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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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China And Saudi Arabia Strengthen Alliance With New Megaproject

  • China and Saudi Arabia have been drifting closer for years, and a new energy project between the two represents a continuation of that trend.
  • The megaproject will be in Shandong, home to around 26 percent of China’s refining capacity and a key destination for Saudi Aramco’s crude exports.
  • The focus of the project, based on China’s 14th Five Year Plan, is ensuring the country’s energy security and stability.

Ever since China gave Saudi Crown Prince Mohammed bin Salman (MbS) the opportunity to save face after his many unsuccessful attempts to float Saudi Aramco in what was supposed to be a glorious initial public offering (IPO), MbS has been in Beijing’s debt and Saudi Arabia has appeared to drift further into Beijing’s sphere of influence. Last week saw the latest example of this apparent drift, with Aramco’s senior vice president downstream, Mohammed Y. Al Qahtani, announcing the creation of a “one-stop shop” provided by his company in China’s Shandong. “The ongoing energy crisis, for example, is a direct result of fragile international transition plans which have arbitrarily ignored energy security and affordability for all,” he said. “The world needs clear-eyed thinking on such issues. That’s why we highly admire China’s 14th Five Year Plan for prioritizing energy security and stability, acknowledging its crucial role in economic development,” he added. 

The megaproject in Shandong, which is home to around 26 percent of China’s refining capacity and is a key destination for Saudi Aramco’s crude oil exports, will broadly involve the flagship Saudi oil and gas giant creating “stronger ties with the world’s largest oil exporter [that] would enhance China’s energy security, especially as we work on increasing our production capacity to 13 million barrels per day,” according to Al Qahtani. Aside from the fact that Saudi Arabia still cannot produce anywhere near 13 million barrels per day of crude oil, despite repeated comments over several years that this is its target production, closer cooperation between Aramco and China will mean Saudi Arabia investing heavily in the build-out of a large, integrated downstream business across the country in tandem with its Chinese partners. This, according to Al Qahtani, will involve: “Everything from reliable supplies of oil and natural gas liquids to refining, marketing, petrochemicals, and lubricants.” In addition to various mooted ‘green initiatives’ also to be jointly undertaken between Aramco and China – which, given its history over ‘IMO 2020’, might be questioned by some – Al Qahtani concluded by stating that the: “Saudi Vision 2030 offers major new supply chain opportunities for Shandong companies in the Kingdom…[and] it would solidify Shandong’s crucial role in making some of China’s most important goals a reality.”

Although there would appear to be some merit in this megaproject from the Saudi perspective, given the existing synergies with its crude oil exports to China, it is difficult not to see this as also being part of the broader drift towards China – and Russia – that has been seen by Saudi Arabia since Russia rescued Riyadh and OPEC at the end of 2016 by joining the OPEC alliance in the aftermath of the disastrous 2014-2016 Saudi-led Oil Price War. As analyzed in-depth in my new book on the global oil markets, this allowed Russia enormous leverage over OPEC states in general, and Saudi Arabia in particular. China’s great chance to compound this leverage further over Saudi Arabia, and MbS in particular, came when MbS – still at a very vulnerable stage in his rise to power – had staked much on his ability to float Saudi Aramco in an IPO. According to MbS’s pitch to the senior Saudis – some of whom were backing his rise to power and some of whom were not – the Aramco IPO would see: a flotation of at least 5 percent of the stock; at least one non-domestic listing to be done on a major international stock exchange; and, a total valuation put on Aramco of at least US$2 trillion by achieving the required price per share.

As analyzed in the book, the more information came out about Aramco, the less any serious international investor wanted anything to do with it. This meant that none of the three major objectives that MbS had pitched to the senior Saudis about the Aramco IPO would be achieved: it would not be able to sell 5 percent of its stock at the required price; it would not be listed on any major international stock exchange; and, it would not achieve a total valuation for Aramco of at least US$2 trillion. At that point – in the middle of 2017 - China stepped in and offered the ultimate face-saving opportunity for MbS, which he has never forgotten, according to senior energy sources in the region. China offered to buy the entire 5 percent stake in Aramco for a price that would guarantee the valuation for the whole company of the required US$2 trillion. Crucially as well, this would all be done through a private placement of the entire 5 percent share block in Aramco, which meant that none of the details surrounding the deal would ever get out publically. As it transpired, several senior Saudis at the time - opponents to MbS’s ascension to power but still powerful voices in the Kingdom at that point – opposed the deal on the basis that it would make Saudi Arabia beholden to China. This, of course, was an accurate view, but the mere offer of the deal from China to MbS resulted in the same outcome anyway, as it turns out.

Having made one face-saving offer in 2017, China did so again in early 2021, for a lesser amount – 1 percent - although it was made clear by Beijing that this could be a precursor to a larger stake sale in the future. This new offer coincided with a point when Saudi Arabia was struggling to pay the enormous dividends on Aramco shares that it was necessary to promise shareholders in order to sell any significant amount of Aramco stock in December 2019. This difficulty in meeting dividend payments due to Aramco shareholders of US$18.75 billion every single quarter of every single year – a total of US$75 billion each year – was exacerbated at the time by crude oil prices still struggling to trade above the US$60 per barrel of Brent benchmark level (the Saudi budget breakeven price was over US$84 per barrel of Brent then). The only reasons the deal was not done, according to senior regional oil industry sources exclusively spoke to by OilPrice.com at that time, was lethargy on the part of the Saudi leadership, which actually worked to their advantage on this occasion, as oil prices started to rise as the year progressed, and then spiked again on Russia’s invasion of Ukraine.

The relationship between Saudi Arabia and the U.S. worsened considerably after the replacement in the White House of former President Donald Trump with President Joe Biden. Biden’s comments on Saudi Arabia during his election campaign – although true; and perhaps because of this – were received extremely badly by MbS, OilPrice.com understands from senior regional energy sources. On 2 October 2020, Biden stated that he would seek to: “…reassess our relationship with the Kingdom [of Saudi Arabia], end U.S support for Saudi Arabia’s war in Yemen, and make sure America does not check its values at the door to sell arms or buy oil.” Biden also appeared to endorse the CIA’s findings that the murder of expatriate Saudi journalist, Jamal Khashoggi, was carried out on the personal orders of the MbS. For MbS, these comments came at a time when his second failed oil price war in less than five years has left the ruling Saud dynasty facing the greatest existential threat to its continued rule over the country since Ibn Saud first consolidated his Arabian conquests into the Kingdom of Saudi Arabia in 1932. Given the choice between condemnation from the U.S. or blank cheques from China, it is not difficult to see why MbS continues to gravitate towards Beijing.

By Simon Watkins for Oilprice.com

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