Shanghai, March 17th, 2011 — China Petrochemical Corp., or better known as Sinopec, has struck a deal late Wednesday to invest in a Saudi Arabian refinery, in a move likely to strengthen China's overseas energy ties but that also carries risks amid rising volatility in the Middle East.
Sinopec will take a 37.5% stake in the Red Sea Refining Company joint venture that will build the Yanbu refinery once its agreement with Saudi Arabian Oil Co., known as Saudi Aramco, becomes binding.
Aramco will hold the remaining interest, the companies said. The deal marks the first move by Sinopec—Asia's largest refiner by capacity—to become a global player in oil processing after focusing its overseas expansion up to now in acquiring stakes in producing crude oil and natural-gas fields.
"It will advance Sinopec's overseas operations, enhance its strategic planning of refining, and further guarantee China's energy supply security," Su Shulin, the company's general manager, said.
Despite China's efforts to diversify its energy sources, much of the imported crude it needs to fuel growth comes from Saudi Arabia, according to the U.S. Energy Information Administration. Chinese officials say they want to boost trade with Saudi Arabia by about 50% to $60 billion by 2015, further increasing Beijing's dependence on the kingdom.
The risk for Sinopec, a state-run entity, lies largely in economic implications of possible disruptions to energy supplies coming through the Persian Gulf, and Beijing's unease that the calls for democratic change sweeping across the Middle East and North Africa will set an unwelcome precedent at home.
Sinopec is playing catch-up with domestic peer PetroChina Co., which has plowed billions of dollars into building up a refining and distribution network that includes hubs in North America, the Caribbean and Europe.
In a major deal in January, PetroChina offered around $1 billion to British petrochemicals firm Ineos Group Holdings PLC for shares in two proposed joint ventures that would conduct crude-oil refining and trading at Scotland's Grangemouth refinery and France's Lavera refinery.
But given the regional turmoil in the Middle East and North Africa, Sinopec's move appears to be much riskier than the PetroChina-Ineos deal.
Saudi troops have been deployed in Bahrain, creating a potential flashpoint in a state that is strategically important to another regional rival—Iran.
Analysts say the escalating tensions in the region call into question the logic of any new energy investment there.
"The present crisis may well worsen, perhaps even to the dimensions of 1973-1974, when contradictions of the Saudi-American relationship reached a breaking point as officials in Washington openly threatened the possibility of seizing Gulf oil fields or even beyond…" says Helima Croft, an analyst at Barclays Capital.
But Sinopec's deal is potentially extremely lucrative, as it enables the Chinese company to forge closer ties with Saudi Aramco, which controls the world's biggest oil reserves. Up to now, the business relationship has centered on crude trading and Aramco's investment in a Sinopec-run, 240,000-barrel-a-day refinery in China's Fujian province.
Saudi Arabia is China's biggest supplier of crude oil, shipping nearly 900,000 barrels a day last year, according to data from China's General Administration of Customs. Although neither Aramco nor Sinopec have disclosed the cost of the Yanbu plant on the Red Sea coast, it will run into billions of dollars.
U.S. oil major ConocoPhillips last year pulled out of the Yanbu project as it decided to cut back on refining and marketing activities.
The Yanbu refinery will process 400,000 barrels a day of Arabian Heavy crude oil, and is expected to begin operations in 2014. The refinery will produce 90,000 barrels a day of gasoline, 263,000 barrels a day of ultra-low sulfur diesel, 6,300 metric tons a day of petroleum coke and 1,200 tons a day of sulfur, and will supply these products to both the international and domestic markets. - The Wall Street Journal
