• Saudi Arabia last week reiterated its commitment to China as its “most reliable partner and supplier of crude oil,”.
• MbS seemingly now sees the U.S. as a partner just for its security considerations.
• Saudi Arabia’s strategic pivot effectively marks the end of the 1945 core agreement between the U.S. and Saudi Arabia that defined their relationship up until extremely recently.

Given the peremptory way in which the core 1945 agreement was ended by MbS, Washington is angry too, as was evidenced in the highly pointed comments from several senior U.S. officials at the time of the OPEC cut, including from Biden himself, who said that: “There’s going to be some consequences for what they’ve done, with Russia [supporting oil prices by leading OPEC’s 2 million barrel per day (bpd) collective output cut]…I’m not going to get into what I’d consider and what I have in mind. But there will be – there will be consequences.” Just before Biden’s comments, John Kirby, the national security council spokesperson, echoed official doubts on the future of the U.S.-Saudi security relationship, as he said that Biden believed that the U.S. ought to “review the bilateral relationship with Saudi Arabia and take a look to see if that relationship is where it needs to be and that it is serving our national security interests,…in light of the recent decision by OPEC, and Saudi Arabia’s leadership [of it].” 

Apparently careless of these ramifications, Saudi Arabia last week stated that, in addition to continuing in its role as China’s partner of choice in the oil market, the two countries would continue “close communication and strengthen co-operation to address emerging risks and challenges,” according to a joint communique from Saudi Energy Minister, Prince Abdulaziz bin Salman and Beijing’s National Energy Administrator, Zhang Jianhua. In the context of crude oil, according to Chinese Customs data, Saudi Arabia delivered 1.76 million bpd in shipments to China over the January to August period, marking an increase in its market share to 17.7 percent from 16.9 percent a year earlier. 

Additionally, last week saw the two countries pledge to continue discussions on developing joint integrated refining and petrochemical complexes and to cooperate on the use of nuclear energy. Although flagged by Saudi Arabia and China as being ‘the peaceful use of nuclear energy’, 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 – and 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 in the Middle East will not have been alleviated.  

This latest round of talks and agreements comes very shortly after the signing of a multi-pronged memorandum of understanding (MoU) between the Saudi Arabian Oil Company – formerly the Saudi Arabian American Oil Company – ‘Aramco’, and the China Petroleum & Chemical Corporation (Sinopec), which can be regarded as 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.”  

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. At that point in early 2021, Aramco had a 25 percent stake in the 280,000 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.

Just prior to this, June saw Saudi Aramco’s senior vice president downstream, Mohammed Y. Al Qahtani, announce 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. 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, 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

Given the transition of Saudi Arabia away from the U.S. and towards China – and the senior Saudis do look at the issue in these terms, whatever they say publicly – there is also every reason to expect Riyadh to continue to back China’s efforts to undermine the power of the U.S. dollar in the global energy markets as well. Not only is Saudi Arabia now a prime mover in advancing the China-GCC Free Trade Agreement (FTA) – a key aim of which is to forge a “deeper strategic cooperation in a region where U.S. dominance is showing signs of retreat” – but also the Kingdom is now a prime advocate for switching away from the hegemony of U.S. dollars in the pricing of global oil and gas. 

Just after China made a crucial face-saving offer to MbS to privately buy the entire 5 percent stake in Saudi Aramco that he originally wanted to float but could not entice Western investors to buy, the then-Saudi Vice Minister of Economy and Planning, Mohammed al-Tuwaijri, told a Saudi-China conference in Jeddah that: “We will be very willing to consider funding in renminbi and other Chinese products.” He added: “China is by far one of the top markets’ to diversify the funding…[and] we will also access other technical markets in terms of unique funding opportunities, private placements, panda bonds and others.” Moreover, recent reports state that long-running talks between Saudi Arabia and China for Saudi to price and receive payments for some of its oil sales in Chinese renminbi rather than in U.S. dollars have intensified in the past few months.

By Simon Watkins for Oilprice.com