Riyadh and Beijing: A relationship of convenience

18 December 2009

Riyadh and Beijing may not be natural bedfellows, but since establishing diplomatic relations a decade ago, they have developed a strong alliance based on trade and oil

Saudi Arabia and China do not make for natural allies. However, in recent years, they have expended considerable effort in developing an increasingly close relationship.

Trade is at the heart of the growing links between the two countries, which centre on the crude oil and petrochemicals industries.

The relationship is relatively young. Full diplomatic relations between the two were only established in July 1990, but Riyadh now appears eager to make up for lost time.

 “I have heard reports from Western embassy sources that the number of Saudi officials visiting China has been remarkable,” says Ben Simpfendorfer, chief China economist at the UK’s Royal Bank of Scotland.

The two-way traffic between the capitals has led to a series of trade deals. An investment agreement was signed in 1992, followed by a series of further pacts to strengthen economic ties, including a strategic oil partnership agreed during the visit to Riyadh by the then Chinese president Jiang Zemin in 1999.

Energy supplies

His successor, Hu Jintao, has made two visits to Riyadh since he took office in 2003. The most recent was in April 2006, just three months after King Abdullah bin Abdulaziz al-Saud had visited China in what was the first visit by a Saudi monarch to the People’s Republic since diplomatic relations were established.

The king’s visit, his first trip outside the Middle East since he assumed power in 2005, was certainly productive. Five agreements were signed covering economic co-operation, trade, tax and, most importantly, energy.

China is the fifth-largest producer of crude oil in the world, with output of almost 3.8 million barrels a day (b/d).

But a lack of new discoveries has meant that production levels have remained flat in recent years, even as consumption has soared, resulting in an increasing gap between domestic supply and demand. The country consumes almost 8 million b/d of oil, second only to the US, and has been a net importer of oil since 1993.

According to UK oil major BP, China’s oil consumption has risen by 68 per cent this decade, from 4.8 million b/d in 2000. Finding reliable sources of foreign oil has therefore become critical for the Chinese economy.

Since 2007, Saudi Arabia has been China’s largest source of oil imports. In 2008, it supplied 720,000 b/d, up from 527,000 b/d the year before. An agreement announced in June this year by state energy company Saudi Aramco will lead to the figure rising to 1.5 million b/d by 2015.

“There is a preference for both parties to sign medium-to-long term contracts, which provide a sense of security,” says Simpfendorfer.

China has also had to increase its domestic refining capacity to cope with the rise in imports from Saudi Arabia. To this end, Saudi Aramco, the US’ ExxonMobil Corporation and state-owned China Petroleum & Chemical Corporation (Sinopec) signed an agreement in 2007 to expand the capacity of the Quanzhou refinery in Fujian province, in the southeast of the country.

The project, which was completed in early November, increased the capacity of the refinery from 80,000 b/d to 240,000 b/d. The project included the addition of a petrochemicals facility with capacity for 800,000 tonnes a year (t/y) of ethylene and 800,000 t/y of polyethylene, along with polypropylene and paraxylene units.

Aramco has also been in talks to take a 25 per cent stake in the 200,000-b/d Qingdao refinery in the eastern Shandong province, half-way between Beijing and Shanghai.

The energy giant is not the only major Saudi company in China. In July 2009, Saudi Basic Industries Corporation (Sabic) was given approval by the Chinese regulator, the National Development & Reform Commission, to help develop a $3bn petrochemicals complex at Tianjin, in the northeast of the country.

Sabic will take a 50 per cent stake in the project, with state-owned Sinopec holding the remaining 50 per cent. Once completed, the plant will produce about 3.2 million tonnes a year (t/y) of petrochemicals, including the basic plastics polyethylene and polypropylene. The plant is expected to start operations in the first quarter of 2010.

The close relations between Riyadh and Beijing have also led to Chinese energy firms becoming heavily involved in the kingdom.

In 2004, Sinopec was granted a SR1.1bn concession to explore and produce natural gas in a 38,000-square-kilometre area in Saudi Arabia’s Rub al-Khali (Empty Quarter), as part of the Sino Saudi Gas joint venture.

The consortium is 80 per cent owned by Sinopec International Petroleum Exploration & Production Corporation, with the remaining 20 per cent held by Aramco.

However, in common with other groups exploring in the area, the consortium has yet to find any commercially viable reserves of gas. Exploring in contract area B in the south Ghawar region, the consortium has drilled six exploration wells to date without success. It is currently drilling a seventh well, the last of its contractual commitment, and costs have risen well above the original projection of $300m.

A lack of finds in  the Empty Quarter has not been the only stumbling block in developing the economic ties between the two countries. In June, China began an investigation into alleged dumping of methanol stocks in the market by producers from several countries, including Saudi Arabia. The move came in response to complaints from Chinese coal-based methanol producers that the international producers were selling their output in China at below cost price.

Global integration

China imports about 8.4 million t/y of methanol from Saudi producers, including Saudi International Petrochemical Company (Sipchem), which has had a presence in China for more than three years.

The Gulf Petrochemicals & Chemical Association (GPCA), the regional umbrella organisation for producers, has criticised the Chinese government investigation as simply being protectionism dressed up as anti-dumping procedures. However, observers say the dispute is unlikely to derail the overall relationship between Riyadh and Beijing.

“The anti-dumping issue does cast a cloud over [relations between the two countries],” says Tim Niblock, professor of Arab politics at University of Exeter. “How significant this will be in the long term is hard to tell. The relationship as a whole is not in trouble.”

“I do not think it will affect things too much,” agrees Simpfendorfer.

The growing links with China should also be seen in the light of Saudi Arabia’s efforts in recent years to protect its national security interests and develop a wider range of allies to augment its links with the US.

Since 2001, Riyadh has appeared more ready to criticise US actions in the region, in Iraq, Iran, and the West Bank and Gaza. When asked in 2006 if China was a better friend than the US, Prince Turki al-Faisal, a former Saudi ambassador to the US, replied that it was not necessarily a better friend but “a less complicated friend”.

But despite China’s growing economic and diplomatic power on the world stage, Riyadh and Beijing remain cautious about the impact their friendship may have on the position of the US in the Gulf.

“All of the Chinese officials I have spoken to are cautious about the Gulf,” says Niblock. “They did not want to do anything that would be seen to challenge the US.”

For China, the Middle East is only one of several regions in the world where it has been developing the trade links it needs to ensure its domestic economy can keep growing. In particular, it has been active in Africa – while Hu Jintao has visited Riyadh twice since becoming premier, he has made the same number of visits to oil-rich Angola.

The diplomatic significance of Saudi Arabia’s relationship with China may become important when it comes to the potential diplomatic flashpoint of Iran. There is specu-lation that the US may, in a complex diplomatic game, try to use its links with Riyadh to influence China to in turn put pressure on Tehran over its controversial nuclear development programme.

“I have heard that the US is increasingly trying to encourage Saudi Arabia to put pressure on China over Iran,” says Simpfendorfer.

China, along with Russia, has to date proved unwilling to back meaningful action by the UN Security Council against Tehran. And the  lack of finds in Sinopec’s concession has also cast doubt on the amount of leverage Saudi Arabia can realistically exercise.

“I don’t think the Saudis are in a strong enough position to pressure the Chinese on Iran,” says Niblock. “I do not know if the Chinese would take much notice anyway. They have consistently opposed any heavy-handed action from the UN on Iran so far.”

Indeed, China has tried not to become involved in contentious issues in countries around the world, such as human rights abuses, preferring to concentrate on pure economic ties.

“China does not believe in forming blocs,” says Andrew Leung, an independent China consultant based in London. “It has a policy of benign engagement.”

Niblock says that, for China, the desire is to integrate into the world system, without challenging the current order.

Such a position suits Riyadh too, as it tries to build its trade links with Asian countries. China’s economic growth is slowing down from the double-digit rate of the past decade. The International Monetary Fund’s latest forecast for 2009 is for its economy to have grown by 8.5 per cent over the year.

In the short term, China’s appetite for oil will grow less quickly than in recent years. But in the medium term, China’s dependence on Saudi Arabia and GCC oil will continue to rise, and its wider trade links with Riyadh and its Gulf neighbours are likely to increase in turn.

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