By Simon Webb
Saudi's oil affair with the US is being redefined amid falling demand and Asian competition.
Saudi Arabia's oil affair with the US is being redefined as contracting demand in the West means the Kingdom competes more fiercely for dominance in the growing Asia market.
US Energy Secretary Steven Chu may have visited Riyadh last week but it is Beijing's allure that has intensified for oil suppliers in 2008 and 2009, as demand grew more in China but contracted in the US and Europe at the same time.
Saudi Arabia has boosted exports to China and the flow of crude from the Kingdom to the US has fallen.
The latter hit a 22-year low during 2009 as recession slashed fuel use and Saudi Arabia led OPEC supply cuts to match supply with demand.
Oil has always been at the heart of the political, diplomatic and economic links that tie Riyadh to its ally Washington. The relationship may be loosening but oil will continue to underpin the US-Saudi connection, analysts said.
It is no longer direct exports so much as the Saudi capacity for balancing the global oil market that gives the Kingdom sway with Washington, Beijing and other consumers.
Riyadh is the only holder of significant spare oil output capacity, the main recourse to deal with any surprise major outage in global supply.
"The old paradigm was that Saudi Arabia saw its geopolitical significance as the largest supplier to the world's largest market," said David Kirsch, director of market intelligence at PFC Energy in Washington.
"It doesn't view that as the key driver anymore. Rather... it is that Saudi Arabia has enough spare capacity to replace the next largest exporter and is willing to adjust its production up and down to meet the needs of the market."Even though the flow has fallen, Saudi still supplied more than a tenth of US crude imports last year.
It was a more reliable long-term supplier than competitors for the US market such as Venezuela or Nigeria, said Frank Verrastro, head of the energy and national security program at the Washington-based Centre for Strategic and International Studies.
"That puts Saudi Arabia in a great position, as oil market anchor on both ends of the world," said Verrastro. "Saudi Arabia is very important to the US strategically, there is a recognition we can't lose the Saudis any time soon."
The changing supply flows also reflect a longer-term shift in oil demand.
Developing countries will soon consume more oil than industrialised nations. Emerging economies would account for 47 percent of global oil demand in 2010, up from 37 percent in 2000, according to the International Energy Agency (IEA). The IEA believes demand in developed nations has peaked.
"The recession accelerated what was happening anyway," Verrastro said. "We are at the tipping point now toward developing countries in terms of energy demand."
Saudi Arabia's position as OPEC's top oil producer and holder of a fifth of the world's oil reserves also gives it the advantage over other producers when competing for new markets.
Energy-hungry Asian refiners, often state-owned, are eager to guarantee future energy supply through long-term deals with the country most able to supply them.
"No single producer is really going to challenge the Saudi position in China in the long run," Kirsch said.
"China is a key market and Saudi Arabia doesn't want to lose market share there. It doesn't want to lose out to Russia and Iran. And that's part of why they will continue to push for long-term refinery deals in China."
One such is for supply to China's Fujian refinery, in which state-owned Saudi Aramco holds a 25 percent stake.
Riyadh plans to ship 200,000 barrels per day to Fujian this year after start up in 2009. Aramco is also looking to invest in a second Chinese refinery, a 200,000 bpd plant in the eastern port of Qingdao.
Other producers are plotting similar deals with China. Kuwait wants to build a refinery while Qatar is eyeing investment in a petrochemical plant.
With little chance to sell existing or additional supplies elsewhere, producers are also fighting to sell more to China in the short-term.
Saudi Arabia agreed to boost crude supplies to China by 12 percent in 2010 from 2009, Kuwait by about 50 percent, while Iraq said it would more than double its flow. (Reuters)