China Looks To Make A Razor-Sharp Deal For Saudi Aramco

THIS BYSTANDER RECALLS a classic television advertisement from the 1970s in which US businessman Victor Kiam said he so loved using a Remington electric razor that he bought the company. China’s state-owned oil companies so love buying Saudi oil they are reportedly thinking of doing the same.

The Reuters news agency recently reported that the kingdom is evaluating the sale of 5% of its state oil company, Saudi Aramco, to a Chinese consortium comprising PetroChina and Sinopec, state-owned banks and China’s sovereign wealth fund. This would be as an alternative, or possibly a precursor to an initial public offering (IPO) of the Aramco’s shares on one or more stock markets, a listing that would likely be the biggest share sale ever and expected to raise $100 billion. The Chinese consortium would presumably have to come close to matching that number.

Ever since the Saudi government said it was looking to sell a small stake in Aramco in 2018 to kick start the funding of its economic diversification programme, Vision 2030, the world’s leading stock exchanges have been bidding for what would be both a large and a prestige bit of business. Some suitors have been ready to turn a blind eye to infringements of their own rules in their desire to get the listing.

A direct sale of a stake to China, the biggest buyer of Saudi oil, would make any eventual listing more likely to happen in Shanghai or Hong Kong than New York or London, which would be a considerable feather in the caps of either exchange.

Such a deal would also strengthen two-way Saudi-China trade and investment ties. In August, the Saudi energy minister said he expected to conclude a deal next year with PetroChina for the Saudis to invest in a new 260,000-barrels-a-day oil refinery in Yunnan that started operations in July. That investment was reported in April to be a 30% stake valued at $2 billion.

A similar arrangement could be struck with China National Offshore Oil Corp, (CNOOC), which is building a 200,000-barrels-a-day refinery in Guangdong province.

Vice Premier Zhang Gaoli (seen above on the left) visited Saudi Arabia in August, meeting Saudi King Salman (on the right) and Crown Prince Mohammed bin Salman in the Red Sea resort of Jeddah. This followed an exchange of official visits in 2016, with the king in March returning a visit by President Xi Jinping in January in which the two countries agreed to upgrade the bilateral ties to a comprehensive strategic partnership.

China is already Saudi Arabia’s largest export market, at $23.6 billion (2016 figures), all but a slither of it crude and refined oil and petrochemical products, and accounting for 15% of Saudi export volumes. China is also the kingdom’s leading source of imports, at $18.7 billion, accounting for 14% of total import volumes. Machinery accounts for 36% of Chinese imports, followed by metals (13%) and textiles (12%).

However, since late 2015, when China changed its rules on where independent refiners could buy crude, Russian suppliers have been vying with the Saudis to be China’s leading source of crude. That generates competition that will be welcome in Beijing for the effect it will have on prices, but another reason that Saudi might be prepared to cut investment deals to secure its exports.

 

Update: Aramco’s chief executive, Amin Nasser, told the US business news TV channel CNBC in an interview broadcast on October 23 that an IPO was on track for the second half of 2018. Nasser also denied a Financial Times report that Aramco was talking to ‘the Chinese or others’ about delaying the share sale. He was not pressed, however, on whether a separate deal with investor groups could co-exist with a public share sale.

North Korea’s Double Dilemma For China

IT IS GETTING ugly on the Korean peninsula, and it was not looking all that pretty to begin with.

However exactly powerful a nuclear bomb North Korea tested over the weekend and whatever the white metallic thing was that the country’s leader Kim Jong-un was photographed posing with — and standing far too close to if it was truly a missile nose cone fitting nuclear device —  it is clear that it is too late to stop Pyongyang ‘nuclearising’.

That poses a what-to-do dilemma for US President Donald Trump, who had said that he would not let Pyongyang get this far with its missile programme. It poses an even bigger one for China, which the Western powers, at least, are blaming for not being tough enough on its ally, while from Beijing’s point of view, it is being asked to take all the risk of dealing with Pyongyang while the United States would get most of the benefit.

As this Bystander has noted before, Washington may overestimate Beijing’s sway over Pyongyang. This weekend’s nuclear test marked the third occasion on which North Korea had upstaged President Xi Jinping at a moment when he wanted to project a particular, and strong face of China to the world.

This weekend was meant to be about Xi presenting the BRICS, with China in the vanguard, as the progressive alternative to an increasingly protectionist West. He will not have appreciated Kim hogging the limelight. That Kim feels confident enough to do that to his only ally, again, implies that North Korea is no dutiful vassal state.

That is not to say that Beijing can do nothing more. It can. It remains North Korea’s primary source of oil and could choke that off, just as it has cut off other trade. It has so far resisted the United States’ pressure to impose such a sanction. It fears that doing so could cause a collapse of the regime that would send millions of refugees flooding across the border into northeastern China and, the far bigger concern, trigger a sudden regime collapse in North Korea that would leave US or US-allied troops hard against its border.

Beijing has in the past cut off oil supplies to North Korea on two occasions. Both times Pyongyang returned to the negotiating table in short order, if only for a while.

There are at least two reasons that Beijing will be reluctant to do so again. First, it does not want to be seen at home or abroad to be knuckling under US pressure. Trump has repeatedly lambasted Beijing for not doing more on sanctions (and when it did, then slapped sanctions on some Chinese companies and has subsequently threatened a trade boycott of any country that trades with North Korea, hardly the thank-you that would encourage further co-operation on this front).

Second, it still does not want to cause a sudden shock that would trigger an economic collapse in North Korea. Instead, it will take incremental back-door steps to cut back oil supplies.

There are signs of this already happening. State-owned China National Petroleum Corp. (CNPC) stopped shipping diesel and gasoline to North Korea in May and June. Ostensibly, this was a corporate decision made on the basis of uncertainty over getting paid. However, such as decision would not have been taken without the express consent of the Party committee within CNPC, and that consent, in turn, would not have been given without express consent and more likely direction from higher up.

Last year, China shipped more than 96,000 tonnes of gasoline and nearly 45,000 tonnes of diesel, worth a combined $64 million, to North Korea. Most of it came from CNPC, but this Bystander would hazard that more and more of China’s other energy companies will discover they have misgivings about trading with Pyongyang and slowly but steadily the oil supply will be choked off.

The statement from the foreign ministry condemning the weekend’s bomb test offers further signs of Beijing’s hardening position towards Pyongyang. While it still called for a resolution to the situation through dialogue, its language was far harsher towards North Korea than in the statements that had followed the five previous nuclear tests.

Denuclearising the peninsula is probably less of a concern for Beijing than Washington, though Beijing would be more than happy for North Korea not to have an independent nuclear deterrent, and especially if its absence bought a removal of the THAAD missile defence system from South Korea as well.

Its priority is to have as much stability on the peninsula as there can be. South Korea response to Pyongyang’s nuclear test (live-fire missile exercises), the planned deployment of a US nuclear-powered aircraft carrier in near waters and a Seoul-Washington agreement in principle to increase the 500-kilogramme permissible payload on South Korea missiles will all destabilise the peninsula more than stabilise it, not to mention discomfort Beijing.

In this environment, Beijing has two sets of relationships to manage, one with Pyongyang and the other with Washington. Both have highly unpredictable players on the other side. Beijing’s preferred option is to work through the United Nations to mitigate the volatility and to put the United States on the track of recognising that North Korea’s nuclear ambitions can no longer be contained, only managed.

The UN Security Council met today, and its member countries will be working on a new set of tougher sanctions expected to be presented for a vote at the beginning of next week. There is still a gulf to bridge between the Chinese and US positions. Meanwhile, China will be applying its own economic squeeze on North Korea to get Kim back to any sort of negotiating table before he provokes the United States into taking actions that will trigger the regime chaos that Beijing so fears.

China Buys Canadian Oil, Gas And Expertise

State-owned PetroChina has been splashing its cash this week–$1.6 billion to buy out BHP Billiton’s stake in the controversial Australian offshore Browse liquefied natural gas project, and $1.2 billion for a 49.9% stake in a joint venture with Encana to develop the Canadian company’s Duvernay shale oil and gas field in Alberta, with a further $1 billion of investment promised over the next four years.

Chinese energy companies acquiring overseas production assets is scarcely news. They have now spent approaching $30 billion this year alone on oil and gas fields. PetroChina’s two deals look like chump change against, CNOOC’s $18 billion acquisition of Nexen, the largest Chinese overseas acquisition and which has only recently been approved by the Canadian government.

What strikes this Bystander as interesting about the two latest PetroChina deals is the expertise as much as the assets that they bring. China has deepwater, natural gas and shale fields in abundance, but not much experience or expertise in exploiting them. CNOOC got its first deepwater drilling platform into the South China Sea only in May this year. Acquiring the know-how has become a priority. The Duvernay shales, in particular, are geologically similar to some of China’s deep shales. Learning how to tap them is something PetroChina can not only take to the bank, but back home, too.

Sinopec Buys Oil Reserves in Nigeria

China Petroleum & Chemical Corp. the state-owned oil company usually known as Sinopec, has reportedly signed a preliminary deal to buy onshore oil blocks in Nigeria from France’s Total. The price is said to be $2.4 billion. Sinopec is seeking to bolster its diminishing reserves of crude, which declined to 2.8 billion barrels at the end of last year from 3.3. billion barrels in 2007. In 2009, it acquired reserves in Nigeria, Cameroon and Gabon when it bought Addax Petroleum. Sinopec’s parent, China Petrochemical, said at the start of this year that Sinopec aims to raise overseas production to 50 million metric tons (366 million barrels) of crude a year. Production was running at 23 million tons last year.

China Seeks Compensation For War-Damaged Libyan Projects

The hopes of Chinese civil engineering firms that they would be able to return to abandoned construction projects in Libya appear to have been dashed for now. Commerce minister Chen Deming says it is too dangerous to return, and that China is seeking compensation from the new government in Tripoli, particularly for housing projects worth more than $10 billion that were completed or close to completion but suffered heavy artillery damage during the fighting.

Before the civil war that overthrew the Gaddafi regime started in February, 2011, some 75 Chinese companies, including 13 large state owned enterprises, were working on $19 billion worth of projects, mainly in oil services, railways, housing construction and telecoms. Evacuating more than 35,000 Chinese nationals from these in March last year was a source of some pride in Beijing. (A similar, though more-low profile and pre-emptive evacuation of Chinese workers in Syria is now underway, with 100 or so being left in the country to secure Chinese engineering projects as far as they can, and so minimize the sort of damage suffered in Libya.)

Chen’s comments about Libya followed the visit of an inspection team from his ministry that arrived in Tripoli earlier this month to assess the extent of the damage, and the prospects for Chinese engineering companies to return. China has, though, resumed its oil imports from Libya, which were interrupted by the civil war. It is expected to ship 140,000 barrels a day from Libya this year.

China, Russia Settle East Siberian Oil Pricing Dispute.

The long-troubled negotiations over China’s purchases of Russian oil have reportedly taken a step forward. Russian press reports say a new deal ensures a below-market price for China’s oil imports from East Siberia. Russia’s largest state-controlled oil company, Rosneft, and the pipeline monopoly, Transneft, are to give China National Petroleum Corporation (CNPC) a $1.50 a barrel discount on the oil it gets via the East Siberian-Pacific Ocean pipeline relative to the market price of Russian oil shipped to other buyers from the Pacific Ocean port of Kozmino.

China receives the vast majority of its Russian oil via a spur on the pipeline from Skovorodino to Daqing, shown above, that opened in January, 2011. But it is starting to buy Kozmino cargoes as an alternative to Iranian oil. Rosneft reportedly says the deal will cost the Russian side $3 billion a year in revenue. That seems haggling hyperbole, rather than a real number. The arithmetic suggests $3 billion over the life of the contract would be closer to the mark. Whatever the true figure, the Russians may just have to write it off as the cost of ending the dispute. China funded the building of the pipeline with a $25 billion loan but claimed Transneft overcharged for transport costs. These are part of the formula for pricing the oil with which the loan is to be repaid at a rate of 15 million tonnes of crude a year from 2011 to 2030.

The two countries still have outstanding negotiations over natural gas. Price is a point of contention in those discussions, too. However, there has been agreement that Russia will start supplying China with Eastern Siberian gas in 2015.

Iran, Oil and U.S. Sanctions: Beijing’s Complex Response

Beijing may be huffing and puffing about the sanctions Washington imposed last week on state-run Zhuhai Zhenrong Corp. for selling refined petroleum products to Iran, but it can scarcely be surprised.

“Imposing sanctions on a Chinese company based on a domestic (US) law is totally unreasonable and does not conform to the spirit or content of the UN Security Council resolutions about the Iran nuclear issue,” foreign ministry spokesman Liu Weimin says.

But it is what Washington does. Zhuhai Zhenron is one of three firms to be sanctioned in this case. The other two were Singapore’s Kuo Oil and the United Arab Emirates’ FAL Oil. Even though the sanctions on Zhuhai Zhenrong are largely symbolic as it does not do much business in the U.S. they could be considered a warning to some larger Chinese energy firms that do.

The sanctions followed Beijing’s rejection earlier last week of visiting U.S. Treasury Secretary Tim Geithner’s request that China use its economic clout as Iran’s largest oil export market to press Tehran to rein in its nuclear ambitions. Recent tightening of U.S. and EU sanctions won’t mean much if Tehran can still ship lots of oil eastwards. Tehran depends on crude oil exports for 60% of revenues and 80% of its hard currency.

Beijing’s argument was that China depended on Iranian oil for its economic development. Up to a point, but meanwhile, Prime Minister Wen Jiabao is in Saudi Arabia for the signing of an agreement between Sinopec and the Saudi energy giant Aramco to build an oil refinery Yanbu on the Red Sea with the capacity to refine 400,000 barrels of oil a day. Along with Angola, Saudi Arabia is already one of China’s top two suppliers of oil, ahead of Iran, which the number three. Wen would like to be assured China can get more oil from Saudi Arabia if necessary. Qatar and the United Arab Emirates are also on Wen’s itinerary.

Tensions are likely to remain high in the Strait of Hormuz for the foreseeable future. Iran is dependent on a break-even price for oil of $90 a barrel, so tension, if not hostilities, may suit it. Even if China and India follow Japan in reducing their purchases of Iranian oil, and even if that cut was by as much as 25%, Iran will get by. Meanwhile, China will continue to seek alternative sources of oil, and not be too sorry if Washington is diverted from its new geo-political pivot towards the Asia-Pacific region by a reminder of its interests in the MidEast.

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Shifting Sands Of China’s Relationship With U.S.

Reuters’ report that China’s three big state-owned energy companies, CNPC, Sinopec and CNOOC, have had their arms twisted by the U.S. to suspend new investments in Iran causes this Bystander to raise an eyebrow. CNPC has reportedly delayed work on a 4.7 billion dollar deal; Sinopec has postponed a 2.0 billion dollar oil development, and CNOOC has halted a gas venture according to the news agency after U.S. officials threatened sanctions against the SOEs’ U.S. investments. This they apparently did by bypassing official diplomatic channels and going directly to the companies.

Now, Washington has not had much success in getting Beijing to go along with its efforts to thwart Iran’s nuclear programme. Beijing opposes proposed UN sanctions, which would jeopardize the oil supplies it buys from Tehran, it’s third biggest supplier. Plus there is the general reluctance on Beijing’s part of being seen to be doing anything at Washington’s behest, and a general tendency to stick with old friends, especially those hostile to the U.S., (a policy that is causing some second thoughts, or at least some readjustment, in the light of events in places like Pakistan, Libya and Syria, all of which also have implications for the leadership’s legitimacy at home).

Even if there may be some shifting of the geo-political sands occurring, there is no way that any or all of CNPC, Sinopec and CNOOC would take it upon themselves to undermine official policy without at least tacit approval from Beijing. Which then makes the question, why would Beijing do this now. Is it just letting some of those swirling geo-political sands settle until prospects become clearer, or is using supposedly business decisions as a smokescreen, if we may mix and match our metaphors, for some back-channel cooperation with Washington that it sees to be in its short- or long-term advantage but which it can’t bring into the open? Or is it, as Reuters implies, just part of Beijing’s desire, seen since late last year, to ease tensions with the U.S.as it heads into it’s own leadership transition?

Time For An Asian Benchmark Price For Oil

One of the side issues raised by the energy pricing disputes between China and Russia is an extension of an old argument about whether Asia needs an oil benchmark price of its own. Benchmarks are essential to unify the global oil market as crude streams vary so significantly in their characteristics in any given region. At present, the international crude market is priced against the U.S. standard, West Texas Intermediate (WTI), or the international one, the North Sea’s Brent. Both decreasingly reflect the new realities of the oil markets.

For one, there is a widening gap between the two, as much as $18 a barrel at times, and the historic trend of WTI trading at a premium to Brent has been reversed. The divergence is largely a reflection the increasing insularity of the North American market. That has become so great that at the start of last year, Saudi Aramco, Saudi Arabia’s state oil company, stopped using WTI to price its exports to the U.S. and switched to the Argus index. At the same time, output and demand for Brent oil is falling while, like so much else in the global economy, the balance of oil demand is tilting eastwards. Asia in now a sixth bigger an energy market than North America and twice a big as Europe.

That all suggests that the time is ripe to develop a Pacific-centric crude oil benchmark and futures market to replace the Atlantic-centric ones (and in the case of WTI, Cushing, Oklahoma-centric). All oil producing regions have some sort of benchmark, but only Dubai Crude has gained any credence from international oil traders. It is no WTI or Brent, though, and is mostly used in physical markets. Attempts to create a Middle East oil futures market off it have never got far though the latest attempt backed by the governments of Dubai and Oman is the best shot to date.

As Asia and particularly East Asia has become the center of the global oil trade it makes more sense anyway for the futures market to be in East Asia as that will give the most effective price discovery. Up until now, the region has been dependent on oil imports from the Middle East, so pricing based on Dubai Crude, which in turn is tightly linked to the Brent price, has been the order of the day.

The oil being shipped to the region via Russia’s Eastern Siberia Pacific Ocean pipeline (ESPO) will fundamentally change that. Once it is operating at full capacity, and supplying markets in South Korea, Japan and farther afield as well as China, East Asia will have significant exports of oil on which to base a new crude futures contract of its own. That might be ESPO oil alone, or a basket of ESPO, Chinese and other Asian crudes, much as Opec has devised a basket of seven crudes.

But where in Asia to locate such a futures market? Such markets thrive where there is significant production and consumption of whatever is being traded to give the market liquidity, developed financial markets to provide the financing infrastructure and speculative (in the technical sense) interest, and a common legal and regulatory system covering market participants and the underlying flow of the good. Nowhere in Asia yet meets all those criteria, though China would come closest. The Shanghai Futures Exchange has certainly had its eye on such a role for several years.

Even if the arrival of ESPO oil potentially gives the trading volumes to make it work, China’s regulatory regimes over both commodities pricing and financial markets, remain a big question mark. It is in Beijing’s hands to overcome those difficulties. There is no doubt that the traditional relationship between regional crude benchmarks and global prices have not been able to keep up with the change in the global flows of the oil trade. Therein lies an opportunity to be grabbed.

China, Russia Make Scant Progress In Resolving Energy Disputes

The agreement signed with Russia after the latest round of Sino-Russian energy cooperation talks just concluded in Moscow papers over some wide cracks. For one, there doesn’t seem to be much more to the agreement than that the two countries will continue to try to conclude their long running discussions over two long-term gas-supply deals. Xinhua’s report is all cheer and no content.

What the two sides have been talking about, seemingly since when the Siberian forests that became the oil and gas were still forests, is to expand an outline agreement under which from 2015 Russia’s gas monopoly Gazprom would supply 30 billion cubic meters a year–roughly one-third of China’s 2009 consumption and a quarter of Russia’s total exports–to more than double the volume, supplied via two direct pipelines from Siberia to western and central China. The formula for determining the price has been the main sticking point.

Been there, done that, got nowhere. Pricing is at the heart of the dispute over the Russian oil China has recently started getting via the Daqing spur to Russia’s East Siberia Pacific Ocean pipeline (ESPO). The deliveries are the result of $25 billion-worth of loans in 2009 from China National Petroleum Company (CNPC) and the China Development Bank to the energy company Rosneft and the state-owned pipeline monopoly Transneft that was to be repaid in oil, expected to be 15m tonnes a year (150,000 b/d) for 20 years starting this year.

The oil started flowing at the start of the year, but since then China has accused Russia of overcharging it for the deliveries, and demanded more oil as a make-up, while Russia said China was way underpaying given market conditions. The pricing formula has broken China’s way and Russia can sell to Japanese, South Korean and American customers far more profitably. It certainly has no intent to double up on its losses supplying China. Transneft has threatened to sue CNPC in court. Hard ball meets hard ball.

Meanwhile, the deliveries continue at their original levels. Last month CNPC and Rosneft broke ground for a joint-venture oil refinery in Tianjin that will be able to refine 260,000 barrels a day and is due to start operations in late 2013.

On the gas front, China’s increasing ability to source domestically and from Central Asia and some doubts about Gazprom’s capacity to deliver the extra gas has strengthened Beijing’s negotiating hand, while the higher prices Russia can get for its gas in Europe make Moscow in no hurry to resolve the issue, let alone buckle. Vice Premier Wang Qishan said after the Moscow that China “hopes the two sides could make further essential progress in gas talks as soon as possible and that the two sides exchanged views and plans on future energy cooperation, demonstrating mutual trust as well as candid and pragmatic spirit of cooperation between China and Russia”. Which pretty much says there was no progress.