Saudi Arabia refining Chinese relations

Saudi Aramco and US giant ExxonMobil have signed an agreement for two joint venture partnerships with China Chemical & Petroleum (Sinopec) worth $5 billion - $1.5 billion more than at the beginning of negotiations in 2005. The joint ventures are intended to expand a Chinese petrochemical refinery and operate a chain of filling stations.

The increase in the project's value was announced at a March 30 signing ceremony held in Beijing. It is attributed to an additional deal that will create a fuel-marketing company separate from the refining and petrochemicals business.

According to ExxonMobil's head in China, PC Tan, this new development is possible because the Chinese government recently opened the sector to foreign competition under commitments made upon World Trade Organisation accession.

Given the length of time it has taken to conclude the deal, some analysts have noted that rising project costs may well have been a factor too - across the world high steel and other material prices have led to hefty cost hikes and even the abandonment of some projects.

The first joint venture is to expand refining and petrochemical capabilities at the refinery in the southeastern city of Quanzhou, in Fujian Province, from 80,000 barrels per day to 240,000. The plant will mostly refine Saudi Arabian sour crude oil and begin operations in 2009.

The agreement also paves the way for the development of an 800,000 tonne-per-year (tpy) ethylene cracker, an 800,000 tpy polyethylene plant and a smaller 400,000 tpy polypropylene facility. An aromatics plant will also be developed and is set to have a 700,000 tpy paraxylene capacity.

A logistics and services hub will also be developed as part of the broader complex and will include a 300,000 tonne crude oil berth.

Details of the precise values of the investment segments have not been disclosed. A Sinopec subsidiary is to own 50% of the petrochemical venture, with the Chinese subsidiaries of ExxonMobil and Saudi Aramco each taking a 25% stake.

The other joint venture, Sinopec SenMei (Fujian) Petroleum, which is the fuel marketing part of the deal, is under a separate and slightly different agreement. Sinopec will own 55% and ExxonMobil and Saudi Aramco will each hold 22.5% of the project. This venture will manage and operate 750 filling stations and a network of terminals across the Fujian province.

Abdullah Jumah, president of Saudi Aramco, told the press in Beijing, "We place great value on our leading role in providing China...with the energy to power its tremendous economic, industrial and social growth."

China's economy has gone into overdrive in recent years. Once an oil exporter itself, it is increasingly looking abroad to satisfy its energy needs and has begun to develop strategic relations not only in the Gulf but with Russia and Venezuela too. Formerly a relatively closed economy, it is notable that these are China's first fully integrated joint ventures with foreign participation.

Saudi Arabian oil accounts for about 17% of the crude China annually imports, and the joint venture gives the kingdom important access to a growing market as it looks to increase its output capacity. The agreement comes just over a year since Saudi Arabia's King Abdullah made a landmark visit to China - his first state visit as king and the first by a Saudi monarch to the country.

During the January 2006 visit, the Saudi delegation signed a number of agreements enhancing bilateral trade and relations, particularly regarding energy. In many respects, analysts see it as a natural alliance as the kingdom has the capacity to fulfill Chinese demand while China provides a new and growing market for its oil products.

(C) Oxford Business Group - www.oxfordbusinessgroup.com

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