China, Saudi Arabia consolidate energy ties

China and Saudi Arabia appear to be building a “more meaningful” relationship with their landmark US$10 billion deal to construct a state-of-the-art refining complex in northeastern Liaoning province, analysts say, as the interests of the world’s largest energy consumer and its biggest oil exporter converge.

Riyadh’s investment in the integrated refinery and petrochemicals complex in Panjin, unveiled on Sunday, “is another way of saying: I’m committed to what you are doing, I will help you out and make this relationship more meaningful,” said Ashok Dutta, an oil industry executive based in Calgary, the heart of Canada’s energy industry.

Sunday’s announcement by Saudi Aramco, which is primarily state-owned, came mere months after Chinese President Xi Jinping in December visited Saudi Arabia, where he held a summit with Gulf Arab leaders and signed a raft of energy and investment deals.

Work on the Panjin project is expected to start within three months, with Aramco securing a deal to supply more than two-thirds of the 300,000 barrels per day of crude oil that the complex will require as feedstock once complete – business that could otherwise have gone to Russia, the main competitor of Gulf energy exporters.

Such processing plants typically have a lifespan of around 35 years, which “guarantees that China will be a stable and continuous export market” for Saudi oil in the near future, said an energy sector researcher based in China who asked not be named because he wasn’t authorised to speak to the media. It will also help to shore up China’s energy security, he said.

“You do the maths,” Dutta said. “Even though the Aramco oil will be a bit subsidised because they are taking it to their own captive refinery, just look at the value and volume of the crude oil that’s been locked-in.”

The Panjin complex could import more than US$160 billion worth of Saudi crude over its lifespan, assuming a daily supply of 210,000 barrels at an average price of US$60 each over three-and-a-half decades.

Saudi Aramco’s 30 per cent stake in the Panjin plant via Huajin Aramco Petrochemical Co, its joint venture with China North Industries Group Corp (Norinco), would also entitle it to a cut of the profits generated by the forecast production of 1.65 million tonnes a year of ethylene – used to make fertiliser – and 2 million tonnes a year of paraxylene, which serves as a building block for the manufacture of other industrial chemicals.

“So it’s a win-win for Saudi Arabia. For China and the downstream industry, it’s about getting the feedstock committed,” Dutta said. “They don’t have to go anywhere [risky like sanctioned Russia] to get a subsidised rate.”

For now, analysts expect China to continue buying heavily discounted Russian crude, but there are fears that US-led sanctions against Russia for its war in Ukraine “could greatly disrupt the global oil supply chain, leading to big price fluctuations”, said Joey Zhou, a Shanghai-based petrochemicals analyst for global energy and chemicals industry consultancy Independent Commodity Intelligence Services (ICIS).

“We expect Middle Eastern companies would be willing to participate in [more] joint ventures with Chinese firms to ensure they have a secure outlet for their oil,” he said.

“To obtain a more competitive position for feedstock costs, Chinese producers are also likely to welcome Saudi or Emirati funds by involving them in existing or new plans for integrated refinery and petrochemical complexes.”

Panjin is just one of several integrated refinery and petrochemical complexes that Saudi Aramco has had its eye on with China in recent years.

In December, Aramco and China’s Sinopec signed an agreement for a 320,000 barrels-per-day oil refinery and petrochemical cracker outputting some 1.5 million tonnes a year in Gulei, Fujian province, that’s expected to commence production in late 2025.

Aramco has also reached an initial agreement with Sinopec to build a similar facility on Saudi Arabia’s west coast, with the companies already partners in a 400,000 barrels-per-day refinery at Yanbu on the Red Sea.

Separately, Aramco’s overseas unit on Monday said it was acquiring a 10 per cent stake in Shenzhen-listed Rongsheng Petrochemical Co. in a deal valued at US$3.6 billion that will see the Saudi oil giant supply 480,000 barrels per day to Rongsheng affiliate Zhejiang Petroleum and Chemical Co. under a long-term sales agreement.

“Gone are the days when the Saudis were selling crude on a term basis, that actually didn’t make much sense,” said Dutta, the oil industry executive. “What makes sense is to take an integrated approach by scraping value from the bottom of the barrel” by looking to profit both from refined fuels and petrochemicals, he said.

China last year accounted for about 37 per cent of the world’s consumption of polythene and polypropylene – plastic polymers derived from oil, also known as polyolefins, that are essential to a wide range of downstream industries – and is forecast to “continue to lead global polyolefin consumption growth” until 2030, said the ICIS’ Zhou.

“Similar stories will take place in other chemical industries, such as polyesters and rubbers,” he said, adding that “China’s potential petrochemical consumption is one of the key drivers motivating Saudi investments.”

Aramco’s joint ventures with Norinco and Sinopec have been timed to coincide with the expected onset of the next upturn in cyclical petrochemicals markets, Zhou said, with petrochemicals producers in Saudi Arabia and the Gulf set to enjoy an advantage because they pay significantly less for crude oil and other feedstocks.

“Whoever controls the feedstock cost advantages will gain more initiative in the next competitive market,” Zhou said.

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