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.