Saudi Aramco aims to surpass Russia as China’s largest oil supplier

Should Chinese buyers of Saudi crude request full contractual volumes, Saudi Aramco’s market share in China could swell from 11% in 2017 to 17% in 2019.
Sunday 02/12/2018
Leading producer. An Aramco oil tank at the production facility at Shaybah oilfield in the Empty Quarter. (Reuters)
Leading producer. An Aramco oil tank at the production facility at Shaybah oilfield in the Empty Quarter. (Reuters)

After signing five crude supply agreements with Chinese customers, Saudi Aramco is on the verge of reclaiming its position as the top crude supplier to Beijing in 2019; the top supplier to China for the past two years has been Russia.

The Saudi state oil and gas conglomerate is not being coy about wanting to recover the status it held for a decade as China’s largest crude supplier, which would make China Saudi Arabia’s single largest crude buyer.

Saudi Aramco’s push to boost exports to China comes when the company is seeking refining and petrochemical opportunities in China and other Asian countries to secure long-term reliable outlets for its crude and help diversify the company’s portfolio.

As Riyadh and Moscow vie to be the largest supplier to the world’s largest oil consuming country, oil markets wonder whether the contest will impede continued cooperation between Saudi Arabia, the de facto leader of OPEC, and Russia, the leading independent oil producer. Riyadh and Moscow have been working with other producers to adjust output levels to ensure international oil prices don’t collapse next year.

The Saudi Aramco crude supply deals with five Chinese customers were signed during the first China International Import Expo in Shanghai in early November. The Saudi state firm had been ramping up its crude sales to Beijing, reporting that in the final quarter of 2018 its oil exports to China have reached a new record of 1.6 million-1.7 million barrels per day (bpd).

Saudi Aramco said the deals would help the firm achieve a total 2019 Chinese term supply volume of 1.67 million bpd. The energy firm said that, “The new supply contracts make it very likely that Saudi Aramco next year will become China’s largest supplier, a position it held from 2006 until 2016.”

The agreements are with the trading arms of Chinese state energy firms CNPC, Sinochem and CNOOC, state defence company NORINCO and independent refiner Hengli Petrochemical.

As part of Saudi Aramco’s goal to diversify its Chinese customer base, it has sought clients outside of state firms, including Hengli Petrochemical and Zhejiang Petrochemical. In September, Saudi Aramco signed a 2019 supply deal with Zhejiang Petrochemical to provide 116,000 bpd to the refiner’s 400,000 bpd refinery and associated petrochemicals facility that is planned for a June 2019 start-up. The Saudi state firm has taken a 9% stake in that project.

Should Chinese buyers of Saudi crude request full contractual volumes, Saudi Aramco’s market share in China could swell from 11% in 2017 to 17% in 2019. Russia accounts for about 15% of Chinese oil imports.

China long has been a strategic focus for large oil producers such as Saudi Arabia and Russia. In 2017, China surpassed the United States to become the world’s largest crude oil importer. In October, the Asian economic giant imported nearly 10 million bpd.

In the mid-2000s, Riyadh turned its attention towards Asian markets, in particular China, while drawing back its sales to the US market. However, the kingdom faced growing competition from Moscow, with Russian crude exports expanding steadily after the first link of the East Siberia-Pacific Ocean (ESPO) pipeline became operational in 2011.

Even higher flows of Russian oil to China became available when ESPO’s second link opened this year. In 2016, Russia surpassed Saudi Arabia as the largest crude supplier to China for the first time on an annual basis, a position Moscow has held since.

Saudi Aramco plans to secure its Chinese oil sales by targeting joint ventures, including downstream opportunities in the country. Saudi Aramco CEO Amin Nasser was quoted in a November 26 interview as saying: “Asia is a very important market to us. We are looking at two potential [joint ventures] for refineries in China right now.”

Exactly how much oil Saudi Arabia sells to China next year will be influenced by the Asian giant’s energy demand. Chinese economic growth is projected to decline from an estimated 6.6% this year to 6.3% in 2019. Economic growth of more than 6% appears to support high oil import demand as the Asian country continues to add refining and petrochemical capacity.

OPEC and its independent producer allies are eyeing lower global demand expectations for 2019, with Saudi Arabia leading a push for unified production cuts heading into next year to help resuscitate fallen oil prices. If Moscow is not on board for those reductions, it certainly will not be limiting its crude volumes to China.

As for Riyadh coping with production cuts in the coming year, Nasser hinted at where Riyadh’s supply priorities lie. In his interview, Nasser emphasised that “all markets are important to us,” adding, “Asia is the biggest market for sure, then Europe and the United States.”