Saudi Arabia Keeps China Oil Cos at Arm's Length

Manifa Field
(Click to Enlarge)

BEIJING (Dow Jones Newswires), Feb. 9, 2009

President Hu Jintao likely has higher crude supply to China on his shopping list when he makes a state visit to Saudi Arabia this week. But he may also be seeking another prize: greater access to Saudi oil and gas projects for Chinese companies.

Chinese officials proudly proclaim that Saudi Arabia is the country's number-one trading partner in Western Asia and Africa, and energy ties are the cornerstone of a growing relationship that also encompasses engineering and heavy industry, such as cement production.

Saudi Arabia shipped 36.37 million metric tons of crude oil to China in 2008, equivalent to 730,000 barrels per day. This was up 38.11% on year and well ahead of second-ranked Angola, which sent 29.89 million tons to China last year.

"For years Saudi Arabia has been China's largest oil exporter and so energy will be high on the agenda of the talks between President Hu Jintao and King Abdullah," Assistant Foreign Minister Zhai Juan told reporters at a briefing Friday.

But this burgeoning trade masks the slow progress made by China's biggest oil and gas companies in securing equity stakes in Saudi's oil and natural gas fields.

China Petrochemical Corp., known as Sinopec, achieved a breakthrough in March 2004 when it signed a deal to look for gas in the northern deserts of Saudi Arabia's Empty Quarter, or Rub al-Khali.

Yet neither Sinopec nor domestic counterparts China National Petroleum Corp. and Cnooc Ltd. have been able to build on this initial bidding success and secure further footholds in the country.

In contrast, Saudi Arabia's biggest energy companies have made great strides in accessing the Chinese market since 2004.

Last June, Saudi Basic Industries Corp., or Sabic, and China Petroleum and Chemical Corp., or Sinopec, agreed to expand a petrochemicals complex being built in the Chinese port of Tianjin.

The $2.5-billion plant, due to be finished in September, will have an annual production capacity of around 4 million tons of petrochemical products.

In addition, state-run Saudi Arabian Oil Co., or Saudi Aramco, has a 25% stake in a joint venture to upgrade and triple the capacity of a refinery in Quanzhou city in the southern province of Fujian to 240,000 barrels a day.

Other shareholders in the venture are Sinopec, the Fujian provincial government and ExxonMobil Corp.

Technical Expertise

One reason Chinese companies like Sinopec have made little progress in getting more acreage in Saudi Arabia is that they lack the technical expertise the kingdom requires.

Saudi Arabia's oil fields are vast but many of them are aging, and it likely needs to find new ways to keep pumping oil from mature fields at high volumes.

Officials at Saudi Aramco say all the new oil set to enter service from a major field known as Manifa in 2011 -- about 900,000 barrels a day worth of capacity -- will offset falling output elsewhere in the kingdom.

"When it comes to securing oil acreage in Saudi Arabia, Chinese oil companies run up against the same challenges as their U.S. and European peers," said Trevor Houser, an energy expert at New York-based consultancy Rhodium Group.

"With service companies like Schlumberger and Halliburton available for hire, it's difficult for a Chinese company to bring something to the table that Saudi Aramco needs," he added.

Sinopec's deal in 2004 was in conventional gas exploration and development. Analysts said it involved investing around $300 million over five years in searching for gas reserves, with a view to developing a natural gas field with an output capacity of around 1.5 billion cubic feet a day.

"Gas holds more promise for Chinese firms, which bring considerable skill and experience in onshore development," Houser said.

That's not to say Sinopec's deal didn't have technical challenges, but these largely revolved making the economics of the contract work.

If a discovery contained more than 5% oil then it would have to surrendered to Saudi Aramco, with the company compensated only for its development costs.

Chinese companies' lack of a technical edge in Saudi Arabia's energy sector is in contrast to that held by companies in other sectors.

One example came in April 2007 when two state-owned Chinese engineering companies signed a deal to invest in a $4 billion aluminum complex in Jizan Economic City, by the Red Sea.

During his state visit, President Hu will look around a cement production project in Riyadh invested by a Chinese company, said the Foreign Ministry's Zhai.

Crude Supply

Even if Hu's visit doesn't generate new opportunities in Saudi Arabia for major Chinese companies like Sinopec and CNPC, it could still bring commitments from the kingdom to keep supporting China's oil demand growth.

In 2006, Saudi Aramco said it wanted to supply China with 1 million barrels of oil a day before 2010 and a string of new refineries due online this year mean there's a strong likelihood this target will be met.

China is pushing ahead in building another eight storage centers to hold strategic reserves of oil, having already completed four which together can contain 100 million barrels of crude, and it will need oil to pour into them.

"If negotiations go well, some documents (related to energy) will be signed" during Hu's visit, which begins Tuesday and concludes Thursday, Zhai said.

Although global oil use is likely to fall this year, China's demand is predicted to grow, potentially giving Saudi Arabia an outlet for its surplus crude if consumption in Western markets thins more sharply than expected.

The International Energy Agency last month predicted China's oil demand will grow 1.1% this year, or 320,000 barrels per day. However, this would be its slowest pace for eight years.

Houser said: "If China is going to ramp up imports from Saudi Arabia, it will come at the expense of other Middle Eastern suppliers."

That's because Chinese refineries are processing just about as much sour crude as they can handle, despite the slowdown in domestic demand, he said.

China's other major Middle Eastern crude suppliers include Iran and Oman, shipping 21.32 million tons and 14.58 million tons in 2008, respectively.

"That said, OECD weakness provides an opportunity for China to fill inventories (both corporate and strategic) on the cheap, which might lead to a temporary uptick in purchases from the Gulf," Houser added.  

Copyright (c) 2009 Dow Jones & Company, Inc.

Related Companies
 Company: Exxon Mobil Corporationmore info

 - ExxonMobil's 3Q Earnings Down 38% from a Year Ago (Oct 28)
 - ExxonMobil Finds Potential 1 Billion Barrel Oil Field Offshore Nigeria (Oct 27)
 - Exxon CEO Doesn't See Supply Shortage Pushing Up Oil Prices (Oct 19)
 Company: Halliburton Companymore info
 - Halliburton, US Silica Set North America Record (Oct 17)
 - More Than 350 Oil Service Workers Laid Off in Norway Due to Strike (Sep 28)
 - Norway Services Strike Affects Schlumberger, Baker Hughes, Halliburton (Sep 21)
 Company: Saudi Aramcomore info

 - CEO: Saudi Aramco Eyes 2018 For Listing (Oct 11)
 - Saudi Aramco Signs Deals To Let Turkish Firms Bid On Future Projects (Oct 11)
 - Saudi Aramco IPO to Offer Stake in All Operations of Company (Oct 6)
 Company: Schlumbergermore info

 - Schlumberger Sees 2% Fourth-Quarter Profit Hit From Iraq shutdown (Dec 3)
 - Schlumberger to Restart Iraq Rumaila Oil Operations, Official Says (Nov 14)
 - Schlumberger Opens New Reservoir Laboratory in AU (Nov 12)
 Company: Sinopecmore info
 - As Oil Giants Dally Over Glut, Asia Gets To Work On Output Cuts (Sep 7)
 - Sinopec Expects Profit from Argentina Unit if Oil Recovers (Sep 2)
 - Profit At China's Sinopec Slumps 21.6% In First Half (Aug 29)
 Company: CNOOCmore info
 - CNOOC Commences Oil Production at Weizhou 6-9/6-10 Project in Beibu Gulf (Sep 13)
 - Ifax: Gazprom Invites China's CNOOC to Take Part in Offshore Oil Exploratio (Sep 6)
 - China Oil Giants Unmoved By Bull Rally After Worst Earnings (Aug 25)
 Company: CNPCmore info
 - CNPC's Natgas Block In Peru Likely Has 3-4 TCF In Reserves (Oct 19)
 - China September Crude Output In Second-Biggest Decline On Record (Oct 19)
 - CNPC Selling $11B In Financial Assets To Listed Unit In Reform Push (Sep 6)
 Company: International Energy Agency (IEA)more info
 - Gadfly: Introducing The Pre-Freeze Oil Boil Before OPEC Meets (Sep 19)
 - Crude Glut Belies Risk From OPEC's Dwindling Output Cushion (Sep 16)
 - China Crude Buying Seen Buoyed As Output Drop Lures Imports (Sep 14)
 Company: SABICmore info
 - Industry Should Hire Hackers to Boost Cyber-Security (Oct 26)
 - Saudi's SABIC Expects To Enter US Shale Market This Year (Jan 22)
 - Sabic Selects Hydratight for Controlled Bolting & OSM Services (Dec 15)

Our Privacy Pledge

Most Popular Articles

From the Career Center
Jobs that may interest you
Operations Supervisor - Hobbs, NM Job
Expertise: Asset Management|Operations Management|Refinery / Plant Operations Supervisor
Location: Hobbs, NM
Senior Fleet Regulatory Compliance Consultant Job
Expertise: HSE Manager / Advisor|QA / QC / Inspection|Regulatory Compliance
Location: Denver, CO
Senior Security Analyst, Compliance Job
Expertise: Accounting|IT - Analysis & Management|Regulatory Compliance
Location: Denver, CO
search for more jobs

Brent Crude Oil : $50.47/BBL 0.98%
Light Crude Oil : $49.72/BBL 1.09%
Natural Gas : $2.76/MMBtu 1.09%
Updated in last 24 hours