One of the most interesting trends to emerge over the past five years in the GCC has been the surge in Chinese investments and contractor successes in the region. These changes have had a substantial impact on the dynamics of project development in the GCC and created a much-needed impetus for economic growth during a period of lower oil prices.The trend is notable because the Chinese presence in the region was not always prevalent. While Chinese contractors had been winning work in the GCC since the 1970s, it was only in the period from 2003 onward that they really began to make an impact. Their entry and rise in the region is, therefore, an interesting case study in how this was achieved.Historically, from an investment and contracting perspective, the Middle East as a whole was firmly under the Western sphere of influence. The US and UK helped discover and then developed the region’s oil reserves, joined later by French and Italian companies. On the back of this, the more complex engineering and technical infrastructure to produce, process and export the region’s vast oil and gas reserves was undertaken by contractors from these nations.From the 1960s onward, and particularly after the oil price spike in 1973 which gave the six GCC states unprecedented amounts of new income to spend, these same contractors branched out to build much of the region’s power and water infrastructure, transport networks and telecommunications systems.Bechtel, for example, has managed the development of the enormous Jubail industrial city since the 1970s. Fluor Corporation built Saudi Aramco’s first processing facility in 1948 and later went on to build Saudi Arabia’s master gas network. France’s TechnipFMC established one of its first overseas engineering centers in Abu Dhabi and has been involved in much of the development of the emirate’s hydrocarbons infrastructure since.This strong grip among European and Western contractors was reinforced by the international oil companies’ (IOCs) holdings in the various national oil companies (NOCs) of the region. Until its full nationalization in 1980, Saudi Aramco’s main shareholders had been the predecessors of today’s ExxonMobil and Chevron Corporation. In Oman, the UK/Dutch Shell was and remains the principal foreign stakeholder in Petroleum Development Oman (PDO), while in Abu Dhabi, the same three IOCs plus the UK’s BP and France’s Total, among others, were the primary long-term shareholders in the Abu Dhabi National Oil Company’s (ADNOC) various operating companies and their concession agreements.History, familiarity, and national interest meant that most major project contracts on the Arabian Peninsula were therefore won by large, experienced contractors from the West. Over time, this was extended to the civil contracting sector too. British contractors, in particular, benefiting from the UK’s strong colonial links with the region, were instrumental in building the early housing, utility, and transport infrastructure across the Gulf.For the GCC states and their NOCs, this was an acceptable comprise. In return for their security, oil production and marketing expertise, and purchase of crude products, it made sense for companies of both vendor and supplier to be closely entwined. Laws requiring local partners’ majority shareholdings in foreign companies operating in the region also meant that local merchant families and royal family members could participate and profit from government spending.For 50 years from the discovery of oil in the region until the 1990s, this economic status quo prevailed in the region. The first signs of a change to this established order came with the gradual increase in Japanese influence.Resource-poor Japan has long recognized the strategic importance of the region from where it imports more than 80% of its energy needs. In 1958 a consortium of Japanese refiners won a 40-year operating concession in the Divided Zone shared by Kuwait and Saudi Araba. This was followed a decade later by another Japanese group winning the production rights to the small, but significant Abu Dhabi Oil Company (Adoc) concession.The entry of Japanese interests in regional oil and gas production opened the door to Japan’s two major engineerings, procurement and construction (EPC) contractors, Chiyoda Corporation and JGC Corporation, which won their first contracts from the region in the 1960s.However, it was not until the oil price shock of 1973 that Tokyo really began to increase economic ties and influence in the region. The same year, Mitsui took a share in ADNOC LNG, and Tokyo Electric Company (Tepco) was the first recipient of Gulf LNG exports four years later.In 1979, Japan expanded its Adoc concession area, and then between 1982 and 1989 took three sizeable minority stakes in Abu Dhabi’s largest offshore oil fields. Japanese corporations Mitsui and Marubeni were early shareholders alongside Exxon and Total in Qatargas 1, established in 1984 to export LNG. Chubu Electric was the foundation customer for the first deliveries in 1997.The highpoint of Japanese influence in GCC projects came in 2005 when Sumitomo Chemical teamed up with Aramco to announce the Petro-Rabigh integrated refinery and petrochemical complex. At the time, the investment was the largest of its type ever undertaken.Little would it be known at the time, but the $15bn Petro-Rabigh project would turn out to be the zenith of Japanese influence in the regional projects and contracting markets.Ironically, the underlying cause of the Japanese decline in influence in the region came from their closest rival. Whereas Western firms had tied up the region for much of the 20th century, with some Japanese input, the first decade of the millennium in the GCC would come to be almost completely dominated by Korean contractors.Korean firms had long been active in the region, but their roles were limited to manpower-intensive, but technologically less complex civil infrastructure schemes such as ports and water infrastructure schemes like the Great Manmade River project in Libya started in the 1970s. For a while when oil prices were in a slump during the 80s, and 90s and South Korea experienced a construction boom, Korean contractors’ activities in the region were minimal. It was not until 2003, and the gradual rise in oil prices that they began to return.With the full support of their government, Korean firms targeted the GCC as the number one international market. Their main challenge until that point in the region was their inability to be prequalified for major oil and gas projects. A perceived lack of technical expertise and quality meant that they had never been able to penetrate the lucrative Saudi Arabia and UAE markets, and had historically been restricted to Kuwait alone in the region. They were similarly hampered by other contractors and consultants in the market which lobbied to keep them from the prequalification shortlists in order to limit competition.Two major factors helped the Korea drive. Firstly, the global economic boom of 2003-2008 drove up EPC costs and stretched contractor workloads to the limit. Keenly priced and aggressive in risk and timeframes, Korean firms were able to offer an attractive alternative to their pricier and more risk-averse European, US, and Japanese competition.Second, two successfully delivered major downstream oil EPC contracts in Abu Dhabi and Qatar proved that Korean contractors could deliver to time and budget, and meet the quality expectations of clients. From seemingly out of nowhere, Korean contractors like Samsung Engineering, Hyundai Engineering ＆ Construction, and Daelim Industrial Company, began to win contract after contract. In 2012, Korean firms had won an incredible 64% of all major EPC contracts in the GCC from almost nothing a decade earlier.Korean success culminated in late 2009 when Abu Dhabi announced that Korean technology had outbid its Japanese, US, and French competition to win the $25bn-plus contract to build the GCC’s first nuclear power plant. The award stunned the Japanese in particular and cemented South Korea’s dominance of the energy projects market in the Gulf.In face of this onslaught and unable to compete, the traditional market leaders like Technip, Saipem, Fluor and Bechtel withdrew from large EPC work in the region and focused increasingly on higher-margin front-end engineering and design (FEED) work in which there was considerably less competition. Others like JGC and Chiyoda, the latter of which was stung by losses on the Qatar LNG program, largely withdrew from projects in the region, period.But this period of dominance was not to last. While Korean contractors had been extremely successful in picking up contracts, in some cases, they had underestimated contractual risks. From 2010 onward losses began to mount on their balance sheets. The attitude toward risk began to change, and they began to be less aggressive in bidding. The result was a sharp fall in contracts won by Korean companies over the past five years as they retreated to more profitable and less risky projects closer to home.The decline of Korean contractor influence in the region has created a vacuum for which other contractors can take advantage. The traditional European and US firms have been able to increase their market share, but it is the Chinese, and to a lesser extent, Turkish and Indian contractors who have most been able to benefit.Chinese companies have historically not had many successes in the GCC. Other than a handful of projects awarded to Sinohydro and Sinopec, Chinese firms were not active generally in the region until the oil price boom starting in 2003. Until that time, the regional market was still small compared with rapid development in East Asia, and strong local and international competition meant that the Middle East was not a chief target market.The gradual rise of oil prices from 2003 onward altered that view. The increase in government revenues resulted in a massive rise in project spending across the GCC, particularly in real estate as some countries like the UAE, Qatar, Bahrain, and Oman relaxed laws prohibiting foreigners from owning property.Civil construction firms like China State Construction, Sinoma International, and China Railway 18th Bureau were all able to capitalize on the significant number of project opportunities available. Total contract values awarded to Chinese contractors in the GCC rose from $112m in 2002 to $4.6bn in 2007, according to regional projects tracking service MEED Projects.But activity was constrained mainly to the civil construction sector and not the more complex oil and gas industry. Chinese EPC contractors still lacked project references in the region and failed on multiple occasions to make the prequalification shortlists for most major hydrocarbons projects. Chinese investments in the region were also still quite muted.A breakthrough for the Chinese EPC market was thought to have been made in 2007 when China National Petroleum Corporation (CNPC) and two of its subsidiaries won a critical $3.3bn contract to build the IPIC oil pipeline between Abu Dhabi and Fujairah Emirate on the UAE’s eastern coast. The export pipeline was of heavy strategic significance as it would offer the UAE the ability to export its crude outside of the Straits of Hormuz and potential Iranian attempts to blockade it.The contract award was expected to be a breakthrough for Chinese EPC contractors looking to expand in the Gulf. However, it had the opposite effect. For various engineering, technological and operational reasons, the project was delayed by more than two years and CNPC, rightly or wrongly, received the bulk of the blame. Rather than enhancing the reputation of Chinese contractors, the project actually set back their attempts to be considered tier one contractors capable of competing with more established players in the region.It was to be more than 10 years before a Chinese firm was to win an equally sized EPC contract in the upstream or midstream sectors in the region.If the IPIC pipeline contract was a false start, the genesis of the rise of Chinese investor influence in the GCC projects market could be pinpointed to the 2011 agreement between Aramco and Sinopec for the latter to take a large stake in the planned Yanbu export refinery project.The 400,000b/d refinery was a key component of Saudi Arabia’s oil and gas strategy. Aramco’s original partner was ConocoPhillips, but after much dithering the US oil major pulled out of the $10bn-plus scheme in 2010. The exit from the project was a major blow for Aramco and meant it had to find a new international partner prepared to invest in the facility.The selection of Sinopec was, therefore, both welcome and a surprise. Never before had a Chinese company made such a significant investment in the region and it marked the first instance of China obtaining a stake in the region’s critical hydrocarbons infrastructure. For Aramco and Saudi Arabia, it also marked a pivot toward East Asia as Sinopec would be able to help them improve their penetration and marketing activities in the world’s fastest-growing region.The refinery deal paved the way for another equally significant event. In 2014, Adnoc announced it had signed a directly negotiated concession agreement with CNPC to develop several onshore and offshore oil fields in Abu Dhabi. This was the first time a Chinese entity had gained a foothold upstream in the region and again signified the region’s pivot eastward.The upstream and downstream agreements marked China’s arrival as a major player in the region’s oil and gas market. But from a contracting perspective, there were still only limited successes for Chinese contractors. This finally changed in late 2017 when CNPC was awarded the $1.5bn onshore Bab integrated facilities expansion, the first time a Chinese contractor had won such a critical upstream EPC contract at such a scale in the region and confirmation that Chinese firms were now fully part of the market landscape.On the civil construction side, Chinese firms have had even more success. The drop in oil prices in late 2014 has had a deeply negative impact on overall spending levels in the GCC. From a high of $177bn in 2014, project spending dropped to a 15-year low of just $98bn in 2018, with all markets and sectors affected. The issue is one primarily of liquidity, with private sector real estate developers particularly strained to raise funding for their projects.The chief advantage Chinese firms can bring in this cash-strapped market is finance. Already, China State has been able to win work on the back of bringing money to the table to help finish projects. Combined with massive resources and its immense experience as the world’s largest contractor according to ENR rankings, it has been able to become dominant over the past two years in the Dubai construction sector, by far the region’s biggest.Chinese contractors are becoming significant figures in other sectors too. The rise of solar power in the region and the emergence of coal as a fuel feedstock for the first time have enabled companies like Sepco, Sepco III and Yingli Solar to increase their workloads in the Gulf. The experience gained from building China’s high-speed rail network has put Chinese contractors in pole position to win the remaining packages on the key Etihad Rail project in the UAE. In Saudi Arabia, China State has signed a memorandum of understanding (MoU) to finance, build, and operate the long-planned Saudi Landbridge rail network. It is also positioned to win the landmark contract to build the world’s tallest tower in Dubai later this year.Where its contractors are winning work, Chinese investments in the region are also growing exponentially in the region. Two years ago it seemed that the Belt and Road Initiative (BRI) had bypassed the GCC completely given that it was rarely mentioned in political or economic discourse in the region. But over the last 18 months, a raft of announcements have dispelled that view.Nowhere is this more apparent than in Duqm, in central coastal Oman. Chinese industrial investments in the hitherto sleepy fishing village are set to transform it into one of the region’s major industrial, fuel storage, chemical, and logistics hubs. Led by Oman Wanfang, a consortium of six Chinese companies, which intends to invest more than $10bn to build a refinery complex, other significant Chinese investments in Duqm include a Sino-Omani industrial park, a new power, and desalination facility, hotels, and a carpet factory.In April, Dubai signed a $3.4bn deal for a giant Chinese Traders Market close to its Jebel Ali Port, and a $1bn agreement for a packaging and export venture, while in January Abu Dhabi announced the signing of a $600m contract to open a Chinese tire plant at its Khalifa Port. The agreements come on the back of a significant move in 2018 to allow Chinese citizens visa-free entry into the UAE as a means of enhancing tourism and trade.This last point is important. Dubai, in particular, is heavily dependent on increasing the number of overseas visitors to the emirate. Chinese tourists are especially seen as a vital factor in maintaining retail sales and hotel rooms filled, as well as potential purchasers of property in the emirates. It is no surprise that today all high-end retail outlets in Dubai have Chinese speaking staff, that signage in megamalls is in Mandarin Chinese, and that even cash options have Chinese language options. In a region that has been hit by lower oil prices, China is viewed as a solution.The increase in trade and contracting ties between the GCC and China is seen largely as a win-win for both sides. For cash-poor clients in the region, Chinese firms can bring much-needed finance to complete their projects, while for Chinese companies the GCC offers a new potential market for investment. Geopolitically, as the two regions the main producers and buyers of energy, it makes perfect sense for there to be a closer alignment between them especially with US influence and interest in the Middle East on the wane as it becomes less and less dependent on oil and gas imports.At the same time, it would not be true to say that the GCC is fully accepting of Chinese investment. Several notable media reports have highlighted local discontent in Duqm with the pace and scale of change that is happening around them. In the UAE, there is a general wariness of any change that could upset the delicate socio-demographic balance among the 10 million-strong population. And in the oil and gas sector, the NOCs of the region appreciate the need for maintaining supply balance to many different markets.Nonetheless, after many years of operating on or near the sidelines, the Middle East and Middle Kingdom business relationship has never been as strong and looks set to grow stronger over the decade ahead.