Oil Sector Deals Said to Represent First Successes for BRI Strategy
Closer mainland-Saudi Arabia links, as well as fuel independence for southwest China, attributed to BRI.
As 2017 drew to a close, Amin Nasser, the Chief Executive of Aramco, the state-owned Saudi Arabian oil giant, confirmed that the company's discussions with PetroChina, the largest oil producer on the mainland, were now at an advanced stage. Should terms be agreed, Dhahran-headquartered Aramco will secure a 30%+ stake in PetroChina's Anning refinery. Located in the southwestern Yunnan province, the refinery – one of China's largest oil-processing facilities – came on line in October last year and currently has a throughput capacity of 260,000 barrels per day (bpd).
At present, the Anning facility solely focuses on supplying local needs. In the longer term, however, it is seen as having an intrinsic role to play in meeting China's future energy demands, with the country estimated to require at least 2.2 million bpd of refining capacity by 2022. In addition to its throughput, however, the site is also seen as having considerable strategic importance.
Set close to the Myanmar border, the refinery is in line for a key role in the Belt and Road Initiative (BRI), China's ambitious international infrastructure development and trade facilitation programme. More specifically, it is expected to help close the development gap between China's megacities and its underdeveloped eastern and western states, while improving China's "connectivity" with the rest of the world – two of the BRI's primary objectives.
The Anning facility is supplied by the Shwe oil and gas pipelines, which stretch back to the western Myanmar port of Kyaukpyu. With a total length of 770km, the pipelines – jointly funded by the China Development Bank and the Myanmar Foreign Investment Bank – source from a nearby offshore natural gas field and the regular oil shipments arriving at the port. Overall, it is hoped this new arrangement will free southwest China from its reliance on slow and costly oil shipments from the Middle East and Africa, with all of its fuel requirements, instead, offloaded in Myanmar and then piped overland.
For many in China, the Shwe pipelines are seen as among the first fruits of the BRI. From the Saudi point of view, the arrangement also has a number of clear benefits. The investment in Anning – expected to be in the region of US$1-1.5 billion – is the cornerstone of the Kingdom's game plan when it comes to regaining the market share it lost to Russia, currently China's primary supplier of crude oil.
One of the key elements in Aramco's approach has been to strategically invest in a number of target refineries, with the quid pro quo being that these installations are then contractually tied into solely (or largely, at least) processing the company's crude. In line with this, PetroChina has already tacitly acknowledged that the deal will lead to an increase in the proportion of Saudi oil processed in Anning.
The deal also paves the way for more Sino-Saudi joint ventures, while also rebooting relations between the world's biggest oil exporter and the world's largest crude importer, with Saudi Arabia clearly keen to move things along as swiftly as possible. Indeed, addressing the likely legacy of the deal, Khalid al-Falih, Saudi Arabia's Energy Minister and the Chairman of Aramco, has gone on record as saying: "Our goal is to be not only the largest crude exporter to China, but also the largest in-market investor overall."
As a further sign of colliding mutual interest, PetroChina is said to be considering buying into Aramco via its massive initial public offering – possibly the world's largest – that is expected to take place later this year. Meanwhile, for its part, Aramco is believed to be eyeing other petrocarbon assets in China. These will be in addition to its existing agreement with the China North Industries Group (Norinco), one of the mainland's leading defence contractors, to build a new refinery and a chemicals complex in northeast China. It also holds a 25% stake in a Fujian-based refinery operated by Sinopec, another of China's oil and gas giants.
Geoff de Freitas, Special Correspondent, Riyadh