Tag Archives: Low-carbon technologies

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.
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 To Hold Growing Sway Over World Energy Industry

The International Energy Agency’s latest World Energy Outlook (to 2035) says China’s demand for energy will rise by 75% between 2008 and 2035, accounting for 22% of the world’s energy consumption, up from 17% today. Put another way, China will account for 36% of the growth in the world’s energy demand (see snapshot of IEA graph below). The IEA’s projections are based on the assumption that governments will do no more than meet any commitments already given on energy conservation, greenhouse gas emission reductions and the phasing out of fossil-fuel subsidies. (That so-called New Policies Scenario is the most conservative of the three sets of assumptions about governments’ intentions the IEA makes.)

It is hard to overstate the growing importance of China in global energy markets. [The IEA’s] preliminary data suggest that China overtook the United States in 2009 to become the world’s largest energy user, Strikingly, Chinese energy use was only half that of the United States in 2000….Prospects for further growth remain strong, given that China’s per-capital consumption level remains low, at only one-third of the OECD average.

The IEA also says that China’s growing need to import fossil fuels will have an increasingly large impact on international markets. It will account for half the net growth in global crude oil demand over the period, largely because it will need more fuel for cars and lorries. It will also have a voracious appetite for natural gas, the more so if coal use is restrained on environmental grounds. Its needs are likely to make the oil and gas producing nations of Central Asia such as Kazakhstan, Uzbekistan, Turkmenistan and Azerbaijan which draw from the Caspian basin a significant new energy region. Similarly, Beijing’s push to develop new low-carbon energy technologies could help drive down the costs of those through economies of scale.

In China, energy demand triples between 2008 and 2035. Over the next 15 years, China is projected to add generating capacity equivalent to the current total installed capacity of the United States.

Electricity generation is likely to be at the forefront of the transition to low-carbon technologies. The greatest scope for increasing the use of renewable energy sources in absolute terms, the IEA says, lies in power generation. China is already a leader in wind power and solar photovoltaic (PV) production as well as having become a leading supplier of the equipment thanks to strong government investment support. The IEA says China will add 335 gigawatts of wind generation capacity, 105 gigawatts of nuclear and 85 gigawatts of solar PV by 2035 (and put 8.5 million electric vehicles on its roads).  That said, coal-fired generation will remain substantial in China, with 600 gigawatts of new capacity exceeding the growth of the renewables and exceeding the current capacity of the U.S., E.U. and Japan.

The IEA takes aim at subsidies for fossil fuels, which it calls the “single most effective measure to cut energy demand”. It wants them phased out to end the market distortions that make it more difficult for low-carbon technologies to get development investment. It says that such subsidies amounted to $312 billion worldwide in 2009, though that was down from $558 billion the previous year. China was the fifth largest subsidizer in 2009, behind Iran, Saudi Arabia, Russia and India, at just shy of $20 billion. About half of that went to electricity generated from fossil fuels and most of the rest equally to coal and oil. Beijing has been moving towards more market based pricing for energy, but as the figures show, there is still a ways to go.

The subsidies analysis was done at the behest to the G-20, whose leaders are meeting in Seoul shortly and where climate change and the successor to the expiring Kyoto protocol on climate change will be on the agenda. The IEA lays out how heavily the burden lies on China and the U.S. to cut back emissions if the ideal target of limiting the increase in global temperatures to 2°C is to be hit by 2035: 32% China, 18% the U.S. 50% rest of the world. Low-carbon technologies would need to account, the IEA reckons, for over three-quarters of global power generation by then and plug-in hybrids & electric vehicles for 39% of new sales. That day may not come, or at least not fully, but the era of cheap fossil fuels is over. China is already investing heavily in those areas and giving itself a first mover advantage that the rest of the world may find difficult to claw back.

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