China And Saudi Arabia Intensify Energy Cooperation With Critical Deal

Yves here. This important post lays out how Saudi Arabia has largely slipped out of the US sphere of influence and is working ever more closely with China. I appreciate the fact that Watkins takes a long historical view, which is critical to understand economic developments that have a significant geopolitical element. Notice also the importance of literal place intrigues in Riyadh.

By Simon Watkins, a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for Credit Lyonnais, and later Director of Forex at Bank of Montreal. He was then Head of Weekly Publications and Chief Writer for Business Monitor International, Head of Fuel Oil Products for Platts, and Global Managing Editor of Research for Renaissance Capital in Moscow. He has written extensively on oil and gas, Forex, equities, bonds, economics and geopolitics for many leading publications, and has worked as a geopolitical risk consultant for a number of major hedge funds in London, Moscow, and Dubai. Originally published at OilPrice

  • Multi-pronged memorandum of understanding between Aramco and Sinopec lays the basis for increased cooperation.
  • China uses Russia’s new leverage over Saudi Arabia and OPEC to deploy its own strategy to accrete and exploit power over the Middle East’s huge oil and gas reserves.
  • The MoU covers refining, up-and-downstream operations, oilfield services, hydrogen, carbon capture processes and more.

The signing last week of a multi-pronged memorandum of understanding (MoU) between the Saudi Arabian Oil Company – formerly the Arabian American Oil Company – (Aramco) and the China Petroleum & Chemical Corporation (Sinopec) is a critical step in China’s ongoing strategy to secure Saudi Arabia as a client state. As the president of Sinopec, Yu Baocai, himself put it: “The signing of the MoU introduces a new chapter of our partnership in the Kingdom….The two companies will join hands in renewing the vitality and scoring new progress of the Belt and Road Initiative [BRI] and [Saudi Arabia’s] Vision 2030.”

The scale and scope of the MoU is enormous, covering deep and broad co-operation in refining and petrochemical integration, engineering, procurement and construction, oilfield services, upstream and downstream technologies, carbon capture and hydrogen processes. Crucially for China’s long-term plans in Saudi Arabia, it also covers opportunities for the construction of a huge manufacturing hub in King Salman Energy Park that will involve the ongoing, on-the-ground presence on Saudi Arabian soil of significant numbers of Chinese personnel: not just those directly related to the oil, gas, petrochemicals, and other hydrocarbons activities, but also a small army of security personnel to ensure the safety of China’s investments.

These developments are all in line with a comment made last March, at the annual China Development Forum hosted in Beijing, by Aramco chief executive officer, Amin Nasser: “Ensuring the continuing security of China’s energy needs remains our highest priority – not just for the next five years but for the next 50 and beyond.” At that point in early 2021, Aramco had a 25 percent stake in the 280,000 barrels per day (bpd) Fujian refinery in south China through a joint venture with Sinopec (and the U.S.’s ExxonMobil) and had also earlier agreed (in 2018) to buy a 9 percent stake in China’s 800,000 bpd ZPC refinery from Rongsheng. Several other joint projects between China and Saudi Arabia that had been agreed in principle were delayed due to a combination of the ongoing effects of Covid-19, Aramco’s crushing dividend repayment schedule, and concern from both countries – especially China – on how Washington might react to this clear threat to the U.S.’s own long-running interests in, and geopolitical relationship with, Saudi Arabia.

The basis of this enduring relationship between the U.S. and Saudi Arabia, as analysed in depth in my new book on the global oil markets, had been struck back in 1945 at a meeting on 14 February 1945 between the then-U.S. President Franklin D. Roosevelt and the Saudi King at the time, Abdulaziz. The first face-to-face contact between the two, this landmark meeting was held on board the U.S. Navy cruiser Quincy in the Great Bitter Lake segment of the Suez Canal, and the deal that they agreed – which had been the basis for all of the U.S.’s Middle East policy up until very recently – was this: the U.S. would receive all of the oil supplies it needed for as long as Saudi had oil in place, in return for which the US would guarantee the security both of the ruling House of Saud and, by extension, of Saudi Arabia.

The landmark deal survived the 1973 Oil Crisis – in which the Saudi-led OPEC placed an embargo on oil exports to various countries that had continued to supply arms to Israel during the Yom Kippur War against it and a coalition of Arab states led by Egypt and Syria – although the U.S. had little choice but to do that, given the dearth of its own alternative oil supply options at that time.

It also looked as though the deal might survive the Saudi-led Oil Price War from 2014 to 2016, aimed by Riyadh at destroying or at least severely disabling the then-nascent U.S. shale oil industry, although Washington would never trust the Saudis to the degree it had before the War again.

The real death of the 1945 Bitter Lake deal came when Russia emerged at the end of 2016 to support the then-beleaguered Saudi Arabia and OPEC in future oil production deals, given the lack of credibility in the global oil markets that both had at the end of the 2014-2016 Oil Price War. Fully cognisant of the enormous economic and geopolitical possibilities that were available to it by becoming a core participant in the crude oil supply/demand/pricing matrix, as also detailed in my new book on the global oil markets, Russia agreed to support the late-2016 OPEC production cut deal (in what was to be called from then-on ‘OPEC+’), although it did so in its own uniquely self-serving and ruthless fashion. At the end of 2016 at the latest, Washington knew its days of being able to count on Saudi Arabia in any meaningful way were over.

China used Russia’s new leverage over Saudi Arabia and OPEC to deploy its own strategy to accrete and exploit power over the Middle East’s huge oil and gas reserves, with the key turning point for Beijing being its own rescue act for Saudi Arabia in the middle of 2017. As also analysed in depth in my new book on the global oil markets, it was at that point that the then-newly appointed Crown Prince, Mohammed bin Salman (MbS), was facing a huge problem at a very vulnerable stage in his rise to power. His problem was twofold: first, he had portrayed himself to the senior Saudis whose support he desperately needed to stay in his new position as a man of canny international business and political instincts, and to this end he had promised them that he could float Saudi Aramco on international stock markets for a price that would value the whole company at US$2 trillion; second, international investors regarded the company as, in market parlance, a ‘dog with fleas’.

It should be remembered that, at this point in 2017, MbS faced real threats at home to his ongoing rise to power, principally from the supporters of the previous King Abdullah and then-heir apparent, Muhammad bin Nayef, who had been appointed the Crown Prince in April 2015, only to be replaced by King Salman with MbS in June 2017. The opposition of these supporters only increased when many of them were rounded up and imprisoned in November of 2017 as part of what MbS’s supporters portrayed as a crackdown on corruption. Others regarded it as a standard criminal shakedown in which those being held were told to hand over US$800 billion-US$1 trillion of their assets to MbS and his supporters or else their lives would become a lot worse very fast.

It was precisely when MbS was at his weakest that China stepped in and 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 publicly.

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. Although the deal did not go ahead, the subsequent trajectory of China-Saudi relations would suggest that MbS has never forgotten Beijing’s willingness to bail him out of any trouble in which he might find himself.

Saudi Arabia’s promise to ensure the continuing security of China’s energy needs remains its highest priority for the next 50 and beyond has found concrete expression since that assurance was made, most recently again 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 prioritising energy security and stability, acknowledging its crucial role in economic development,” he added.

It has also found a broader expression in the news just before Christmas 2021 that U.S. intelligence agencies had found that Saudi Arabia is now manufacturing its own ballistic missiles with the help of China. Given China’s long-running and extensive ‘assistance’ to Iran’s nuclear ambitions, as analysed in full in my latest book on the global oil markets, ongoing U.S. fears about what Beijing’s endgame might be in building out the nuclear capabilities of key states – and historical enemies – in the Middle East, look well-founded.

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  1. Altandmain

    The Saudis are fully aware that the US is a declining power relative to the Chinese and Russians.

    Combined with Washington’s major geopolitical mistakes, it makes a lot of sense for the Saudis to form closer ties with the Chinese.

    I suspect that history will show just how badly the Biden administration and some of his predecessor’s have blundered.

    1. TimD

      It is also smart for the Chinese to ensure that they have a number of suppliers. It will be interesting if the Saudi’s use this new deal to lever deals they have with American companies.

    2. Susan the Other

      My read is that this is all a consequence of the failures of neoliberal geoeconomics. In order to keep financialized global economics alive, finance itself needed to grow; in order to grow it needed to practice usury and overcharge everyone, creating debt servicing that crushed other countries and bloated the West’s banks. It had become blatantly apparent by 2010 or so. The dollar as the reserve currency, based originally on Saudi Oil, couldn’t handle a different paradigm – it was stuck in place so it became sink or swim. Even though the dollar was creating obscene imbalances and extraction and pollution problems just to stay one step ahead of collapse (all my opinion here, of course). Naturally inflation became the go-to technique for maintaining control of it all. And in the end we were almost amazed to see the Fed’s flat-out purchases of “assets” to maintain the system. And etc. This article was very informative, it explained the difficulties with the Aramco IPO and it’s exorbitant dividends – making the whole deal look like loan sharking. And it almost explains our scheme to use Ukraine to go for the Prize – (also my opinion) – the Caspian. It certainly has been an interesting oil war to watch. And one thing that can probably be said by all is that it, this modern oil war, has miraculously avoided nuclear confrontation. That’s encouraging. Very interesting stuff.

  2. PlutoniumKun

    The House of Saud is not made up of particularly bright people, but they do understand power and how to use it. They are very cunning, and its quite clear that for decades they’ve more or less had the measure of the US. They’ve used the US to destroy their main enemy (Saddam Hussein and other secular autocrats) and may yet use it to attack their historic Persian rivals (although they’ve been comprehensively out maneuvered by the Qataris)

    Its not long ago that everyone assumed that a combination of MbS’s stupidly and low oil prices doomed the HoS. But here they are, back at the front row again. Its likely that they are no longer the fulcrum of the world oil market – they can’t set prices anymore – but they do have enough oil to stay very rich for several decades yet.

    Russia has been playing a long game in the Middle East, and this is likely to benefit them more than China. Russia’s weapons are far more admired than Chinas, and they have a much longer history of dealing with the region. I suspect that for now the Saudi’s will be content to milk China for cash so they can pour it into obvious white elephants like Neom. While the Chinese will have helped with SA’s ballistic program, SA has long had military connections with Pakistan, and since the latter is a long time ally of China the connections are likely to be a little more complex than just a bilateral one.

    1. Daniil Adamov

      I’m not sure that any global or regional elites are particularly intelligent, with a few possible individual exceptions here and there. You only have to be smarter than your rivals, though. Most mistakes you make will be compensated by theirs, but if you can make slightly fewer mistakes, you win.

      1. Yves Smith Post author

        You miss PK’s point about cunning. I’ve seen it happen repeatedly in bureaucratic infighting that the bright boys underestimate the apparently duller bloke who is cunning. The bloke will execute a move, say a ruthless sabotage (one I saw was putting bonus tallies on everyone’s desk) where he must have done it since he’s the big beneficiary, but no one has proof and others (with no or weak motives) had more apparent opportunity. I seen clients be on the losing end of plays like this and I’ve had it happen to me.

        Go look at Marcie Frost at CalPERS as a classic example of the type.

        1. Michael.j

          I concur. As you probably well know it’s been estimated that sociopaths occur approximately at a rate of 8% in the population, but at a rate of 32% in CEOs. It seems that our society has a tendency of promoting this genetic anomaly to positions of power, at the expense of the rest of society and to the current inhabitants of this rock.

  3. Louis Fyne

    —The first face-to-face contact between the two, this landmark meeting was held on board the U.S. Navy cruiser Quincy in the Great Bitter Lake segment of the Suez Canal, and the deal that they agreed – which had been the basis for all of the U.S.’s Middle East policy up until very recently –—-

    Anyone know the real story behind Bitter Lake? I was intrigued by the “Bitter Lake Agreement” ever since I heard about it from an Adam Curtis documentary.

    However the story is sourced to one person in FDR’s entourage, and some historians doubt the claims as the claims didn’t leave much of a paper trail.

  4. Thuto

    The Saudis are just recognizing the asymmetrical upside in trimming their sails in the direction of the prevailing geopolitical winds. They’ve probably calculated that such an invidious act will provoke a response from the US and are prepared to weather that coming storm.

  5. David

    The Saudis have been following the rules for weak states in dangerous areas for generations now. Rule No 1 is to find a foreign protector. Rule No 2 is to learn that protector’s weaknesses and how to manipulate them. Rule No 3 is to multiply foreign protectors wherever possible and play them off against each other. For generations now, the Saudi regime has encouraged the US (and France and the UK) to convince themselves that “stability” (= the survival of the House of Saud) should be a major strategic objective. This has successively enmeshed western countries further and further into the Saudi system. Since their only real concern is regime survival, they can and do agree to more or less anything to please their western protectors, so long as the interests of the regime are not compromised thereby. It’s a common pattern around the world: the US, in particular, is outsmarted all the time by regimes which have to be clever just to survive. Probably, no regime in history has been written off more frequently than the Saudis, but they are still there.
    So now Rule No 3 applies. Diversification for such regimes is an end in itself, whereby each protector is insurance against a loss of interest by the others. But I suspect the Saudis will also be hoping to benefit from Chinese political support, at the UN and in Global South fora.

    1. PlutoniumKun

      Thanks – you express it for clearer than I could.

      I think that one of many big questions about the new dynamic is how China’s entry as a big player in the Middle East will impact on UK/EU policy. The UK may find the special relationship with various Gulf States to be under treat and that could have all sorts of implications for loose capital flows around the world. I suspect the the UAE will continue to grow as a world centre for hot money seeking a ‘respectable’ home. This has obvious implications for London. Europe as a whole may find its options for secure oil and gas reserves are getting narrower all the time. Japan and ROK too will be very concerned if they find that China has a chokehold over fuel supplies to the Pacific.

      1. Raymond Oliver

        Nate Hagens says peak oil occurred in 2018. Prof Hagens concentrates on energy use as the key problem in the planartery overshoot problem.

    2. Thuto

      I imagine keeping the top military brass onside and “well fed” (e.g. skimming off the top for procurement contracts in the army) to quell any incipient threats and mutiny would also be a top priority for the House of Saud.

      1. PlutoniumKun

        My understanding of the Saudi military is that its made up of a combination high level members of the HoS (the generals and F-15 pilots), with lower levels made up of of the useless sons of sunni tribes that are considered ultra loyal to HoS, along with much more competent mercenaries. The pay structures of the mercenaries are very well designed to ensure long term loyalty (i.e. they include pensions, support for family members in countries such as Pakistan, Egypt, etc). Plus of course a vast number of support personnel from the US and European arms suppliers.

        I think the ‘skimming’ on arms contracts in RSA is very much high level stuff. The percentage cut works both ways – obviously senior Saudi’s get it, but much of it gets fed back to western politicians and people of influence. I doubt if anyone outside the HoS has enough say in purchases to be able to gather their percentage. Baksheesh in RSA is very formalised. Breaking the unwritten rules of who gets what is very dangerous.

        1. David

          Yes, I think this is one of those cases where the military and the ruling political and business elites are all part of the same blob. I don’t think the military top brass sees itself as a separate group, because its members are probably all princes anyway. And don’t forget the National Guard, whose commander reports directly to the King, and is recruited from specially loyal tribes. It’s the ultimate weapon of the House of Saud.

        2. Thuto

          Staffing senior military ranks with family members is a double edged sword, it limits the threat of outsiders toppling the HoS yet leaves the army vulnerable to being split into factions in the event of a “palace feud”, which has serious ramifications for the national security of SA. As regards the skimming, you’re right of course about arms supplies, what I had in mind was more localized procurement for “smaller” things like cleaning services, supply of army uniforms, construction and maintenance, catering etc which, while not enticing for the military top brass from the HoS, would keep leadership tiers immediately below that loyal and happy.

    3. Eclair

      So this means that the US only cares about bringing Democracy and The Empowerment of Women to countries that don’t have large supplies of oil and gas? Who knew!

  6. Peter Nightingale

    I quote:

    … Aramco had a 25 percent stake in the 280,000 barrels per day (bpd) Fujian refinery in south China through a joint venture with Sinopec (and the U.S.’s ExxonMobil) and had also earlier agreed (in 2018) to buy a 9 percent stake in China’s 800,000 bpd ZPC refinery from Rongsheng.

    I can make no sense of quantities in obscure units such as barrels per day. The numbers make even less sense because they lack context, as is the case with these 250,000 Saudi and 800,000 Chinese barrels per day. Here is one possible way to create context. There are lots of ways to provide context, possibly better ones. Here is one:

    I hope that I didn’t drop factors of ten, but converting these quantities to Standard International units I get:
    (1) barrel of oil energy equivalent: 6e+09 J;
    (2) barrel of oil per day power equivalent: 7e+04 W;
    (3) world power consumption: 2e+13 W
    (4) Saudi 250,000 barrels per day as a fraction of world power: 0.1%; and
    (5) Same for the China 800,000 barrels per day: 0.3 %.

    After the dust settles, what have I learned? Little more than that the Chinese and the Saudis are talking to each other and that the U.S. foreign policy is extremely successful in enhancing this cooperation.

    Of course, there is the deeper problem that—at least as I see it—we’ll never solve the world’s energy problems if we keep using obscure units that reflect early 19th century understanding of physics and thermodynamics.

    So much today for fighting windmills!

    1. Susan the Other

      The Memo of Understanding between KSA and China was hopeful. Clearly China wants control of Mideast oil. All of the technology to produce it, refine it, including hydrogen. Item #4 was a standout: maintaining a “carbon capture process.” So it makes good geographic sense that if China is putting all its resources into Mideast oil that one of the top priorities will be carbon capture. It has always seemed obvious to me (simplistic maybe) that the best place to “capture” carbon is at the source and if Mideast oil turns into a humongous operation, all centered in a fairly small area, it will be easier and more efficient for capturing CO2 than if oil production is dispersed and scattered all over the planet. Just one point for optimism, imo. “Renewing the BRI” is almost cryptic because the BRI is considered a global driver of economics – not a Chinese plot. Everybody is investing in the BRI. So under this plan between KSA and China, even massive manufacturing projects will be included in the same area – easier to maintain CO2 mitigation. The one big thing that is missing is a recycling project to match their manufacturing plans. Instead of planned obsolescence, they do need to work on recycling.

      1. drumlin woodchuckles

        How much carbon is skydumped to “produce” a barrel of oil? How much carbn is skydumped when that barrel of oil is burned for fuel? Carbon skydumping from pumping the oil may well be concentrated where the oil is being pumped ( and hence maybe “captured” though I doubt it), but carbon skydumping from burning the oil after it has been pumped will happen diffusely all over the world and never “carbon captured”. How does one install a billion carbon capture devices on the billion tailpipes of a billion cars?

        1. Susan the Other

          Cut back on combustion engine cars and busses. Capture the carbon at the power plant. And what happened to riding bikes? One of our greatest little inventions. If the focus is now to capture carbon, one very important regulation will be needed which will limit the amount of petroenergy used. I’m anticipating a certain amount of rationing – it will be called some sort of recession. It will always be framed as economic control. Which it is.

  7. Kien

    Isn’t it projection to presume that China aims to make S Arabia a client state? An equally valid hypothesis is that China simply wants to weaken the US hold over S Arabia.

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