The fascinating complexity of China’s Middle East energy ties

Saudi Aramco is seeking to anchor its position in the Chinese market, and particularly in petrochemicals

May 20, 2024, 2:26 PM

China is investing more in Iraqi oil at a time when Western companies are withdrawing from the country

In a clear plurality, eight of the 22 qualified bidders in Iraq’s just-concluded auction of oil and gas blocks were Chinese.

Chinese companies won 10 blocks, the local KAR Group won three, eight went unawarded, and no other company, local or foreign, got anything. China’s dominance in Iraq is extreme, but the Middle Kingdom’s footprint is deepening in the rest of the Middle East’s petroleum sector.

Iraq needs the Chinese interest. Luminaries of the Western oil world, such as Shell, Equinor, ExxonMobil and Occidental have steadily withdrawn from its oil sector.

The only Western company to up its involvement in Iraq recently is TotalEnergies, with the award of a large combined solar, gas, oil and water injection project.

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As Opec discussions approach another crunch point, Iraq needs to demonstrate its ability to boost oil production over the longer term, from a current capacity of 4.8 million barrels per day. And its ailing electricity sector needs more gas fuel.

Its Ministry of Oil said the awarded blocks could eventually produce more than 1 million barrels of oil per day, and about 3.5 billion cubic feet per day of gas.

China is nothing like as dominant in the petroleum sectors of Iraq’s neighbours, but it is still important. It is effectively the only paying buyer of Iran’s oil exports, although long-standing attempts to invest in the country have fallen foul firstly of Iranian bureaucracy, then of an unwillingness to brave US sanctions.

It also buys more than 90 percent of Oman’s oil exports, though its investments in the country are more in the petrochemical business.

In the UAE, China National Petroleum Corporation (CNPC) began production from the offshore Belbazem field in a joint venture with Abu Dhabi state oil company Adnoc.

CNPC and China National Offshore Oil Company collectively hold 10 percent in the massive Lower Zakum and Umm Shaif and Nasr offshore concessions.

So Chinese companies are significant but far from overwhelming, alongside a carefully curated blend of US, UK, French, Italian, Japanese, South Korean and Indian players.

But the relationship is most complex and interesting in Qatar and Saudi Arabia. In November 2023 the third leading Chinese state oil company Sinopec signed to buy liquefied natural gas (LNG) over 27 years and take a 5 percent stake in the North Field South project, having in April 2023 agreed to a similar deal for North Field East.

CNPC agreed a comparable contract in June 2023. And in April 2024, QatarEnergy ordered 18 LNG carriers for $6 billion from China State Shipbuilding Corporation.

The Chinese companies provide security of demand for Qatar’s LNG, in what looks likely to be a competitive and oversupplied market in the later part of this decade. They diversify Doha’s traditional reliance on Western and Japanese partners in its world-leading gas export business.

In turn, the deals deliver reasonably priced gas as China seeks to continue its programme of gasification and shifting to lower-carbon energies, without becoming too dependent on the US, Australia or Russia, which – in too-big doses – bring some political concerns.

This model of joint investment is taken even further by Saudi Arabia. State oil behemoth Saudi Aramco is seeking to anchor its position in the Chinese market, and particularly in petrochemicals, which it sees as one of the main drivers of future oil demand.

It is in negotiations to buy, or has already bought, stakes in several important private Chinese refining and petrochemical groups, including Rongsheng, Shandong Yulong, Jiangsu Shenghong and Hengli.

Aramco subsidiary Sabic has a joint venture to build a $6.4 billion petrochemical complex with state-owned Fujian Fuhua Gulei.

This does not exclude the familiar Chinese strength in engineering, construction and other oil-field services. On May 6 Aramco awarded a $1.7 billion contract to expand its gas infrastructure to CNPC subsidiary China Petroleum Engineering and Construction Company.

The model of in-house engineering units has been particularly prominent in the Chinese companies’ activities in Iraq, providing a counterweight to stringent fiscal terms.

Iraq is arguably over-dependent on China, and risks getting bad deals

Interestingly, these moves come at a time that the Saudi and the broader Gulf share of the Chinese oil market has shrunk.

This is mostly because of the flood of discounted Russian barrels, driven out of Europe by measures imposed following the invasion of Ukraine. It is partly because Kuwait and Oman have expanded refining capacity and so are sending out less crude oil.

The China-Gulf relationship continues to deepen. Chinese companies will bring increasing technical sophistication, and the ability to deliver, as the interest of traditional Western partners grows more tepid.

But their Gulf hosts face some interesting dilemmas.

Iraq is arguably over-dependent on China, and risks getting bad deals and seeing Beijing exercising more influence over its economy and politics. But its contractual models and difficult bureaucratic environment deter nearly everyone else.

The GCC states probably won’t go down that road, although China will clearly be a critical customer for Qatar’s new LNG.

The Gulf states face almost the opposite conundrum to the government in Baghdad: how much should they deepen their reliance on the Chinese oil market, even as Chinese petrochemical companies struggle with over-capacity, and electric vehicles seem likely to drive the market for road fuels into decline within a few years?

Robin M Mills is CEO of Qamar Energy and author of The Myth of the Oil Crisis