Saudis Tighten China Energy Ties to Reduce U.S. Dependence

Photographer: Nelson Ching/Bloomberg

Mohammed al-Mady, vice chairman and chief executive officer of Saudi Basic Industries Corp. (SABIC), speaks at the Boao Forum for Asia in Boao, Hainan province, China, on April 10, 2010. Close

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Photographer: Nelson Ching/Bloomberg

Mohammed al-Mady, vice chairman and chief executive officer of Saudi Basic Industries Corp. (SABIC), speaks at the Boao Forum for Asia in Boao, Hainan province, China, on April 10, 2010.

Li Wei, a Chinese diplomat in Riyadh, had only just seen off a Ministry of Commerce delegation to Saudi Arabia this month when he started preparing for another Chinese governmental visit in two weeks.

“Every month we have delegations coming to Saudi Arabia,” said Li, who works in the Chinese Embassy’s commercial section in the Saudi capital. “We are too busy.”

China, the world’s second-largest oil consumer, and Saudi Arabia, holder of about a fifth of global crude reserves, are forging ever closer ties as the Persian Gulf kingdom responds to a Chinese drive to feed its rising energy needs. China in November overtook the U.S. as the main buyer of Saudi oil, and Saudi Arabian Oil Co. and Saudi Basic Industries Corp. are investing in refinery and petrochemicals projects in China.

The partnership between Saudi Arabia and China is part of a broader strategy by the world’s largest oil exporter to tap Asian markets and extend global influence. It also helps Saudi Arabia reduce reliance on the U.S., which since World War II has protected Saudi security in return for stable oil supplies, said Ben Simpfendorfer, Hong Kong-based chief China economist at the Royal Bank of Scotland Plc.

“China’s rise has provided Saudi Arabia with an excuse to knock on Washington’s door and to say, you are not our only partner,” he said.

Photographer: F. Carter Smith/Bloomberg

A file photograph shows Prince Turki Al-Faisal, former ambassador of the Kingdom of Saudi Arabia to the United States. Close

A file photograph shows Prince Turki Al-Faisal, former ambassador of the Kingdom of... Read More

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A file photograph shows Prince Turki Al-Faisal, former ambassador of the Kingdom of Saudi Arabia to the United States.

Compared with the U.S., whose support for Israel has created friction with Saudi Arabia, “with China, there is less baggage, there are easier routes to mutual benefit,” said Prince Turki al-Faisal, a former Saudi ambassador to the U.S. and brother of Foreign Minister Saud al-Faisal, in an interview.

Booming Trade

Since Saudi Arabia and China established diplomatic ties, two-way trade has grown to more than $40 billion in 2008 from $290 million in 1990.

Oil lies at the heart of the relationship. With about a fifth of China’s crude imports now coming from Saudi Arabia, or about 1 million barrels a day compared with 455,000 barrels a day in 2005, the kingdom is investing to expand Chinese capacity for refining of Saudi heavy crude.

Saudi Aramco, the world’s biggest crude producer, teamed with China Petroleum & Chemical Corp. and Irving, Texas-based Exxon Mobil Corp. to triple capacity at a refinery in China’s Fujian province to 240,000 barrels a day last year. Dhahran- based Saudi Aramco is in talks with the same Chinese partner, Beijing-based Sinopec, to take a stake in a 200,000-barrel-a-day plant in Shandong.

Petrochemical Complex

Riyadh-based Saudi Basic Industries Corp., the world’s largest petrochemicals maker, collaborated with Sinopec to build a petrochemical complex in the northern Chinese port city of Tianjin that starts up this year.

“China is a country that has the greatest market for our products, so there is no politics behind this, it is only straight business,” Mohammed Al-Mady, the chief executive officer of the company known as Sabic, said in an April 10 interview at a conference on the Chinese island of Hainan.

China’s need for oil is prompting it to seek greater influence in the Middle East, said Shi Yinhong, a professor of international relations at Renmin University in Beijing.

Increasing economic ties to Saudi Arabia “will play some role in gradually eroding American preponderance over that country, but this is not a very elaborate and conscious objective of China’s relationship with Saudi Arabia,” Shi said. “This is a by-product. China’s objective is energy.”

China and Energy

Chinese demand for refined products is forecast to jump 7.2 percent this year to 9.12 million barrels a day, according to the International Energy Agency’s monthly Oil Market Report on April 13. Demand climbed 20 percent in February from a year earlier.

U.S. demand for crude oil and petroleum products will average 18.84 million barrels a day this year, the Energy Department said on April 6. That will be a 9.4 percent drop from the 2005 peak of 20.8 million barrels a day, according to data from the U.S. Energy Information Administration.

That mirrors a decline throughout the developed world. Consumption in the 30 industrialized countries that belong to the Paris-based Organization for Economic Cooperation and Development will average 45.4 million barrels a day this year, down 8.3 percent from 2006, according to the International Energy Agency, which coordinates the energy policy of 28 developed nations.

Military Security

China isn’t looking to provide Saudi Arabia with the protection it gets from the U.S., which maintains air, naval and army bases in the Gulf, including one in Saudi Arabia. In 1991, the U.S. assembled a coalition to reverse the Iraqi occupation of Kuwait and, before that, defended neighboring Saudi Arabia from a threatened Iraqi attack.

Now it is enlisting Saudi help to pressure Iran to rein in its nuclear program. Saudi Arabia was the biggest foreign buyer of U.S. weapons between 2005 and 2008, agreeing to purchase $11.2 billion worth, according to the Congressional Research Service in Washington.

“It shouldn’t surprise anyone that the Chinese are buying more Saudi oil than ever before,” Robert Hormats, the U.S. undersecretary of state for economics, energy and agriculture, said in an April 11 interview in Hainan. “But the fact is that our relationship with Saudi Arabia is much deeper and broader than oil.”

King Abdullah, 86, picked China as the first destination on his maiden foreign tour in January 2006, months after becoming king. Chinese President Hu Jintao has been twice to Saudi Arabia since 2006, most recently in February last year.

More Trade

More than 90 Chinese companies do business in Saudi Arabia, including 70 construction firms employing 20,000 Chinese people, according to a study by John Sfakianakis, chief economist at Riyadh-based Banque Saudi Fransi.

Among recent contracts won by Chinese companies in Saudi Arabia was a $1.8 billion award to a Saudi-Chinese consortium including Beijing-based China Railway Construction Corp. in March 2009, for a new high-speed line between the holy cities of Mecca and Medina.

To cater to the influx, Riyadh’s Sheraton hotel last year started to offer a Chinese breakfast of rice porridge, dim sum and steamed buns along with Arab, continental and U.S. dishes.

“We try to satisfy the cultural preferences of our Chinese guests,” said Farid al-Aauuar, director of rooms at the hotel.

To contact the reporter on this story: Henry Meyer in Riyadh via the Dubai newsroom at hmeyer4@bloomberg.net.

To contact the editors responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net. Bill Austin at billaustin@bloomberg.net

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