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Sino-Saudi ties: Oil, gas, bauxite ... then arms?
By Stephen Blank

A scandal is brewing in the United States over Saudi Arabia's promise to President George W Bush that it would lower oil prices in time for his election in order to aid his victory. This offer, if true - and one should not dismiss the evidence gathered by journalist Bob Woodward in 75 interviews with top officials - would represent a major scandal in American politics, and in Washington's ties with Riyadh.

Remember: 15 of the 19 hijackers on September 11 were Saudis, and Saudi Arabia has had a close and ambivalent relationship with that nation's least-favored son, Osama bin Laden. Also, while selling prodigious amounts of oil to the US and the West, Riyadh has allowed ferociously intolerant, and anti-US Wahhabist Islam to flourish, though it now is trying to rein in the Islamist militants.

But even more revealing is the sign that Saudi Arabia is prepared to play hardball with energy in order to achieve its objectives. Indeed, China's recent deals with Saudi Arabia show that Riyadh is moving determinedly to cultivate ties with all major players in world affairs. Last year it made important oil deals with Russia, and now it is closing deals of similar magnitude with China in order to demonstrate and achieve its independence from Washington, obtain and secure important new customers, and retain market share in critical global energy markets.

China, for its part, also satisfies critical objectives through Saudi and other such deals, showing again that converging economic interests, especially oil, often lubricate relationships whose compatibility might otherwise be seriously doubted.

China's interests are relatively easy to explain. Its booming economy is sending demand for commodities of all sorts, including gas and oil, higher than markets can easily tolerate. Indeed, the spiraling demand for oil in China and East Asia more generally might well exceed prognostications that already project this region as the future driver of demand for energy. Indeed, the International Energy Agency expects China's demand for oil to grow at a rate of 580,000 barrels a day.

Since China, once an energy exporter, has been an energy importer on an increasing scale for over a decade, it clearly cannot meet this demand from its own sources. For obvious reasons it also does not wish to be excessively dependent on oil and gas that originates in areas whose security depends on the capacity and will of the US navy, China's potential adversary in possible military conflicts in Asia, in the Taiwan Strait and elsewhere.

China desperate to diversify energy sources
Accordingly, Beijing long been aimed to diversify its energy holdings all over the world and to seek market share in numerous locations, among them Ecuador, Sudan, Gabon and other states in Sub-Saharan Africa, Yemen, Central Asia, Russia, and elsewhere. The kingdom of Saudi Arabia, despite the unstable Middle East, is part of that strategy by the Middle Kingdom.

However, many of these potential suppliers have turned out to be unreliable. Russia not only rebuffed Chinese efforts to buy Slavneft, a major state-owned oil company that was scheduled for privatization, but it also has evidently reneged on the projected Angarsk to Daiqing oil pipeline that China was counting on. Instead, the pipeline will go to Nakhodka, a container port in the Russian Far East, on the Sea of Japan, from where China must buy oil like everyone else.

Earlier programs for investing in Kazakhstan in Central Asia have also encountered numerous problems. Thus, by default, China has had to turn with redoubled interest to Gulf-based producers. So China has begun negotiations with Iran for the provision of liquefied natural gas and has signed major deals with Saudi Arabia for both oil and gas.

Saudi Arabia has already been exporting sizable amounts of oil to China, and now it will expand those exports to include Liquefied Natural Gas (LNG). Thus China has signed an agreement with Saudi Arabia to build a refinery for natural gas in Fujian. Sinopec, one of China's major energy concerns, also won the right to explore for natural gas in Saudi Arabia's Rub al-Khali Basin. In return, Chinese firms will also explore for the possibly of extensive extensive bauxite and phosphate reserves in Saudi Arabia.

These deals open the way for a productive relationship with Saudi Arabia, and even more so with Iran, that might help offset the loss of expected energy supplies from Russia (through loss of the China, Daqing, pipeline deal) and increase political understanding between China and Saudi Arabia, each of which would like to distance itself to some degree from Washington.

Saudi motives also combine economic with political purposes. First of all, Saudi Arabia clearly wishes to expand its share in China's rapidly expanding market. Although it already sells China 17 percent of Beijing's oil imports, this is proportionally much less than Saudi Arabia sells to other Asian markets, such as South Korea. In fact, as China's market took off, Saudi Arabia faced the possibility of actually losing market share to China since Riyadh's sales were not expanding to China. Beijing's strategy of diversification had already given it many other options besides Saudi Arabia's overvalued oil.

Saudis get greater entry to China market
These new deals in oil and gas go a long way toward giving Saudi Arabia a greater entry into the Chinese market, and these will help it maintain a strongly competitive profile there. They also represent a way to diversify Saudi interests in China, because much of the energy that will be processed in the new refinery in Fujian province will then go into China's plastics markets. Aramco, the Saudi oil company, will thus help secure a lasting presence for Saudi Arabia in the China market.

Saudi Arabia is also signaling, through its deals with China and other East Asian states, that it is responding to strong US pressure on the Organization of Petroleum Exporting Countries (OPEC) to abandon the production cuts it adopted on March 31.

At the same time, Saudi Arabia is entering a new field by exporting LNG to China and by opening up its potential holdings to private Chinese exploration. Saudi officials openly voice a desire to diversify their exports beyond oil, to include gas and commodities like bauxite and phosphates, hence the deals with China in these minerals. But for Saudi Arabia to mine those reputed world-class bauxite and phosphate reserves, it needs substantial volumes of gas for transportation and support infrastructure, and for the downstream industries tied to them.

This explains the need to explore for gas as well as to sell excess holdings abroad to diversify its export base. Expansion of ties to China as both explorer and customer are therefore a logical progression, given the rising attraction of the rapidly growing Chinese market and China's capital holdings.

Saudi Arabia also wishes to enter into the World Trade Organization (WTO) by the end of 2004. To satisfy the WTO it must make deals with major customers for its products, and it must make itself more open and attractive to foreign investment and to privatization, not least in the energy sector. Therefore, the deals with China represent a significant fulfillment of these WTO requirements. In other words, there are strong economic and political factors driving China and Saudi Arabia to conclude major deals in the energy and related sectors to their mutual long-term benefit.

However, there is also a potential political and strategic sub-text to these deals. Not only are there compelling economic reasons for the transactions, but also both sides seek to create greater distance between themselves and Washington and US pressure. Likewise, analysts like Gal Luft have openly expressed the concern that economic ties might create bases for political and strategic ties that would lead to Chinese proliferation of advanced weapons of mass destruction (WMD) and missile capabilities to Saudi Arabia.

China, Saudi Arabia aided Pakistan's arms buildup
After all, both governments were major supporters of Pakistan's nuclearization and continuing buildup of conventional and WMD capabilities. Moreover, in the 1980s, China sold Saudi Arabia Silkworm missiles to defend its shipping and energy holdings during the Iran-Iraq War, so that a renewed military relationship is by no means out of the question. Therefore, there may well be more than meets the eye in these initially "purely" commercial deals that may open doors to a deeper and more strategic engagement between Riyadh and Beijing.

While nobody can really question the fundamental logic of the need for demanders and suppliers of energy and investment to get together, if these economic deals are merely the prelude to a reinvigorated and expanded weapons proliferation relationship, the ensuing crisis and inevitable scandal might have profound reverberations throughout the Middle East, Asia - and in Washington.

Should Saudi Arabia replace Iraq as an energy power and military power with WMD, it would be more than an ironic traducing of the objectives for which the recent war against Iraq was fought. Then Saudi Arabia, like Iraq, would no longer be in America's good graces, and also would no longer be, so to speak, in line with Washington. Given what we are learning these days, that could well be one scandal too many in Arabia.

Stephen Blank is an independent analyst of international security affairs living in Harrisburg, Pennsylvania, US.

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Apr 23, 2004

Asians fighting the next Asian energy crisis (Apr 16, '04)

While oil prices will stay high (Apr 8, '04)

China setting up strategic oil reserve (Febr 7, '04)

China's imports of oil, oil products surge (Marr 5, '04)


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