G.C.C., Iran Look to Sea Trade to Reduce Dependence on Oil

Continuing low oil prices have prompted Persian Gulf states to diversify their heavily petro-dependent economies. This issue is forcing the oil-rich states to invest and expand their potential as international trade hubs as a pathway away from the time bomb of single commodity exports. As many Gulf states have outlined in economic plans, as well as developed on the ground, maritime trade is an increasingly essential link connecting the Middle East to the global economy. Continual expansion across the region in maritime trade has created a race to secure a dominant position in this industry. Once small fishing villages are currently transforming into large trade hubs, which will play an increasingly important role in the global economy.

Saudi Arabia

This rapid expansion is most apparent in Saudi Arabia. With the creation of multiple multibillion dollar economic cities, Saudi Arabia is determined to become one of the world’s top economic powers. Riyadh has set a goal of non-oil exports from 16 percent to 50 percent in the next 15 years. The dedication of these ambitions is apparent in the continued development of the Jazan Economic City, where the Saudi government has contracted the Indian Gammon Group to bring in $20 billion to help develop the economy in the made-from-scratch city. The Port of Jazan stimulates the city’s economy too, providing easy access of Saudi goods to the world market. The kingdom also hopes to increase its position in the Logistics Performance Index, a ranking of the countries with the best logistics infrastructure, from , underscoring the importance which the Saudi leadership places on becoming a world trade hub.

A similar example of the Saudi city-from-scratch method is the King Abdullah Economic City and Port. King Abdullah Port (K.A.P.) has experienced a rapid expansion of its own, opening a fourth berth and increasing from 2 million twenty-foot equivalent units (T.E.U.) in 2014 to over 3 million in 2015. In addition, the port is planning on the completion of two roll on/roll-off berths for vehicles by the end of 2017, with the eventual aim of completing a fifth berth bringing the total annual capacity of Car Equivalent Units (C.E.U.).

Despite the rapid expansion of the port, the main source of income remains the service of trans-shipment vessels, accounting for 73 percent of the port’s total business. The port’s geopolitical advantage lies in its location on Saudi Arabia’s western shore, bypassing the choke point in the Strait of Hormuz, which Iran has continued to use as leverage, increasing the total cost of shipping in the area. K.A.P. takes advantage of its proximity to the Suez Canal, which attracts of annual worldwide maritime shipping, amounting to over 11,000 vessels per year. The attractive location and new state of the art facilities have already attracted a major contract with Maersk Line to service some of their largest vessels making their way from Asia to Europe and North America. This kind of expansion into international trade provides an excellent source of diversification and continued growth, which the Saudis are pursuing in order to foster the high level of stability they hope to achieve in the next 15 years.

The United Arab Emirates

One state already seasoned in the benefits of tapping into international trade is the United Arab Emirates. The historical center of trade in the Middle East, Dubai DP World’s Jebel Ali is the only port in the Middle East to be ranked among the international ports by quantity. The Emirate of Dubai is a shining example for other Gulf Cooperation Council (G.C.C.) states in terms of diversifying their economy through trade logistics and the industrial sector ranking as the top contributors to national G.D.P. Even with their historical dominance, they are keeping their hold on trade in the region, recently updating Terminal 2 to increase the overall total capacity of the port to T.E.U. In addition to the increased capacity, Dubai is capitalizing on its pre-established dominance in the field by branching out into various maritime sub-industries, including pharmaceuticals, fabricated metals, fast moving consumable goods, and machinery and equipment. The Dubai-based maritime giant has even stretched beyond its own borders, investing heavily abroad with over $1 billion in India and a planned joint venture in Russia lined up in the near future. These foreign investments will help DP World to achieve the T.E.U. goal they have set for worldwide operations by the year 2020, ensuring that Dubai will remain a leader in the global maritime industry.

Similarly, Abu Dhabi seeks to further diversify its economy to improve economic durability, though the oil-rich emirate trails Dubai in this regard. Their two main ports, Kizad and Port Zayed, are currently undergoing massive expansions, increasing the total capacity by nearly 400,000 T.E.U. between 2014 and 2015, raising to a total capacity to . Additionally, three new ship-to-shore gantry cranes and ten rail mounted gantry cranes are planned to be between 2016 and 2017. Beyond the docks, Abu Dhabi has already 50 major investors to help create the Khalifa Industrial Zone Abu Dhabi in Kizad. The project is planned to reach nearly 420 km2 of special economic zone, an attractive incentive to those in the fields of manufacturing, trade and logistics that will be crucial to the creation of a diverse economy for Abu Dhabi as well as the greater U.A.E.

On the opposing end of the U.A.E. spectrum is the oil- and gas-starved Emirate of Fujairah. However, as the U.A.E. becomes more integrated, Fujairah’s position, south of the Strait of Hormuz, has become of increasing importance in the exportation of oil from Abu Dhabi, with estimates predicting that half of Abu Dhabi’s oil will be shipped via Fujairah in the near future.

Fujairah already has major maritime capabilities, capitalizing on trade routes linking Asia to Europe that have made the Port of Fujairah the world’s second largest refueling station (behind Singapore). The Emiratis are determined to evolve this port and increase the percentage of import/export shipments through the area. Part of this effort includes the construction of the International Petroleum Investment Company Pipeline (I.P.I.C.) which, once completed, will pump nearly barrels a day through to the port, creating a substantial asset. Though the I.P.I.C. has endured recent financial difficulties, the state-owned investment company’s recent merger with fellow state-owned giant Mubadala has an S&P rating of AA in the long term, suggesting that creditors will continue to provide funds.

Oman

South of the U.A.E., Oman is also taking advantage of the many companies unwilling to go to greater lengths in order to enter the Strait of Hormuz. The Port of Duqm is playing a key role in the heavy traffic that passes through the area. The port is one of the largest ship repair yards in the region with only marginal amounts of import/export trade, having a current capacity of only 250,000 T.E.U. annually. Oman is eager to create an international hub and is currently floating a tender for the construction of a commercial berth, which would increase the Port of Duqm’s capacity to annual T.E.U. The project is ambitious with the tender dredging and reclamation, construction of a jetty structure and topside facilities inkling product storage tanks, dry bulk facilities, pipelines, building, roads, and all accompanying infrastructure.

On top of the large amount of work, the timeline ambitiously hopes that the construction of the pipeline to the in-land Saih Nihayda Gas Field will be completed by the end of 2018. Upon completion, the gas field will have the capacity to export a daily cubic meters of gas to Duqm. There is also a $6 billion refinery being constructed in the economic free zone that, when completed, will produce barrels per day. While neither the pipeline nor refinery are the largest in the region, they would become highly sought after by Saudi Arabia and other G.C.C. members should Iran ever close the Strait of Hormuz.

Iran

The Islamic Republic itself is also rapidly expanding its export capabilities as it re-enters the world market. Western companies such as Royal Dutch Shell are pursuing new opportunities in Iran, the world’s last untapped economic goldmine. The refinery at the port city of Bandar Abbas is undergoing major improvements, with investments of . The improvements will increase the refinery’s daily production capacity to 6 million liters and improve the overall quality of the product. In a coordinated effort, the construction of pipelines from to Rafsanjan terminal and the Gulf Star Refinery will redeveloped pump stations in Bandar Abbas and nearby Ghotabad and Mehraran in order to move supply through to central Iran. The construction of 18 new storage tanks totaling cubic meters will connect to the Gulf Star refinery and the existing Bandar Abbas Oil Terminal, expanding the storage capabilities of the refinery. The high amount of activity demonstrates that Iran will waste no time re-entering the market.

Further down the coast, the Chabahar port is also undergoing major improvement with the financial backing of India. Designed to compete with major G.C.C. ports, Chabahar also provides a deep water port capable of taking on heavier tonnage than Bandar Abbas. India Ports has $85 million into the construction of two new berths. India has not stopped there, with a total investment of around $500 million into the port, which, in addition to providing strategic footing in the Gulf, could reduce the shipping time from India to Europe by as much as . Chabahar demonstrates an increasing trend of China and India investing in closer ties with the Gulf in order to secure energy for their expanding economies.

Russia also factors into the equation. At trilateral talks in Baku on August 8, President Vladimir Putin joined his Iranian and Azeri counterparts to the International North-South Transport Corridor (INSTC) project, a Russia-Azerbaijan-Iran-India trade nexus linking the subcontinent, MENA, the Caucasus, Central Asia and Europe. This promising multi-modal trade network, which includes rail, road, and ship transport, relies on Iran’s Bandar Abbas. Geopolitical implications for North-South and East-West relations are significant given that INSTC provides Russia with a commercial corridor to the route’s southern hub in Mumbai (and by extension the rest of the subcontinent, East Africa and the G.C.C.), bypassing the Suez Canal. For New Delhi, INSTC offers India a more cost-effective trade route to Eurasia and Central Asia with Iran’s Chabahar port as a focal point, bypassing Pakistan's Gwadar port away across the Pakistani-Iranian border. Ultimately, it places Iran at the center of the project as a major transit hub for trade between two major global economies.

The Need for Stability

The continuing trend of development in the Gulf, both by G.C.C. states and Iran, demonstrates an ongoing effort to secure economic stability despite a depression in oil prices. With the additional increase of competition from a freshly sanction-free Iran, the oil producing Gulf states are unlikely to reduce production, thus ensuring prices remain low for the foreseeable future, and emphasizing the importance of a diverse economy. The rapid expansion of trade capabilities among all Persian Gulf states demonstrates their dedication to reform and positions them for a potential new era of maritime dominance.

Situated between several continents and within close proximity to the world’s most important water passages, these major ports represent valuable opportunities for the southern Gulf littoral states to gain greater leverage in the global economy as international trading hubs between the East and West. Based on the strategic visions set forth in several G.C.C. states, Gulf leaders view these ports as cornerstones of a strategy aiming to diversify their economies away from oil by growing the logistics sector and by extension others such as aviation, roads, railroads, shipping and warehousing.

That the G.C.C. states and Iran share a similar vision for maritime trade expansion as a means to diversify their economies from oil may work as a stabilizing factor in their relations. Prospects for shipping trade for the coming decade are based on estimates of supply and demand in addition to freight derivatives, such as dry bulk and oil tanker rates. Insurance is also part of the calculus as shipping companies are on the lookout for risks involving not only port management and competition, but also any emerging maritime threat that will boost their insurance premiums. Thus, it is in the interest of all Gulf states, including Iran, to maintain stability in the Persian Gulf waters if they are all indeed betting their financial future on becoming maritime trade hubs.  

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