China & GCC Widen Energy Ties

Published on Monday, 08 Apr 07:00 am

The GCC and China have widened their energy ties for mutual benefit. While some difficulties have arisen, thus far the two parties have managed to work around them, and cooperation is set to increase further.

The energy needs of the GCC and China are intertwined in a relationship that is complicated by geopolitics:  GCC countries are unhappy with China’s role in Iran’s energy sector, albeit limited, and its support for Syria’s President Bashar al-Asad.

Despite this hiccup, GCC companies and Chinese companies are developing major downstream projects.  But, in the long-term, rising North American NGL exports threaten Gulf dominance of the Asia-Pacific petrochemicals market.

China has gradually gained a mainly upstream foothold in Gulf Cooperation Council (GCC) countries, although, so far, GCC states have kept Chinese firms away from their top producing fields.  GCC countries have reciprocated with downstream sector investment in China.

China and the GCC have strategic and political reasons, as well as economic reasons, for fostering energy interdependence.  On one hand, GCC countries have realized that their future depends, to a large extent, on their relationship with the rapidly expanding Asia-Pacific hydrocarbons market. On the other hand, energy-poor China, concerned about the security of its petroleum supply, is eager to develop its relationship with GCC countries.

GCC countries are pragmatic in their politics and are unlikely to punish China directly, yet they will find it difficult – given their reliance on western military support at a time of tension with Iran – to dump western international oil companies (IOCs) in favor of handing concessions to Chinese companies.

High Level Energy Talks
Chinese President, Xi Jinping, is widely regarded as the architect of China’s global energy expansion, harking back to his role as China’s Vice President. On 2 April, Mr Xi met with Saudi Arabia’s deputy defense minister Khalid Sultan.  High level talks are commonplace between Chinese and GCC officials.

In September 2012, Chinese Foreign Minister Yang Jiechi held a discussion with Saudi Deputy Foreign Minister ‘Abd al-’Aziz bin ‘Abd Allah, Bahraini Foreign Minister Shaikh Khalid bin Ahmad Al-Khalifa and GCC Secretary General ‘Abd al-Latif al-Zayyani while they had gathered in New York for a UN General Assembly meeting.

Outgoing Prime Minister of China, Wen Jiabao, visited Abu Dhabi in January 2012 as Chinese oil companies were chasing onshore concessions ahead of their January 2014 expiration.  As Vice President in 2008, Mr Xi held extensive meetings with a wide range of Saudi policy makers, including King ‘Abd Allah. The visit included a trip to Saudi Aramco headquarters in Dhahran, underlining the centrality of energy to Sino-Saudi relations (MEES, 30 June 2008).

But there is also strategy at work in China’s GCC hydrocarbons investments.  When Chinese state-owned refining giant Sinopec – through its Sino-Saudi Gas Limited joint venture (JV) with Saudi Aramco – failed to find commercial gas in Saudi Arabia’s Empty Quarter, Sinopec turned its attentions downstream.

In 2012, Sinopec signed a JV with Saudi Aramco to build a 400,000 b/d refinery at Yanbu’.  However, the prize for Sinopec – and for China, generally – is not in the overseas downstream sector.  It has little to learn from Middle East downstream and China is not a major importer of Middle East refined products.  Rather, Sinopec – and China – covet a piece of Saudi Arabia’s upstream.

Quid Pro Quo?
The Chinese hydrocarbons firm likely hopes that its refining partnership would yield a quid pro quo: “The Saudis probably told Sinopec, ‘go into downstream and we’ll give you opportunities upstream.’  If Sinopec invests in the Yanbu’ refinery, Saudi Aramco will do better for Sinopec in the future,” a regional oil analyst tells MEES. China is already Saudi Aramco’s largest customer, taking 1.04mn b/d for February. Sinopec Chairman Fu Chengyu noted last year that “China needs energy to fuel its economic growth,” while the kingdom “needs a reliable market” (MEES, 23 January 2012).

Yanbu’ Aramco Sinopec Refinery Company (Yasref) is China’s only GCC downstream project so far.  The project has been split into a number of engineering, procurement and construction (EPC) contracts, on which work is progressing. Saudi Aramco says the plant’s output will include 263,000 b/d of diesel and 90,000 b/d of gasoline (MEES, 1 March) and that it will be completed in 2014.

Chinese hydrocarbons companies have exploration and/or minor producing field stakes in Oman, Qatar, Saudi Arabia and the UAE (see Table 2), but they do not have access to major producing fields in any GCC country.

However, China National Petroleum Company (CNPC) was one of ten companies invited by Abu Dhabi’s state-owned Abu Dhabi National Oil Company (ADNOC) to prequalify to bid for a stake in onshore oilfields operated by the Abu Dhabi Company for Onshore Oil Operations (ADCO – MEES, 16 November 2012).  China’s geopolitical weight – it is one of five permanent members of the UN Security Council – helped it make the shortlist. Companies from all five permanent Security Council states are on the shortlist. China’s relationship with Iran and Syria give it a degree of leverage.  ADCO’s current crude production is 1.5mn b/d and is expected to rise to 1.8mn b/d in 2018.

GCC In China
GCC companies investing in refineries in China secure for themselves a crude outlet:  the refineries guarantee a stable, long-term market for Gulf crude – especially important for heavy crudes.

Kuwait, for its part, hopes to participate in a 300,000 b/d refinery project in China’s Zhanjiang and signed in March 2012 a Memorandum of Understanding (MOU) with France’s Total and Sinopec.  The project will see the refinery built alongside a 1mn tons/year ethylene plant and will bring together Total (20%), state-owned Kuwait Petroleum Corporation (KPC) subsidiaries Kuwait Petroleum International (KPI) and Petrochemicals Industries Company (PIC) with a combined 30% stake, and Sinopec with 50%. However, it remains a possibility that Sinopec will decide to complete the project on its own.  The Chinese complex will cost about $9.5bn and is unlikely to be finished until at least 2016-17. KPI hopes to market its products through its Q8-branded retail network, though it has yet to secure rights in China.

State-owned Qatar Petroleum’s overseas investment arm, Qatar Petroleum International (QPI), is teaming up with Shell and CNPC in a 400,000 b/d capacity JV oil refinery and associated 1.2mn t/y ethylene complex in China’s eastern coastal province of Zhejiang (MEES, 7 September 2012).  In addition to their Yanbu’ project, Saudi Aramco and Sinopec are partnering with ExxonMobil in the 240,000 b/d Fujian refinery and petrochemical project. Aramco has also signed an MOU with China’s state-owned CNPC to build a new 200,000 b/d refinery in China’s southwest Yunnan province (MEES, 27 February).

China and the Asia-Pacific will likely remain demand growth leaders over the medium-term, and GCC producers are slowly coming to the realization that North American production will compete for a market share in Asia.  Al Troner, President of Asia Pacific Energy Consulting (APEC), tells MEES:  “Asia is not the automatic dumping ground for Middle East production – GCC countries will have to defend their turf.  North America represents a long-term competitive challenge to these countries.  The GCC can’t take the Asian market for granted, and it may need to reevaluate pricing going forward to compete with future North American NGLs and gas exports.”

The US Threat
North American LPG and condensate exports meanwhile are soaring, which will impact Asia-Pacific after 2015 when the Panama Canal is expanded.  A potential threat to Middle East petchem producers is the growing glut of ethane in North America, which could be cooled and transported as a liquid to the Asia-Pacific market through the Panama Canal.

North American exports present another hurdle for GCC countries in China (and for China in the GCC):  Feedstock for petrochemical plants is heavily subsidized in GCC countries, such as Saudi Arabia.  If Saudi Aramco cannot guarantee discounted feedstock for a 20-30 year period, there is little strategic sense in Chinese investment in Saudi petrochemicals.

And another threat is that China would not be a viable market for GCC petrochemical imports if they cannot retain their price-competitiveness.

With sky-high Saudi gas demand, driven by cheap power plant feedstock, easy gas is drying up in the Kingdom, giving way to more expensive alternatives.  Saudi Arabia also has a bottleneck of petrochemical projects; projects are on hold as the country does not have enough feedstock.  In an attempt to remedy this, Saudi Aramco is pushing into offshore gas exploration, as well as tight and sour gas development.

This compounds the problem of petrochemicals economics in the Kingdom, given that these types of reserves are more expensive to exploit, and Chinese companies will surely take this reality, as well as future North American exports, into account.

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