Saudi Arabia’s state-owned oil giant, Saudi Aramco, is looking at several further opportunities to expand its downstream dealings with China, according to recent comments from the company’s chief executive officer, Amin Nasser. During the conference call to report the company’s latest results, he stated: “We’re currently working with a number of opportunities with Sinopec, and are also exploring a good number of opportunities with other players in Asia - all for mainly highly integrated complexes with more than 50 percent liquid to chemical that would represent a huge growth opportunities.” Any deals with Sinopec would augment the existing joint Saudi Arabia-China refining and petrochemical complex to be built in northeast China. The original deal for Saudi Aramco and China’s North Industries Group (Norinco) and Panjin Sincen Group to build the US$10 billion 300,000 barrels per day (bpd) integrated refining and petrochemical facility in Panjin city was signed in February 2019. Due to the ongoing negative financial effects on Saudi Arabia of its first disastrous Oil Price War from 2014 to 2016, as analysed in depth in in my new book on the global oil markets, the plans were shelved later that year.
Talks to resuscitate the idea then began again at the beginning of 2020 until Saudi Arabia launched another calamitous oil price war in April of that year, which again caused massive economic damage to Saudi Arabia and served to compound the economic pain on Saudi Aramco - already struggling under the weight of a huge dividend debt burden. With the turnaround in oil pricing since the beginning of the third quarter of last year, talks to go ahead with the refinery again resumed, together with the plan for Saudi Aramco to supply it with up to 210,000 bpd of crude oil feedstock, and it is expected to be operational in 2024.
These new downstream projects with Sinopec follow this year’s earlier series of meetings in Beijing between senior officials from the Chinese government and foreign ministers from Saudi Arabia, Kuwait, Oman, Bahrain, and the secretary-general of the Gulf Cooperation Council (GCC). At these meetings, the principal topics of conversation were to finally seal a China-GCC Free Trade Agreement and “deeper strategic cooperation in a region where U.S. dominance is showing signs of retreat,” according to local news reports.
However, although the specific meetings between Saudi and Chinese officials at this event may have served to expedite some specific projects, such as those currently being discussed with Sinopec, the seeds of extensive broad and deep co-operation between the two countries were truly sown when Saudi Arabia’s Crown Prince Mohammed bin Salman (MbS) was desperately looking for a way to save face by completing his much-vaunted IPO of Saudi Aramco amidst widespread shunning of the offering by the West. As analysed in depth in my 2019 book, China offered MbS a way out by simply buying the entire stake – at that time 5 percent was the stated amount to be offered – in a straight private placement.
This would have two huge benefits for MbS, firstly, raising the money that Saudi Arabia needed immediately, and secondly, not requiring any public disclosure of the offer price per share. This latter factor would allow MbS to assure the senior Saudis, who by that time were sceptical of his abilities to lead the country when the time came, that he had managed to hit the US$2 trillion valuation for the whole of Aramco that he had publically set as a benchmark for IPO success. Although the offer was eventually declined, the fact that China had offered itself as a backstop bid for MbS’s most important public project to that point was not forgotten, and nor were the corollary desires of China to forge closer links with Saudi Arabia going forward.
Although there have been recent reports of Saudi Arabia considering accepting Chinese yuan instead of US dollars for Chinese, this is in fact nothing new and was examined in depth in my 2019 book and previous articles dating back to 2017. To recap from that book: “China sought to tie in its assistance in taking the pressure off MbS [through a private placement to China for the complete stake in Saudi Aramco] with the notion of Saudi Arabia accepting the yuan (the trading unit of the renminbi currency) in payment for crude oil supplies.”
This was a key strategy in China’s desire for its renminbi currency to more properly reflect the country’s increasing importance in the global financial architecture that was evidenced as early as the G20 summit in London in April 2010. At this summit, Zhou Xiaochuan, then-governor of the People’s Bank of China (PBOC), flagged the notion that the Chinese wanted a new global reserve currency to replace the U.S. dollar at some point.
The long-planned sequencing for this to occur was: the renminbi’s inclusion in the IMF’s Special Drawing Rights (SDR) reserve asset mix (which happened in October 2016); increasing its use as a trading currency (which naturally followed that); its use as the key currency of an international energy trading exchange (which occurred with the launch of the renminbi-denominated Shanghai International Energy Exchange in 2018); and increasing calls from big oil producers and other major trading nations to use the renminbi (which has occurred frequently since the renminbi’s inclusion in the SDR mix).
By the time of China’s suggestion to rescue the ailing Saudi Aramco IPO, the renminbi had already been included in the SDR mix but it had still not hit the mainstream in terms of breadth and depth if usage internationally. Therefore, Beijing succeeding in leveraging the Saudis into accepting yuan for oil would have been – and remains - a huge step for the renminbi’s wider acceptance, especially as other producers in the Middle East might be expected to follow suit.
Despite any objections to the idea that the U.S. might have harboured, the Kingdom’s then-Vice Minister of Economy and Planning, Mohammed al-Tuwaijri, told a Saudi-Chinese conference in Jeddah at the end of August 2017 that: “China is by far one of the top markets…We will also access other technical markets in terms of unique funding opportunities, private placements, panda bonds and others.” He added: “We will be very willing to consider funding in renminbi and other Chinese products, and [the] Industrial and Commercial Bank of China and other divisions have shown interest for us to do that.”
These comments came at around the same time as the visit of high-ranking politicians and financiers from China to Saudi Arabia, which featured a meeting between King Salman and Chinese Vice Premier, Zhang Gaoli, in Jeddah. At these meetings, according to comments at the time from then-Saudi Energy Minister, Khalid al-Falih, it was also decided that Saudi Arabia and China would establish a US$20 billion investment fund on a 50:50 basis that would invest in sectors such as infrastructure, energy, mining, and materials, among other areas. The Jeddah meetings in August 2017 followed a landmark visit to China by Saudi Arabia’s King Salman in March of that year during which around US$65 billion of business deals were signed in sectors including oil refining, petrochemicals, light manufacturing, and electronics.
The fact that the ‘One Belt One Road’-related investments made by China come with considerable caveats allowing Beijing to secure key strategic tracts of land or sea in lieu of debts owed or investments made - including Iran’s major airports and naval ports under the 25-year deal with China, Sri Lanka’s Hambantota Port, and Djibouti’s Doraleh Port – may be regarded by Saudi Arabia and several other Middle Eastern states as being little different to the conditions attached to U.S. investment since the end of the Second World War. For the U.S., though, news just before Christmas that Saudi Arabia is now actively manufacturing its own ballistic missiles with the help of China, may not be regarded as part of a reasonable rebalancing of power in the Middle East, especially in light of Washington’s current and ongoing efforts to address Iran’s nuclear ambitions.
By Simon Watkins for Oilprice.com