Saudi Arabia and China Extend Ties Beyond Oil

Publication: China Brief Volume: 5 Issue: 20

Though initially slow to develop, Sino-Saudi relations today are multifaceted—expanding both in scale and in scope. China and Saudi Arabia lie at the center of a complicated set of cross-regional relationships. Saudi Arabia is a global oil superpower. China, having rapidly emerged as a major player in the international economy, is today the world’s second-largest oil consumer. Indeed, these countries might rightly be regarded not only as the twin engines of growing Gulf-Asian energy independence but of broader economic and geopolitical trends that are just beginning to take shape.

Facts and Facets

The Sino-Saudi relationship is more than two decades in the making. The international spotlight was first cast on this relationship with the disclosure of an arms transfer agreement that resulted in China’s delivery of 36 CSS-2 missiles and nine launchers to Saudi Arabia in 1998 (The Guardian [London], March 19, 1988; China Brief, October 24, 2002). That same year, Beijing and Riyadh signed a memorandum of understanding on the opening of trade offices. Two years later, they established diplomatic relations.

Since then, both countries have undertaken efforts to further develop the relationship. The number of personal and professional contacts and exchanges has risen in recent years, overcoming the linguistic-cultural divide, and establishing in both countries a widening band of educated elites who are familiar with each other’s societal norms and traditions, knowledgeable about each other’s distinctive ways of conducting business, and attuned to their counterparts’ national and institutional interests. Chinese hajj pilgrims have traveled to Saudi Arabia every year since 1955; their number regularly exceeded 6,000 in the 1990s, and by 2003 had ballooned to over 10,000 (China Daily, February 2, 2004). Saudi-China friendship associations were set up in 1997. Since then, a half-dozen trade fairs have been held in Saudi Arabia. In 2003 a non-governmental joint commercial committee was created with a mandate of organizing business forums and other activities, as well as advising government officials on ways to facilitate trade.

High-ranking official visits and business delegations have become routine. Then-Foreign Minister Qian Qichen traveled to Saudi Arabia twice in 1990, Defense Minister Chi Haotian visited in 1996, and President Jiang Zemin in 1999. King Abdullah (then Crown Prince) visited China in 1998. Saudi Defense Minister Prince Sultan and Saudi Oil Minister Ali al-Naimi are frequent visitors to China. The latter has made at least six trips to the PRC in just the past two years.

In the economic sphere, the reputation of Chinese products has improved, overcoming earlier concerns in Saudi Arabia (and the MENA region in general) about poor quality and non-price competitiveness. Chinese firms have made significant advances in skills, technology, business practices, and marketing strategies.

In the energy sector, in contrast to a decade ago, China today is importing massive quantities of oil and, with the modification and augmentation of its refining capacity, is able to absorb increasing amounts of Saudi “sweet” oil. This has catapulted Saudi Arabia into becoming China’s leading foreign source of oil, while at the same time making China the leading customer for Saudi crude oil.

There has been progress in the development of cross-investment as well. During the visit of then-President Jiang Zemin to Saudi Arabia in 1999, an agreement was reached to open up the Chinese refinery sector to Saudi investment and to make oil exploration and development opportunities available to Chinese investors. As a result, Sinopec and Saudi Aramco have collaborated on downstream projects in China, joining forces to build a refinery in Qingdao in eastern Shandong province and to expand a petrochemical facility in Quanzhou in the province of Fujian. Saudi Basic Industries Corporation (SABIC), the Middle East’s largest petrochemical company, has reportedly been involved in talks regarding several downstream projects in China (South China Morning Post, October 5, 2004; Alexander’s Gas & Oil Connection, October 14, 2004). Meanwhile, Chinese companies are seeking to acquire and expand their footholds in Saudi Arabia as well. In 2004, Sinopec won the bid for a natural gas project in a northwestern block of the Rub al-Khali gas fields, an area that Saudi Arabia has opened up to foreign firms for the first time in 25 years (Alexander’s Gas and Oil Connections, February 10, 2004; Oil and Gas Magazine, September 9 – October 3, 2004; Petroleum Economist, September 2004).

Saudi and Chinese government officials and members of the business community are looking for ways to boost non-energy trade and cooperation in industrial development. This very subject was raised at the April 2005 Arab-China Business Conference in Beijing. Abdullah Al-Mubti, head of the Saudi delegation to the meeting and chairman of the Abha Chamber of Commerce and Industry, noted approvingly that Saudi-Chinese trade exchange reached $10 billion in 2004, but called specifically for meetings between Saudi and Chinese businessmen to expand relations further (Alexander’s Gas & Oil Connections, April 17, 2005).

With respect to U.S. Middle East policy, China and Saudi Arabia have found themselves on the same side of some key issues. Yet the facts that Chinese and Saudi roles and interests in the region are not identical and that both Beijing and Riyadh highly value their relationships with the United States have tempered any desire to join forces to oppose Washington. In the run up to the 2003 Iraq war, for example, Beijing sided with Riyadh in the latter’s dispute with Washington over U.S. access to Saudi bases for launching the invasion. This support, however, was expressed mainly through a series of articles published (August 20-22, 2002) by leading Chinese newspapers, such as Renmin Ribao, Guangming Ribao, and the China Daily.

Though neither Beijing nor Riyadh can be expected to throw caution to the wind, they nonetheless seem more willing than in the past to explore the possibility of closer political ties. The meeting between Chinese Foreign Minister Li Zhaoxing and Saudi foreign ministry undersecretary Nizar Madani in Jeddah in September 2004 yielded an agreement to hold regular political consultations. Yet the agenda, substance, and modalities of cooperation remain unclear.

Even more murky is the nature and extent of Sino-Saudi military cooperation. Since Saudi Arabia took delivery of CSS intermediate-range ballistic missiles in 1988, there has been no documented evidence of transactions of a similar nature. Nor since then have there been credible reports of sales by China of significant quantities of conventional arms to Saudi Arabia. Over the past decade, U.S. complaints and punitive actions have been directed against Chinese companies guilty of proliferating missiles and related technology to Iran, not to Saudi Arabia.

Catalysts and Compulsions

With respect to trade in oil, Sino-Saudi cooperation is a natural fit. China’s search for supply security has risen to the highest level of priority in terms of statecraft and commercial activity. That China has its sights on Saudi Arabia is a reflection of the latter’s preeminent position in the global oil market. But it is important to note that the Sino-Saudi relationship is one of mutual attraction. In the energy sector, for instance, Saudi officials are eager not just to lock in a long-term oil supply relationship with China, but also to expand their sales of refined products and to gain access to the Chinese retail gas market.

It is also interesting to look at the development of Sino-Saudi economic ties at the level of economic enterprises. The energy sectors in both countries, while in the process of being restructured, are controlled by a handful of giant firms. Saudi Aramco, which has a monopoly on upstream oil development, employs over 50,000 and controls virtually all of the country’s oil reserves. Aramco and Saudi Basic Industries Corporation (SABIC) dominate the Saudi economy. Saudi Oil Minister Ali al-Naimi is currently serving his third four-year term. In China, the picture is similar in the sense that three oil giants dominate the energy sector: CNPC, Sinopec, and CNOOC. Of the three, CNPC is by far the largest and most active overseas.

The most obvious consequence of this concentration of power and wealth in both countries is that energy firms are largely instruments of the state. The consolidation of Sino-Saudi energy ties can thus be viewed as an extension of state policy. Yet, perhaps less obvious is the maturation of, and growing competition between, the leading energy entities within each country. Saudi Aramco, for example, has over the past two decades developed from principally an oil and gas producer to an integrated company with significant refining, shipping, and distribution assets. China’s largest energy enterprises are similarly engaged. The net effect is a commercial environment where diversification and joint alliances are the norm. The activities of Saudi and Chinese energy firms, including the partnerships being struck between them, reflect this.

Since oil is vitally important to national survival and the enhancement of national power—in the cases of Saudi Arabia and China, to regime survival as well—one must consider the political-strategic subtext of Sino-Saudi relations. Viewed through Beijing’s geopolitical lens, a long-term partnership with Saudi Arabia could be seen as a hedge against a deterioration of relations with regional rivals like India and Japan, or for that matter souring relations with the United States. Through a Saudi lens, China could be regarded as a valuable source of support as Riyadh continues on a path of cautious and selective economic liberalization while seeking to deflect U.S. pressure in the area of political reform.

Risks and Uncertainties

In a climate marked by record-high world oil prices, by China’s surging oil consumption/import requirements, by Chinese energy firms’ bold attempts to purchase security at the wellhead, and by a renewed debate over whether global oil supplies have “peaked,” oil has become a complicating factor in Sino-American relations.

To be sure, Beijing has been willing and able to exploit situations where Washington’s relations with third countries are problematic. Sudan and Iran are obvious examples. The fact that U.S.-Saudi relations are strained would seem to provide the opportunity and the additional incentive for Beijing to seek to curry favor with the Saudi leadership. But it is not a foregone conclusion that China will succeed in capitalizing on this turbulence. Saudi Arabia confronts threats against which China is a poor substitute for U.S. support and protection: on the domestic front, the challenge of countering what is now a full-blown internal Islamic insurgency, and on the regional front, contending with growing Shi’a political power anchored by Iran. There is, therefore, no immediate risk of China supplanting the United States.

Nor is there a great risk that Saudi Arabia and China will enter into an exclusive oil supply relationship. Saudi Arabia has increasingly focused on the vast energy market potential of South and East Asia, targeting a cluster of partners and not a single country. India, Japan and South Korea also figure prominently in these calculations. Similarly, the hallmark of China’s approach to energy insecurity is the diversification of energy relationships.

What, then, are the risks posed by the expansion of Sino-Saudi relations? Two come to mind. The first is that Saudi Arabia, in the quest to secure a long-term energy relationship with China, will try to undercut competitors. Its ability to do so is enhanced by the facts that the Saudi oil contracting process is opaque and that Saudi oil is not sold on the open market. The second is that Saudi authorities might seek to purchase missiles or other weapons/technologies in an effort to offset the Iranian military advantage. To dissuade Saudi Arabia from exercising these options, the United States would be best served by combining pressure for transparency with a firm commitment to protect the Kingdom against Iranian intimidation or aggression.

Perhaps the greatest risk is not what might happen because of Sino-Saudi relations but what might happen to Sino-Saudi relations. It is the risk of civil war or a period of protracted instability in Saudi Arabia that might jeopardize the export of oil, creating market instability and inducing panic-buying, skyrocketing prices, and unpredictable and perhaps even provocative behavior by desperate states. For the foreseeable future, bigger risks and uncertainties lay inside the Middle East, in this case Saudi Arabia, than in the growth of Sino-Saudi relations per se. These are risks and uncertainties that the United States shares in common with China and with all of the other stakeholders in the global economy.