Tag Archives: Saudi Arabia

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

Chinese Vice Premier Zhang Gaoli (L) meets with Saudi King Salman bin Abdulaziz Al Saud in Jeddah, Saudi Arabia, Aug. 24, 2017. Photo credit: Xinhua/Wang Ye

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.

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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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Leaked Cables Show U.S. Frustration At China’s Role In North Korea-Iran Trade

The leaks of U.S. State Dept. cables by the online whistleblower WikiLeaks as far as we can tell so far don’t reveal any great new secrets about Sino-American relations. We’ve turned up only a few China-related cables in the batches published by some newspapers, which are not the full set shown to them, so it is thin pickings at this point, though there will be thousands more to come. (WikiLeaks’ leaked cables from the U.S. Beijing embassy here.) Yet one of the few that has been made public initially underlines the depth of frustration felt in Washington about its inability to stop China playing the middleman in North Korea’s weapons trade with Iran.

A 2007 document signed by then U.S. Secretary of State Condoleezza Rice (via Guardian) mentions “about 10” occasions between December 2006 and August 2007 on which the Americans said North Korean shipments of jet vanes for ballistic missiles passed through Beijing. The vanes were trans-shipped to commercial passenger flights out of Beijing Airport, with the Chinese authorities ignoring American requests to intervene to stop them, despite the Bush administration raising the issue several times at the highest levels.

The leaked cable also says Iran was trying to buy tungsten-copper alloy plates from Dalian Sunny Industries to make the vanes itself should its North Korean supply dry up. Separate cables also have the Americans accusing Chinese firms last year of supplying Iran with materials and assistance for making chemical weapons and saying that Iran was trying to buy gyroscopes and carbon fiber for its ballistic missiles from Chinese companies.

If the jet vanes were missile related, as the U.S. claims, their trans-shipment would have been in contravention of a U.N. Security Council resolution preventing their international trade and China has publicly said that it won’t help any country develop ballistic missiles that can be used to deliver nuclear weapons. But there is plenty of wiggle room within those constraints for anyone who didn’t want to look too closely.

At the same time, a cable from the U.S. embassy in Beijing dated March 2009 says that senior Foreign Ministry officials were telling the Americans that China’s good political and economic relations with Iran weren’t unconditional, that China didn’t want a nuclear-armed Iran (and was not 100% certain Iran was developing nuclear weapons, as opposed to “nuclear capability”, which would give it some regional clout). The officials also said China was supporting international talks on the issue but that the U.S. should take the lead with direct negotiations. They also said that they had told the Iranians “not to take China’s economic interests in Iran for granted” and that progress on the nuclear issue would “create a foundation” for further Chinese investment in the energy sector.

Improved ties with Saudi Arabia makes Beijing less reliant on Iran for oil and gas. Another cable, on the occasion of Foreign Minister Yang Jiechi’s visit to Saudi Arabia in January this year, notes some prodding from the kingdom for China to get in line with international efforts to limit Iran’s nuclear ambitions, and non-specific promises that Saudi Arabia would assure what is now the largest customer for its oil of adequate supplies should its purchases from Iran be interrupted.

Without providing the supporting cable in its database of the leaks , The Guardian also reports that

the hacker attacks which forced Google to quit China in January were orchestrated by a senior member of the Politburo who typed his own name into the global version of the search engine and found articles criticising him personally.

The New York Times, another recipient of the leaked cables, adds that

The Google hacking was part of a coordinated campaign of computer sabotage carried out by government operatives, private security experts and Internet outlaws recruited by the Chinese government. They have broken into American government computers and those of Western allies, the Dalai Lama and American businesses since 2002, cables said.

The New York Times also reports that “American and South Korean officials have discussed the prospects for a unified Korea, should the North’s economic troubles and political transition lead the state to implode. The South Koreans even considered commercial inducements to China, according to the American ambassador to Seoul. She told Washington in February that South Korean officials believe that the right business deals would ‘help salve’ China’s ‘concerns about living with a reunified Korea’ that is in a ‘benign alliance’ with the United States.”

A cable from May 2009 also reveals that China felt that the “lever of economic development” had not been used effectively on North Korea in the six-party talks, and that the further sanctions being pushed by the West wouldn’t work. As with Iran, Chinese officials have been telling the Americans that they need to take the lead through a bilateral dialogue with Pyongyang to get the international talks going again. A cable from December 2009, summarizing China’s advice to the U.S. on what reassurances it should give North Korea about its intentions, gives a good sense of why Kim Jong Il’s regime feels its back is against the wall.

It also contains the best piece of diplomatic understatement in all the leaked cables we’ve seen. Wang Jiarui, who heads the Party’s department dealing with other Communist Parties, told the Americans that “it was impossible to predict North Korean behavior through ‘normal’ means of reading public indicators”.

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