Oiling The China-Saudi Arabia Relationship

IN 2017, THERE were reports that a Chinese consortium encompassing PetroChina, Sinopec, state-owned banks and sovereign wealth fund China Investment Corporation (CIC) were in discussions with Saudi Arabia about buying 5% of its state oil company, Saudi Aramco.
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This was talked of as an alternative or possibly a precursor to an initial public offering (IPO) of Saudi Aramco shares. The IPO eventually came in December 2019 when the kingdom listed some 1.5% of Saudi Aramco on the Riyadh stock exchange, raising $25.6 billion.

It was not the blockbuster the Saudis had hoped. Neither, as far as anyone knows, did anything come of any significant stand-alone Chinese investment.

Yet reports that elements of the original Chinese consortium are again in talks to buy a stake in Saudi Aramco are doing the rounds once more as Saudi Arabia prepares to sell another slice of Saudi Aramco to international investors to help finance the kingdom’s economic diversification strategy.

Late last month, during a rare interview on Saudi TV, Crown Prince Mohammed bin Salman said that there were discussions underway with a leading global energy company to acquire a 1% stake. His tease was that the energy company was from ‘a huge country’.

A 1% stake would be worth some $19 billion based on Aramco’s current market valuation.

The rationale for selling to Chinese interests is, in part, the same as in 2017 — to bolster Saudi Aramco’s sales in its largest export market. The crown prince made no bones about that in his interview. He needs to secure oil export markets for the long-term because he is increasingly leaning on Aramco to finance Vision 2030, his faltering plan to transform the Saudi economy away from its hydrocarbons dependency.

China is the biggest buyer of Saudi oil, but Russia has been eating into its lead over the past couple of years. Regardless of the pandemic, Saudi shipments to China in 2020 rose 1.9% from a year earlier to 84.92 million tonnes, or about 1.69 million barrels per day (bpd), according to General Administration of Chinese Customs data.

However, imports from Russia rose by 7.6% to 83.57 million tonnes or 1.67 million bpd. The Saudis had to cut their prices late in the year to hold off Russia from taking the top spot. Russia has the advantage of being able to send its oil through a pipeline over its land border with China; Saudi oil has to be shipped.

Imports from both countries were dwarfed by those from the United States, which more than tripled in 2020 to 19.76 million tonnes, or 394,000 bpd, bolstered by the requirements of Phase One of the US-China trade deal.

However, over the next two decades, output from US and Russian producers is set to drop, leaving a supply gap in China that Saudi Arabia as the low-cost producer, wants to fill.

To ensure that it will still have a market to supply as China heads toward net carbon neutrality by 2060, Saudi Aramco has been co-operating with China’s research to develop low-to-no carbon internal combustion engine technologies for cars and lorries. Its chief transport technologist gave a keynote at the grandly titled Second World Congress on Internal Combustion Engines held in Jinan a couple of weeks ago.

Beijing has designated Saudi Arabia and the United Arab Emirates (UAE) as comprehensive strategic partners. President Xi Jinping made a point of mentioning that when he spoke to the crown prince in mid-April about the geopolitics of climate change ahead of the forthcoming Paris climate agreement meeting later this year.

However, China sees that status mostly in terms of the considerable expansion of its footprint in the Gulf over the past decade with the signature of numerous multi-sectoral cooperation agreements in the region focused on infrastructure and energy. However, it also has to tread lightly among the Gulf Arab states with regards to its relationship with Iran.

For its part, the kingdom sees China as only one source for the inflow of foreign investment for economic diversification, not as a substitute for established partners. Selling Beijing oil helps keep that distinction clean politically.

Critically, the crown prince will need to balance Saudi Arabia’s growing relations with Beijing with not alienating Washington. The United States remains its principal economic partner and is still the main Gulf security guarantor even if the relationship with the United States is less overtly cosy under US President Joe Biden than with his predecessor, Donald Trump.

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Filed under China-Middle East, Energy

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