Category Archives: China-Middle East

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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China’s CNPC Takes Advantage Of Total Retreat From Iran

WITH WASHINGTON AGAIN turning the financial screws on Iran, China stands to pick up a lot of the pieces that will get broken in the process.

The Iranian state news agency yesterday announced that China National Petroleum Corp. (CNPC) would take over Total’s 50.1% share of the $4.8 billion Phase 11 (of 24) development of the giant South Pars gas field, the world’s largest unitary gas reserve.

Terms, including financial ones, are unknown. Neither Total nor CNPC has made a public comment at this point. Confusingly, the Iranian oil ministry subsequently said that the terms of the contract remain formally unchanged, though that is not necessarily inconsistent with CNPC taking over.

Last year, in signing on, the French energy company became the first sizeable Western oil and gas company to invest in Iran following the lifting of sanctions on Tehran the previous year.

Now the Trump administration has pulled out of the nuclear agreement that enabled those sanctions to be lifted, fresh US sanctions have been imposed that force companies to choose between trading with Iran and trading with the United States.

For most Western companies, it is no choice at all. Total had already indicated that it would have to walk away from the South Pars project in the new circumstances.

CNPC, which has had a presence in Iran since 2004, already had a 30% stake in Phase 11. Iranian state-owned Petropars owns the rest.

The project is intended to supply gas to the domestic Iranian market from 2021 with excess to that requirement being exported, now assuredly eastwards rather than westwards. That gas could either be shipped or sent to China via the network of pipelines existant, under construction or planned across Central Asia and Pakistan.

China is already the largest market for Iran’s exports of crude oil and condensates, taking 24% of the total last year.

In addition, Chinese banks have extended $25 billion in credit lines for infrastructure investment, suggesting Chinese firms will easily be able to slip into the spaces vacated by Western multinationals and be in a position to negotiate favourable terms now they will be the only game in town for Tehran.

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China’s Western March Into The Middle East

President Xi Jinping (C, front) poses for group photos with Kuwaiti Emir Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah (6th L, front) and heads of delegations to the eighth ministerial meeting of the China-Arab States Cooperation Forum in Beijing, July 10, 2018. Photo credit: Xinhua.

CHINA’S INTERESTS IN the Middle East are quietly expanding, driven by the region’s growing role as a source of energy and as a recipient of Belt and Road Initiative (BRI) investment.

The eighth meeting of the China Arab States Cooperation Forum, (pictured above) held with some fanfare in Beijing this month, brought that into focus, with Beijing promising $23 billion of funding to its guests.

Such large-headline-number funding packages (not that $23 billion is that large by the standards of these things) tend to comprise money already spent or committed and money that will never materialise. But $150 million that will likely be shelled out is the sum allocated to ‘social stability’. As in Africa, Chinese investments in the Middle East are at risk from social and political developments in the region. (See Libya, Zambia and Angola for precedents.)

That $150 million promise will probably manifest itself as sales of Chinese security equipment and the training to use it. Afghanistan provides a rudimentary model.

And, as in Afghanistan, China is recognizing it has to play a more active diplomatic and security role in the Middle East, and has been doing so — incrementally — since at least 2012-16, part of the ‘March West’ to counter the ‘Pivot East’ of the then US administration of Barak Obama. This was outlined in a policy paper published at the start of 2016.

The bulk of the latest tranche of offerings, $20 billion, is earmarked for loans for reconstruction and development, though that is a relatively modest sum in overall BRI investment. What the money also does is help Beijing straddle the historical rift in the region between Saudi Arabia and Iran.

China is unlikely to break its ties with Tehran and will continue to be a market for Iranian oil as restored and new US sanctions cut off sales to the West. The Trump administration’s withdrawal from the Iran nuclear deal, which Beijing played an instrumental role in setting up, is likely to leave Chinese firms better positioned commercially than they were on the ‘last man standing’ principle as Western firms are driven to retreat from Iranian business by Trump’s reversal of policy.

But equally, China needs good working relations with Riyadh and its allies, whose influence in northern and eastern Africa touches directly on China’s greater economic interests in those regions, too (from oil fields and copper mines to China’s first overseas military base in Djibouti and anti-piracy operations off the Horn of Africa).

Outreach to the Gulf States also balances within the Arab world China’s long-standing relationship with Egypt. The $65 billion memorandum of understanding for investment cooperation that Saudi King Salman signed during a visit to Beijing in March last year had already underlined this.

China sells Saudi Arabia the weapons and military kit that the United States will not out of deference to Israeli objections. One of only thee Chinese armed-drones manufacturing plants outside of China is in Saudi Arabia.

One complication for the countries of the Middle East is Beijing’s repressive treatment of its Muslim minority, and particularly the Uighers. However, few Middle Eastern leaders have spoken out publicly on this — a sign of the importance of the growing ties in other areas and China’s ability to use its economic clout to dampen international criticism of its domestic policies.

The more significant issue for Beijing in the region will be the one that has confronted the other outside powers that came before it: it is difficult to maintain a neutral position in a part of the world where there are so many overlapping and longstanding rivalries and conflicts while stepping up diplomatic and security engagement beyond the purely mercantilist.

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