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Analysis of Cooperation on Energy Projects between China & Saudi Arabia in the Post-COVID Era


Recently, China and Saudi Arabia have further deepened various cooperation, including energy trade. How will the collaboration reshape the world oil trade in the future? This article will dive into energy projects between the two countries and analyze the "petroyuan" challenge to the US dollar in the post-COVID era.

 


 

State of Saudi Arabia's oil and gas industry


Saudi Arabia has a single energy structure, and oil has an absolute advantage, which is the pillar of the energy industry and economy. Relying on affluent oil and gas resources, Saudi Arabia has become the world's largest crude oil exporter.


Saudi Arabia is rich in oil and gas, with oil and natural gas resources of 53.89 billion tons and 18.5 trillion cubic meters, respectively. Oil and gas resources are mainly distributed in the central and northeastern regions, concentrated in the Widyan-Widyan-North Arabian Gulf Basin.


Oil and gas production


As a major oil producer, Saudi Arabia's oil production has grown steadily in recent years. In 2019, Saudi Arabia's oil production reached 557 million tons (including natural gas liquids, or NGL), ranking second in the world. In 2020, affected by COVID-19 and the "OPEC+" production reduction agreement, Saudi Arabia's oil production was 520 million tons (including NGL), a decrease of 6.9% from the previous year, ranking second in the world.


In terms of natural gas, since Saudi Arabia stepped up its natural gas development in 1999, its natural gas production has entered a stage of rapid growth. In 2020, its natural gas production will reach 112.1 billion cubic meters, an increase of 0.6% over the previous year, ranking seventh in the world. According to Saudi Arabia's "Vision 2030", Saudi Arabia will vigorously increase natural gas production in the future, hoping to use natural gas resources to replace oil power generation to increase foreign exchange earnings from oil exports.


Refining Industry


As of the end of 2020, Saudi Arabia has nine refineries with a total processing capacity of 161 million tons per year. Among them are 6 refineries with a refining capacity of more than 20 million tons per year, 2 refineries with a processing capacity of 10 million to 20 million tons per year, and one refinery with fewer than 10 million tons per year. According to Saudi Arabia's "Vision 2030", crude oil processing capacity will be increased to meet domestic demand growth.


Petrochemical Industry


Saudi Arabia's petrochemical industry is leading in the Middle East. Currently, Saudi Arabia has established two major petrochemical centers in Jubail in the Persian Gulf and Yanbu in the Red Sea.


The leading petrochemical companies are Al-Jubail Petrochemical Company (KEMYA, 50% owned by Saudi Basic Industries Corporation and Exxon Mobil Corporation), Saudi Petrochemical Company (SADAF, 50% invested by Saudi Basic Industries Corporation and Shell Corporation), Saudi Yanbu Petrochemical Company (YANPET, invested 50% by Saudi Basic Industries Corporation and ExxonMobil Corporation) and Arabian Petrochemical Company (PETROKEMYA, a wholly-owned subsidiary of Saudi Basic Industries Corporation).


In 2020, Saudi Arabia's petrochemical production capacity will exceed 90 million tons annually. Saudi government policy strongly supports the development of the petrochemical industry in terms of funds. The government allows foreign capital to invest in the petrochemical industry, participate in the construction of petrochemical infrastructure, and allow domestic and foreign companies investing in Saudi Arabia to use the methane, ethane, and propane, butane produced in Saudi Arabia at very competitive prices. Shell, Exxon Mobil, Mitsubishi Chemical, and other companies have established joint ventures in Saudi Arabia to promote the development of the Saudi petrochemical industry.


Oil and Gas Export


Saudi Arabia is the world's largest oil exporter but has no natural gas exports. In 2020, Saudi Arabia exported 349 million tons of oil, mainly to Asia-Pacific, North America, and Europe.


China imported 84.92 million tons of crude oil from Saudi Arabia, accounting for 24.3% of Saudi Arabia's total exports in 2020. In recent years, the flow of Saudi oil exports has changed. The share of oil exported to North America and Europe has gradually declined, while that in the Asia-Pacific region has increased significantly.


In the future, with the development of unconventional oil and gas resources in the United States and the implementation of the energy independence strategy, Saudi oil exports will be more inclined to the Asia-Pacific market.


In terms of natural gas, Saudi Arabia's natural gas consumption multiplied from 2000 to 2020, reaching 107.8 billion cubic meters in 2020. Natural gas consumption in Saudi Arabia is mainly used in industry and power generation. It is expected that in the future, affected by factors such as economy, population, chemical industry, and power generation, the demand for natural gas in Saudi Arabia will continue to rise. Still, it will not import natural gas, and consumption growth will rely on increased domestic production.


Oil and Gas Foreign Cooperation Policy


The upstream implements limited opening to the outside world and the midstream and downstream cooperate with the outside world in the form of joint venture companies. Saudi Arabia's oil and gas foreign cooperation laws are mainly based on the "Foreign Investment Law" that came into force in 2010. The state owns the country's oil and gas resources, and Saudi Aramco monopolizes the exploration, development, processing, transportation, and sales.


In the oil field, Saudi Aramco monopolizes oil exploration and exploitation and does not allow foreign companies to invest and obtain share oil in proportion to investment. However, after passing the pre-qualification of Saudi Aramco, foreign companies can participate in the bidding of oil exploration, design, and production projects in which Saudi Aramco is the owner and operator in the form of service contracts.


Different opening policies in the natural gas field are implemented in different regions and stages. The areas already in production will continue to be exploited by Saudi Aramco, and only the processing and sales of natural gas will be opened to the outside world.



The economy hit hard by low oil prices


Saudi Arabia is the largest economy in the Gulf region, and the oil industry is the backbone of the Saudi economy. Historically, benefiting from rising international oil prices, Saudi Arabia has enjoyed substantial oil export income, and its economy has maintained relatively rapid growth.


The sharp drop in international oil prices in 2014 significantly impacted the Saudi economy, and the GDP growth rate dropped to 3.6% that year. In 2016 and 2017, the GDP growth rate of Saudi Arabia fell to 1.8% and -0.7%, respectively. In 2018, with the recovery of oil prices, the GDP growth rate of Saudi Arabia recovered to 2.2%.


Since 2020, due to the superimposed impact of low oil prices and COVID-19, the downside risks of the Saudi economy have become prominent. Compared with the previous year, GDP in 2020 fell by 4.1%, setting a new low value of growth rate since 1985.


Seeking Greater Efforts to Develop New Energy


Saudi Arabia plans to invest US$20 billion in new energy fields in the next ten years to reduce crude oil consumption for power generation to increase crude oil exports. Northwestern Saudi Arabia has abundant sunshine, a warm Red Sea breeze, and vast and unused land resources. It is a golden area for developing hydrogen energy and can become a global energy center in the future.


As the world's largest crude oil exporter, Saudi Arabia hopes to strengthen cooperation with China, Europe, Australia, and other countries and regions to lead the international hydrogen industry as the world looks for a cleaner and low carbon-based energy with lower pollution.


In 2020, Saudi Arabia and Air Products in the U.S. agreed to cooperate in constructing a large-scale green hydrogen production plant in Neom, a new city in western Saudi Arabia. The hydrogen production plant is expected to be implemented in 2025, with a total investment of 7 billion U.S. dollars and a designed hydrogen production capacity of 650 tons per day. It will then become the world's largest hydrogen production plant.


On January 10, 2021, Saudi Crown Prince Salman announced that he would invest 100 billion to 200 billion US dollars in the New Future City area (Neom) in northern Saudi Arabia to build a new city called "The Line". Designed with sustainable development in mind, the new city will be powered entirely by clean energy and achieve zero carbon emissions.


"The new city project will start in the first quarter of 2021 and plans to create 380,000 jobs by 2030 and contribute $48.1 billion to Saudi GDP."


Investment in China


President and CEO of Saudi Aramco, Amin H Nasser, spoke at the International Petroleum Technology Conference 2022 in Riyadh.


“Definitely, we are looking for more investment in China. And we are currently in discussions with a number of our partners in China.”


Enhancing Crude Oil Trade


In 2020, the global economy will be severely affected by COVID-19 and low oil prices. However, with the reopening of the economy in the coming years, China's economy and oil demand will continue to grow. It will import 84.92 million tons of crude oil from Saudi Arabia, an increase of 1.9% compared with 2019. Saudi Aramco hopes to continue to strengthen the crude oil trade with China.


In addition to the original customers, Sheng Hong Group Holdings Limited may be a new customer of Saudi Arabia's crude oil exports to China. The company's new refinery in Lianyungang, with a processing capacity of 320,000 barrels per day, will be put into operation by the end of 2021, and hopes to reach an oil supply agreement with Saudi Aramco.



Saudi Arabia and China's existing refining and petrochemical integration cooperation projects



Date

Project

December 9th, 2022

Sinopec & Saudi Amraco: The Fujian Gulei Phase II project signed a cooperation framework agreement. The Phase II project plans to build 16 million tons/year of oil refining, 1.5 million tons/year of ethylene cracking, and downstream derivatives integrated units, which are expected to be completed and put into operation by the end of 2025.


At the same time, Sinopec signed a memorandum of understanding on cooperation with Saudi Aramco and Saudi Basic Industries Corporation, planning to jointly develop a large-scale project in Yanbu, Saudi Arabia, that converts liquid raw materials into chemical products. This project will achieve collaborative optimization with the Yanbu refinery.

March 10, 2022

The joint venture Huajin Aramco Petrochemical Co., Ltd. will develop a large-scale integrated refinery and chemical plant in Northeast China.


Its joint venture company, Huajin Aramco Petrochemical Company, will participate in developing a large-scale integrated refining and chemical unit in Northeast China. The complex will be built in Panjin City, Liaoning Province. The project is expected to be put into operation in 2024. It will consist of a 300,000 barrels per day refinery and a vinyl steam

September 2019

Saudi Aramco signed a memorandum of understanding with Zhejiang Free Trade Zone to advance further Saudi Aramco's plan to acquire a 9% stake in Zhejiang Petrochemical's refining and chemical integration project. According to the memorandum, the Zhoushan government strongly supported Saudi Aramco's future downstream investment in Zhejiang. In addition to Saudi Aramco's plan to acquire a 9% stake in the Zhejiang Refining and Chemical Integration Project, it also includes a long-term crude oil supply agreement and the right to use Zhejiang Petrochemical's large oil depot. The signed MoU will facilitate Saudi Aramco's participation in the new 400,000 barrels per day (20 million tons per year) petrochemical project in Zhoushan. The two parties will also evaluate potential investment opportunities in other value chain links, including refining and chemical, crude oil Natural gas storage and trade, refined oil retail, and distribution within the Zhejiang Free Trade Zone, etc

May 2017

Saudi Aramco signed a cooperation agreement with Norinco and Panjin Xincheng to develop a refining and chemical complex in Panjin, Liaoning Province. With a total investment of more than US$10 billion, the project will become China's most significant Sino-foreign joint venture and be put into commercial operation in 2024. Saudi Aramco holds 35% of the shares, while NORINCO and Panjin Xincheng each own 36% and 29%.

May, 2016

November 2009

Sinopec and Saudi Basic Industries Corp. (SABIC) announced the establishment of a joint venture company, China-Saudi (Tianjin) Petrochemical Co., Ltd., with each party holding 50% of the equity. The total investment of the project is about 18.3 billion yuan. Among them, SABIC has invested in cash, while Sinopec has invested in equipment.

March 2007

Fujian Refining & Petrochemical Company Ltd. is a large-scale Sino-foreign joint venture petrochemical enterprise jointly established by Fujian Refining and Chemical Co., Ltd., ExxonMobil China Petroleum and Chemical Corporation, and Saudi Aramco China Co., Ltd. with a share ratio of 50%: 25%: 25%. With an approximately RMB 40 billion investment, it aims to build and operate a world-class, high-tech, integrated petrochemical base.



Achieving Energy Transition Goals


Presently, Saudi Aramco has set up a research and development center in Beijing to cooperate with Chinese universities and companies in clean fuel engine projects, crude oil conversion chemical technology, and carbon emission reduction technology.



Triangle Relationship: US-Saudi Arabia-China


Since the 1970s, the United States and Saudi Arabia have gradually formed a solid "oil-dollar-security" interest relationship. Saudi Arabia has cooperated with the United States' energy, financial and regional security interests in exchange for the United States security commitment to the Saudi royal regime.


But as the U.S. shale oil and gas revolution continues to advance, the importance of Saudi Arabia in U.S. oil and regional security interests continues to decline. During the Trump administration, although Trump's son-in-law Kushner established a "close" personal relationship with Saudi Arabia's Crown Prince Mohammed, the conflict between the United States and Saudi Arabia's oil and gas and regional security interests has become increasingly prominent.


After Biden's new government came to power, it completely reversed Trump's pro-Saudi foreign policy, accelerated its strategic shift from the Middle East, and significantly weakened its willingness to intervene in Middle East affairs. Saudi Arabia's importance in US Middle East diplomacy has declined rapidly.


Since 2021, the Biden administration has successively announced the suspension and review of arms exports to Saudi Arabia, published the investigation report on the Khashoggi case and sanctioned Saudi government officials, stopped providing Saudi intelligence support on the Yemen battlefield, and increased its support for Saudi Arabia on human rights issues. The conflict of security interests between the United States and Saudi Arabia has rapidly intensified due to the pressure and the acceleration of negotiations on the nuclear agreement with Iran and secret diplomacy despite Saudi Arabia's opposition.


Regarding oil and gas interests, the Biden administration has wholly reversed Trump's energy policy of supporting the fossil energy industry, vigorously promoting the Green New Deal and green infrastructure, and seeking to lead the global energy transition and address climate change.


With the Biden government coming to power, the foundation of the US-Saudi strategic partnership has tended to be loose in the US-Saudi "oil-dollar-security" interest relationship. Saudi Arabia has continuously enhanced its strategic autonomy, especially seeking to deepen practical cooperation with China, Russia, Japan, and other major powers.


In April 2021, President Xi Jinping spoke with Crown Prince Mohammed. The two sides agreed on building a general and high-level cooperation pattern in energy, economy, and trade and deepening coordination and cooperation in international and regional affairs. Under the guidance of the diplomacy of the two heads of state, China-Saudi Arabia's practical cooperation in various fields represented by oil and gas cooperation has been in-depth development.


In the oil and gas trade field, as the United States reduces its dependence on oil imports from the Middle East, Saudi Arabia seeks other stable oil export markets, and the oil trade between China and Saudi Arabia grows steadily.


According to China Customs Statistics, from February to October 2022, China imported 465,922,163,376 kilograms of crude oil under HS code 27090000. Among all the countries, Saudi Arabia topped with 73,761,364,489 kilograms.


Sources of China's crude oil imports from January to October 2022



Source: China Customs Statistics


Uncertainties & Risks in the Grand Energy Project


Affected by the reduction of capital expenditure, Saudi Aramco will slow down the investment process of refining and chemical projects in Indonesia, India, China, and other Asian countries in 2020.


The ebb tide of globalization and COVID-19 have superimposed, the world economy has shrunk sharply, and the downward pressure on the economy is relatively high. In this context, the cooperation space between China and Saudi Arabia in the energy and chemical industry field tends to narrow.


In the global energy industry, the high stock, low demand driven by the slow recovery from COVID-19, and potential regional wars led by the Ukraine & Russian conflicts… all shadow the grand energy project between Saudi Arabia & China.


Impact on dollar-denominated oil trade by petroyuan


In recent years, with the increasing internationalization of the RMB, Russia, Angola, Iran, and other countries have begun to use the RMB as the settlement currency for crude oil trades. This phenomenon is called "petroyuan," replacing "petrodollar."


The renminbi settlement of bulk commodity trade represented by the "petroyuan" is expected to strengthen the renminbi's role in international business and pricing of energy commodities, and the function of the renminbi as a payment and reserve currency may also be enhanced accordingly.


The conflict between Russia and Ukraine and the financial sanctions imposed by Europe and the United States on Russia has led to the resurgence of "de-dollarization". Europe and the United States imposed financial sanctions on Russia by freezing foreign exchange reserves and threatening to disconnect the SWIFT system, which also impacted the credit of the US dollar.


Recently, China and Saudi Arabia have further deepened various cooperation, including energy trade. According to the Saudi Press Agency (SPA), on December 8, on the 7th, relevant companies of the two countries signed 34 investment agreements covering green energy, green hydrogen, photovoltaics, information technology, cloud services, transportation, logistics, medical care, housing and construction factories and many other areas.


Before the summit, whether the two countries can agree on settling some crude oil trade in RMB is the focus of attention from all walks of life. However, as of now, there is yet to be any information about a substantial breakthrough.


China's importance in the global economic system is increasing day by day. In 2020, it accounted for 17% of the worldwide GDP, and the total import and export of goods will account for 13%, surpassing the United States.


However, there is a big gap between the RMB and the US dollar regarding foreign exchange reserves, foreign exchange transactions, global payments, trade financing, and securities valuation.





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