up their renewable energy portfolios in line with their state patrons’ drive to diversify hydrocarbon-based economic growth. Masdar, for instance, intends to attain a clean energy capacity of 100 GW by 2030 from 20 GW in 2022, while Acwa Power’s target is for renewable assets to comprise 50% of gross power capacity by 2030 up from 33% in 2021 (Acwa Power 2021, 2; Masdar 2022, 5). In this respect, greater Gulf engagement in Asia’s non-hydrocarbon sector is to be expected. War-induced constraints along with general climate skepticism and lack of a national renewable energy strategy (Melnikov 2023; Mitrova and Melnikov 2019) mean that Russia cannot hope to compete effectively with the Gulf states on this front.

Conclusion

This article has argued that the intensity of Russia’s energy engagement with Asia is likely to increase in the short term as a result of its pariah status in Europe following the Russia-Ukraine war. Nevertheless, Asia as theatre of competition for Russian and Gulf energy exporters – and the position of the Gulf states as the dominant oil and gas suppliers for the region – are rooted in pre-2022 long-term trends that are highly unlikely to change. These are founded on Asia’s demographics, consumption patterns, domestic energy mix, and integration into the global economy along with the complementarity and comparative advantage of Gulf-Asia trade (Rutledge and Polyzos 2022; al-Tamimi 2013), all of which suggest largely self-reinforcing and path-dependent trajectories. While a temporary detour may occur – in the form of rising fossil fuel imports from Russia – a complete derailment of Gulf pre-eminence in the region’s energy market is unlikely. In this regard, the Gulf states do not perceive the Russia-Ukraine war as a “critical juncture” that will dramatically and permanently alter the trajectory of Gulf engagement in Asian energy markets. The same cannot be said for US LNG exports to Europe or for Russia’s energy monopoly in Europe (Paik 2022; NYT 2022).

Building upon the above analysis, there are further steps the Gulf states can take to further leverage changes in the energy market resulting from the war. They should not rest on their laurels but should build on already robust ties with Asia. Joint ventures and investments outside of the oil and gas commodity trade will be especially valued by the Gulf states since these align with their focus on economic diversification. Examples include tie ups for ammonia/hydrogen in bunkering and steel, localization of parts of the shipbuilding or solar module processes in the Gulf, and space cooperation among other fields.

At the same time, the Gulf states should explore opportunities that have opened up for them in Europe even though it has traditionally been a non-core energy market. Europe offers avenues in terms of oil arbitrage and petroleum product sales, long-term LNG contracts, and renewable energy investments. There are also opportunities for leading Gulf companies like Emirates Steel, Emirates Global Aluminium, and SABIC to increase market penetration of low carbon steel, green aluminium, and fertilizers respectively to replace Russian products shunned in Europe (Sim 2023a). Clean energy certificates available in some Gulf states can provide internationally-recognized verification to European importers regarding the low carbon claims of such products (Sim 2023b). In this regard, progress on concluding the long-stalled EU-GCC free trade agreement would be helpful; a future UAE push for a free trade deal with the EU is also not inconceivable given similar ongoing negotiations with the Eurasian Economic Union.

Finally, despite the intensification of competition from Russian hydrocarbons in Asia, the Gulf states should continue their positive engagement with Russia in OPEC+, disregarding suggestions that Russia be excluded from monthly quotas in response to difficulties with oil production and consequently increasing the scope for Gulf states to pump more oil at Russia’s expense (Faucon 2022). Despite the expected fall in oil production due to sanctions and other difficulties, Russia will still be the second largest oil producer by far in OPEC+. It is, therefore, in the interest of the Gulf states to manage longer-term influence over global oil production and prices within the grouping.

Returning to the theme of the Special Issue to which this article is part of, this article suggests that for the Gulf states, the Russia-Ukraine war is less of a radical “critical juncture” event than an accelerator of pre-existing policy trends in the Asian energy market. Three particular pathways of change hinted at in the article are particularly noteworthy; none of them emerged after the war although they have benefited from it. First, as a result of the war, Russia’s relative importance as an actor in the Asian energy market – and across all fuel segments – has increased, as highlighted in the article. Secondly, the war has reinforced the efficacy of relatively recent policy tools used to engage Asia. Nuclear diplomacy, clean energy diplomacy, and decarbonizing fossil fuels are being wielded by Russia and the Gulf states to strengthen their foothold in the fast growing Asian energy market (Aminjonov and Sim 2023). Lastly, the war has intensified the pace of implementing sometimes long discussed policy changes. Japan, for instance, has announced a return to nuclear power through restarting nuclear plants, extending the life of existing ones, and even developing new generation reactors. A recent poll even found that 53% of Japanese support restarting reactors so long as safety can be ensured – the first time a majority has favoured this in over a decade (Bakshi 2023). In India’s case, the government has finally moved forward with a roadshow to attract private investors to build the second phase of the country’s strategic petroleum reserve, a proposal first mooted in 2018. In other words, while the Russia-Ukraine war is generally framed as a “critical juncture” for the global energy market, a more nuanced perspective is probably warranted for Asia.

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Li-Chen Sim

Li-Chen Sim is an Assistant Professor at the Institute of International and Civil Security at Khalifa University in Abu Dhabi, UAE, and a non-resident scholar at the US Middle East Institute, Washington D C. She is a specialist in the international political economy of Russian and Gulf energy. Her research interests include energy transition politics in the Middle East, Gulf-Asia exchanges, and Russia-Middle East interactions. She is the author of journal articles, chapters, policy pieces, and books including Asian Perceptions of Gulf Security (2023), Low Carbon Energy in the Middle East and North Africa (2022), and The Rise & Fall of Privatization in the Russian Oil Industry (2008).

Notes

1 The terms “Arab Gulf states” and “Gulf states” are used interchangeably in this article. For the purpose of this article, they refer to the six member states of the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) and Iraq; they share a common geographical location on the Arabian Peninsula and they are hydrocarbon exporters.

2 An exception is Meidan et al. (2022).

3 Residual fuel oil is a type of petroleum product used mainly by power stations and in ships.