Saudi Arabia, the world’s largest oil exporter, is planning to increase its investments in China’s refining sector, as it seeks to secure its market share and compete with rival suppliers such as Russia and Iran.
The kingdom’s state-owned oil company, Saudi Aramco, announced on Tuesday that it had signed a comprehensive strategic partnership agreement with China, which includes a number of deals and memoranda of understanding on energy cooperation.
One of the key deals is Aramco’s purchase of a 10% stake in Rongsheng Petrochemical Co., a private Chinese refiner, for about $3.6 billion. The deal will allow Aramco to supply about 480,000 barrels per day of additional crude oil to Rongsheng-affiliated refineries, which have a total capacity of 1.4 million barrels per day.
The investment is seen as a strategic move by Aramco to strengthen its position in China, the world’s largest oil importer and consumer, which accounts for more than 15% of global oil demand. China is also Saudi Arabia’s biggest trading partner and a source of growing investment. Last year, bilateral trade between the two countries hit $87.3 billion, up 30% from 2020, according to Chinese customs figures.
By taking a share in key refineries, Aramco is not only securing long-term crude sales contracts, but also gaining access to China’s domestic market, where demand for refined products such as gasoline and diesel is expected to grow as the economy recovers from the Covid-19 pandemic.
The deal also gives Aramco an edge over its competitors, which typically sell crude via yearly-reviewed contracts or on a spot basis. Countries such as Iran and Russia, left with limited options due to Western sanctions, have had to deeply discount their cargoes in order to entice buyers in China and, in some occasions, offered free shipping and other perks.
Saudi Arabia’s Race against Russia
Saudi Arabia and Russia have been locked in a fierce rivalry for the top spot as China’s biggest oil supplier. In 2020, Russia surpassed Saudi Arabia as China’s largest crude source for the first time on an annual basis. However, Saudi Arabia regained its lead in the first half of 2021, thanks to its aggressive pricing strategy and China’s increased purchases ahead of the OPEC+ production cuts.
The partnership agreement between Saudi Arabia and China also covers other areas of cooperation, such as hydrogen energy and enhancing coordination between the kingdom’s Vision 2030 and China’s Belt and Road Initiative. The two sides also agreed to work together on climate change and green development.
The agreement reflects the mutual interest and strategic alignment between the two countries, which have maintained close ties since establishing diplomatic relations in 1990. Chinese President Xi Jinping visited Saudi Arabia in 2016 and signed a joint statement on establishing a comprehensive strategic partnership. Saudi Crown Prince Mohammed bin Salman visited China in 2019 and met with Xi again.
The latest visit by Xi to Saudi Arabia this week is seen as a sign that China and the Gulf region are deepening their economic relations at a time when US-Saudi ties have crumbled over OPEC’s decision to slash crude oil supply. The US has accused OPEC and its allies of creating an artificial shortage of oil and driving up prices, which have soared to their highest levels since 2014.
China, on the other hand, has refrained from criticizing OPEC and has expressed its support for Saudi Arabia’s efforts to stabilize the oil market. China has also shown interest in expanding its cooperation with other Gulf countries, such as the United Arab Emirates and Qatar, on energy and infrastructure projects.
As Xi wrote in an article published in Saudi media before his visit, the trip was intended to strengthen China’s relations with the Arab world. “China will continue to view its relations with Arab states from a strategic and long-term perspective,” he said.
