International Finance
July-August 2019 Magazine Ports and Shipping

Mideast port building: A clever neutrality is key

The Gulf Arab nations are building new ports by astutely leveraging their relationships with China and the US and without precipitating a conflict

The Middle East governments have been heavily investing in port projects as part of their economic diversification strategies since the early part of this decade. These Middle East ports lie on major transhipment routes through which much of the world’s crude oil is moved and the governments in the region seek to control the supply of crude and leverage the power of the ports to benefit their economies.

Equally important is the fact that a number of projects related to the diversification strategies are closely connected to the development of these ports. A key aspect of the development of these ports is the involvement of China or Chinese companies. How does this fact affect the relationships of these Gulf states with the world’s extant superpower the US? How will these Gulf economies manage to make the make the ports a success amid the increasingly bitter rivalry between the US and China?

Oman’s Singapore

The port town of Duqm in Oman is modelled on the world’s maritime capital Singapore. Duqm is investing efforts in its maritime activities to become a major transhipment regional hub, connecting the Gulf to the world’s busiest maritime routes.

Significant developments in Duqm’s economic zone include a multi-purpose harbour, a refinery targeting 230,000 barrels of crude oil per day, and the region’s largest dry dock with an estimated capacity of 200 ships each year. The port is equipped with a ship repair yard and drydock facility, which is the first of its kind in Oman. With that, Duqm is expected to become the centre of Oman’s non-oil economy.

The port is rapidly changing the maritime power equations in West Asia. Experts believe that the port has the potential to develop into one of the largest ports in the Middle East, primarily because of its strategic geopolitical location. Tehran’s frequent threats to block oil shipments passing through the Arabian Sea passageway have marked Duqm port as an alternative hub for shipping. The port sits on the Arabian Sea and could also provide smooth access to the Indian Ocean for commodities such as oil and gas arriving from the Gulf states.

With the port, the maritime industry will gain access to the Middle East as in the case of Jebel Ali without having to venture into the Strait of Hormuz, which is a strategic link between the Middle East crude producers and key markets in Asia Pacific, Europe and North America. It is through this passageway that a third of oil shipments pass. Duqm’s geopolitical status suggests that it is halfway through with challenging Jebel Ali by opening up major port access to the main sea channels.

China’s BRI

For China, the Duqm port is critical to its Belt and Road Initiative, which is a state-backed campaign for global dominance and a strategy to boost Chinese investments around the world.  

Wanfang, one of the top Chinese investor companies actively involved in Duqm’s development has pledged to invest more than $10 billion in an effort to establish a Chinese industrial city. The investor is aiming to introduce more Chinese investors to the area. For that reason, it executed several campaigns in 2018 across many Chinese prefectures.  

It appears that the Omani authorities have provided the investor with all the necessary facilities, including foreign manpower. The investor was also granted permission to set up a Chinese engineering company in Oman. These developments suggest that Oman and China have moved to the next phase of their strategic partnership, pointing to the fact that the Chinese influence in the port town is only expected to increase in the coming years.

The port is seen as a likely operating base for Chinese businesses near chief export markets in the Gulf, the Indian subcontinent, and East Africa that they are planning to develop. In addition, Duqm is in close proximity to some of the raw materials which the Chinese companies might require for that purpose. For example: the oil and gas resources in the Gulf. In addition the Duqm port is connected to the Mineral Line railway link that Oman is building as part of its diversification strategy.

The outcome of Chinese investments will benefit Duqm and Oman. Oman’s state finances have been hurt by low oil prices. This means the country is seeking foreign cash inflow to establish new industrial zones that will in turn create better job opportunities for Omani citizens. The government of Oman has not been able to provide sufficient employment for all nationals.

But it is uncertain whether these Chinese investments worth more than $10 billion will materialise because of the undue pressure on Chinese companies and the current economic conditions. However, if the investments take place as promised, then Oman will see financial gain to the tune of more than half of its current foreign direct investment.

Duqm’s competitive advantage is that it is still new unlike Jeddah or Dubai. Although it requires time to mature, it is considered a better prospect than those ports. Because of Duqm’s strategic geopolitical location offers wide access to Arabian passageway, it is seen as a lucrative port destination. But what’s more appealing is that it is situated outside of the Strait of Hormuz, uprooting any likelihood of conflict for the shipments when regional tensions rise.

Chinese investments in the Middle East have incrementally increased in this decade. A research operation at Italy’s Torino World Affairs Institute ChinaMed observed that in 2009, China accounted for less than 1 percent of the foreign direct investments in the region. The Belt and Road Initiative in part is responsible for the increase. The ratio rose to more than 5 percent in 2015.

Three years ago, China was ranked as the top foreign investor in the Arab world, pledging $29.5 billion in investments, according to Kuwait’s Arab Investment and Export Credit Guarantee. The country was followed by the United States as the second biggest investor accounting for $7 billion worth of investments.

For now, Oman Wanfang is planning to develop over 11 square kilometres. This way, the Chinese will become Duqm’s biggest prospective foreign tenants. The company’s first facility is a $138 million complex built to store building materials and distribute them in the region. The complex is expected to be complete in 18 months. The permission granted for the project will drive more negotiations between Oman Wanfang and the Omani government. It might also aid Chinese investors in Duqm to obtain loans from Chinese banks, largely controlled by the Chinese government.  

Another fact pointing to the Chinese government’s efforts in strengthening the ties with China is that it recently borrowed $3.55 billion from Chinese financial institutions. This deal is said to be the largest by a Gulf borrower in the Chinese market.

Despite these developments, analysts do not expect China to shift all of its ‘regional trade activities’ to Duqm because the UAE still remains its top trading partner in the region.

Allied projects

A number of key projects allied to the Duqm port are also coming up in the surrounding area. For example: Oman Oil Marketing Company will construct an in-port bunker terminal at the Duqm port. It has already secured the board’s approval for 30,000 cmm of tankage capacity. On May 13, the company’s board also approved  the required ancillary equipment and facilities for the terminal. The bunker terminal will supply marine fuels to ships in and around the port and contribute to its development, Oman Daily Observer report said. Another project is the Duqm Refinery and Petrochemical Industries’ contract to John Wood to provide designs for a proposed onshore petrochemicals complex in Duqm’s economic zone.

With the continued developments, Duqm Port recently signed four lease agreements for a nearly 70,000sq m logistics land to be leased out for 24 years. The logistics land will mainly accommodate the sector-related industries for import of goods. The port is a joint venture between the Oman government and a Belgian consortium led by Antwerp Port is assigned to take charge of several roles including port authority, terminal operator, and landlord.

China here, China there

Kuwait is another Gulf Arab country leading the region with high investment sea port infrastructure. The Mubarak Al Kabeer port on the Bubiyan Island which is valued at $16 billion is Kuwait’s key logistics project that is believed to be the driver of economic growth and a lynchpin of its Kuwait Vision 2035 diversification strategy.

If Iraq and Kuwait do not clash over their differences with regard to the development of the Mubarak Al Kabeer port, traders and companies are expected to prefer the port with least cumbersome procedures, rules and regulations as well as the lowest export and import tariffs.

The Mubarak Al Kabeer port on the eastern coast of Bubiyan Island can pressurise Iraq’s narrow window to the Gulf. If both countries prioritise economic gain over political point scoring, the development of the port will be seamless. The primary economic purpose of the port is to serve the markets in Iraq and beyond and Kuwait has an eye on the European markets as well in the long term.

Allied to Kuwait’s Mubarak Al Kabeer Port project is the $9 billion mega project of the Silk City. Stretching from Mubarak Al Kabeer Port to Al Subiya, where the causeway comes ashore, Silk City is another lynchpin is Kuwait’s diversification plans. In the wider strategy involving the Silk City, China is again a major player. Kuwait and the People’s Republic of China signed several memorandums of understanding including one to start building the first phase of Silk City. The Silk City, in fact, fits into the maritime component of China’s Belt and Road Initiative.

The Mubarak Al Kabeer port completes a string of ports that China is involved in the Middle East region. These ports include the Khalifa Port in Abu Dhabi, Duqm in Oman, Jizan Port in Saudi Arabia, and Port Said in Egypt. Kuwait connects this necklace of ports by connecting the overland routes of the New Silk Road through Asia and into Iran and Iraq

Currently, Kuwait houses the world’s sixth largest oil reserves. The project will help the country to widen its capabilities and reach out to the Red Sea, the Mediterennean, Turkey, and Eastern Europe.

No conflicts with China

It appears that China’s presence near Mubarak Al Kabeer Port is likely to be favoured by Kuwait because the People’s Republic of China is often recognised as a neutral party in that part of the region. So China’s position is relatively secure in the region. Although the countries in the region have conflicts with each other, they seldom have conflicts with China.

With Duqm, a key concern is that China’s main geopolitical rivals hold considerable stakes in the port. India, for instance, has developed a major interest in the Duqm Special Economic Zone including Sebacic Oman, a $1.2 billion project for the largest Sebasic acid plant in the Middle East. India has also signed an agreement for the development of a $748 million Little India integrated tourism project. The UK is also signing a deal to setup a permanent naval base in Duqm.

Recently, the US confirmed a strategic port deal with Oman which will secure better access for US ships to the Gulf region. More importantly, reduce the need for ships to pass the Strait of Hormuz. In a statement, the US embassy in Oman had said that the agreement reinforced both countries’ efforts to promote ‘mutual security goals’.

The US’ interest in Duqm port is strategic. The Duqm port can easily harbour large ships and is big enough to even turn around an aircraft carrier. China will not be pleased with the US trying to firm up its presence in Duqm. In the past, China has explicitly expressed its disapproval of the US military facilities.

However, the US perceives the Chinese investments in Duqm as a commercial move and not a military arrangement. The US is relatively relaxed about the Chinese involvement in Duqm despite its obvious interest in the port. The reason is because a portion of the Duqm industrial zone reserved for the Chinese does not have any exceptional developments as yet and the US believes that the Chinese might not invest all the amount that they promised.

Despite the fact that the presence of China in such a key project like Mubarak Al Kabeer is bound to make Kuwait’s global ally the US wary, Kuwait is seen as cleverly leveraging its relationships with both sides to its own benefit. It is in Kuwait’s interest to maintain friendly relationships with its neighbours especially Iran and Iraq and develop a port which has the potential to serve the Mediterranean and Europe.

The tug-of-war between the US and China over Duqm has implications for Oman. However, so far Oman has managed to keep this rivalry form developing into a conflict while leveraging relationships with both superpowers to its advantage. The ability of the Gulf states to maintain a smart neutrality amid the heightening US-China conflict while ensuring the support of the geopolitical rivals to develop their logistics infrastructure and economies is seen as astute diplomatic manoeuvring.

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