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Saudi-Indian energy to power the future?

Despite the historical and strategic relations that link Riyadh with Islamabad, the kingdom cannot ignore the rise of economic power of New Delhi

Dr. Naser al-Tamimi

Published: Updated:

The Saudi Crown Prince, Deputy Prime Minister and Defense Minister Salman bin Abdulaziz, accompanied by a large contingent of high-ranking Saudi officials and businessmen, is on an official visit to India as part of a foreign tour which also includes Pakistan and Japan. The tour of the Crown Prince will come in the wake of the visit of the Indian Finance Minister P. Chidambaram to Saudi Arabia last month, in which he signed several agreements that will certainly contribute to strengthening the growing relations between the two countries.

Despite the historical and strategic relations that link Riyadh with Islamabad, the kingdom cannot ignore the rise of economic power of New Delhi. Indeed, India was the 10th largest economy in the world in 2012 ($ 1.84 trillion) and Saudi Arabia 19th ($ 712 billion) as measured by nominal gross domestic product (GDP) according the latest estimates by the International Monetary Fund (IMF). These two economic giants have a good opportunity to push the relations towards a strategic level.

Growing interdependence

Saudi-India economic relations have shown remarkable growth in the last few years. In fact since King Abdullah's visit to New Delhi in 2006 and the reciprocal visit by the Indian Prime Minister Manmohan Singh to Saudi Arabia in 2010, the trade between them has doubled more than 3 times. If this trend remained prevalent, the trade between the two countries could double again in the near future and move on to new levels.

Despite the historical and strategic relations that link Riyadh with Islamabad, the kingdom cannot ignore the rise of economic power of New Delhi

Dr. Naser Al-Tamimi

Indeed, Riyadh and New Delhi are expected to expand trade and cooperation and joint ventures in energy, information technology, telecommunications, pharmaceuticals, health services, biotechnology, agriculture, infrastructure projects, financial services and educational / training opportunities.

In 2012, Saudi Arabia was the 4th largest trade partner (excluding the EU) of India and the bilateral trade reached almost $ 42 billion, and hit over $ 36 billion in the first 9 months (January-September) of 2013 according to IMF data. For Saudi Arabia, India is the 5th largest market for its exports, accounting for nearly 6.3% of its global exports.

In terms of imports by Saudi Arabia, India ranks 6th and is the source of around 8.2% of Saudi Arabia's total imports. Consequently, the trade between the two countries are on the verge of a strong surge over the next few years, thus it makes sense for Riyadh to strengthen its ties with New Delhi.

Booming oil trade

Acknowledging India's importance as one of the largest and fastest growing economies in the world, Riyadh expressed its readiness to engage New Delhi and fulfil its oil requirements on a long-term basis. In this regard, cooperation in the oil sector is a driving force in Saudi-Indian ties. Saudi Arabia is the world's largest oil exporter, whereas India has become the world's fourth-largest oil consumer (after US, China and Japan).

India imported between 60% and 70% of its oil from the Middle East and Saudi Arabia currently is India's largest oil supplier, at about 19 percent of oil imports (about 735,000 barrels per day).

From the Saudi point of view it makes sense to look to India as a major market for its energy products. First, India could become the second-largest oil consumer over the next two decades. Subsequently, crude oil imports from the Saudi kingdom are expected to double over the next decade or two. Apart from seeking enhanced energy supplies to India, Saudi companies (Aramco and Sabic in particular) are looking for major investment opportunities in India.

Skills shortage

Above all, Saudi Arabia is expected to become the world's third largest exporter of petrochemical products with its market share poised to reach 10 percent by 2015.

On the other hand, Saudi Arabia is encouraging Indian companies to take advantage of investment and growth opportunities in the Kingdom. Furthermore, Saudi companies also seek to boost engineering and project skills at national companies by getting international companies to work with local partners on projects.

Perhaps more importantly, Khalid al-Falih, the President and Chief Executive Officer of Saudi Aramco noted recently that a skills shortage is holding back growth in the energy industry.

In that context, Saudi companies may tap countries such as India looking for professionals as well as experienced talent and to develop technology, applications and solutions to meet the needs of an increasingly sophisticated business environment and also address sustainability related issues.

Energy for the future

During the 1990s India then began to pursue a policy of openness to the outside world. As a result of this and other gradual reforms, India has become one of the fastest-growing economies in world, with annual GDP growth averaging over 6 percent between 1990 and 2012.

A rate that the country is expected to sustain over the next two decade. Ultimately, the Centre for Economics and Business Research in London predicts that India overtakes Japan in 2028 to become the world's third largest economy.

In this context, India's growing appetite for oil is the product of the country's 20-year-long economic boom, which has seen expanding external trade, rising incomes, a growing population, industrialisation and increasing urbanization. The International Energy Agency (IEA) forecasts that India could import 2.6 million barrels per day (mb / d) of crude oil in 2014.

While, the U.S. Energy Information Administration (EIA) in its recent annual report projects that India may add another 2 mb / d over the next decade. In the long term, BP's analysis of projected trends, India will eventually be importing around 6-7 mb / d, roughly 85-90 percent of its future petroleum needs by 2035. In this context, Saudi-India relations are promising and may develop steadily over the coming years

Taking growth seriously

Given the structure of its economy, Saudi Arabian exports are geared very much to the major oil consumers in the industrialised world, India and China. Japan was the largest export market in 2012, but China is expected to overtake it in the next few years, with India becoming the second largest market and the US and Korea being the third and fourth largest export destinations respectively according to an HSBC forecast report. Thus, Riyadh must seriously take into account its growing ties with India.

Against this backdrop, from the perspective of Saudi investors, accelerating additional structural reforms remain essential over the longer term to maintain the high growth rates in India.

Business Monitor International (BMI) noted that India’s energy sector still dominated by state-controlled enterprises, although the government has taken steps in recent years to deregulate the industry and encourage greater foreign participation. Regulated prices also have impeded production growth and remain a deterrent to foreign investors.

Furthermore, a drawn-out bureaucratic process and favouring of national oil companies is hindering opportunities for private and international companies. Additionally, India's low scores for corruption and physical infrastructure undermine its overall performance.

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Dr Naser al-Tamimi is a UK-based Middle East analyst, and author of the forthcoming book “China-Saudi Arabia Relations, 1990-2012: Marriage of Convenience or Strategic Alliance?” He is an Al Arabiya regular contributor, with a particular interest in energy politics, the political economy of the Gulf, and Middle East-Asia relations. The writer can be reached at: Twitter: @nasertamimi and email: nasertamimi@hotmail.co.uk

Disclaimer: Views expressed by writers in this section are their own and do not reflect Al Arabiya English's point-of-view.