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More than a Pipe Dream

Negotiations are underway for Saudi Arabian oil giant Aramco to secure a more than 30 per cent stake in PetroChina's Anning refinery. In late 2017, Aramco Chief Executive Amin Nasser confirmed that discussions with the Chinese mainland’s largest oil producer were now at an advanced stage.

Located in China’s southwestern Yunnan Province, the refinery – one of China's largest oil-processing facilities – came on line last October and currently has a throughput capacity of 260,000 barrels per day (bpd).

At present, the Anning facility solely focuses on supplying domestic demand. In the longer term, however, the facility is expected to play an intrinsic role in meeting China's future energy demands, with the country estimated to require at least 2.2 million bpd of refining capacity by 2022. In addition to its throughput, however, the site also holds strategic importance.

Set close to the Myanmar border, the refinery is set for a key role in the Belt and Road Initiative, China's ambitious international infrastructure development and trade facilitation programme. More specifically, it is expected to help close the development gap between China's megacities and its underdeveloped eastern and western states, while improving China's "connectivity" with the rest of the world – two of the Initiative's primary objectives.

The Anning facility is supplied by the Shwe oil and gas pipelines, which stretch back to the western Myanmar port of Kyaukpyu. With a total length of 770 kilometres, the pipelines – jointly funded by the China Development Bank and the Myanmar Foreign Investment Bank – source from a nearby offshore natural gas field with regular oil shipments arriving at the port.

Overall, it is hoped the new arrangement will free southwest China from its reliance on slow and costly oil shipments from the Middle East and Africa, with all of its fuel requirements, instead, offloaded in Myanmar, then piped overland.

For many in China, the Shwe pipelines are considered among the first fruits of the Belt and Road Initiative. From the Saudi point of view, the arrangement also has several clear benefits. The investment in Anning – expected to be in the region of US$1billion to US$1.5 billion – is the cornerstone of the kingdom's game plan to regain market share lost to Russia, currently China's primary crude oil supplier.

One of the key elements in Aramco's approach has been to strategically invest in several target refineries, and in exchange, these installations would be contractually tied into solely (or largely) processing the company's crude. In line with this, PetroChina has already tacitly acknowledged that the deal will lead to an increase in the proportion of Saudi oil processed in Anning.

The deal also paves the way for more Sino-Saudi joint ventures, while also rebooting relations between the world's-biggest oil exporter and the world's-largest crude importer, with Saudi Arabia keen to move things along as swiftly as possible. Indeed, addressing the deal’s likely impact, Khalid al-Falih, Saudi Arabia's Energy Minister and the Chairman of Aramco, has said: "Our goal is to be not only the largest crude exporter to China, but also the largest in-market investor overall."

In a further sign of converging interest, PetroChina is said to be considering buying into Aramco via its massive initial public offering – possibly the world's largest – which is expected to take place later this year. Meanwhile, for its part, Aramco is believed to be eyeing other petrocarbon assets in China. These will be in addition to its existing agreement with the China North Industries Group, one of the mainland's leading defence contractors, to build a new refinery and a chemical complex in northeast China. It also holds a 25 per cent stake in a Fujian-based refinery operated by Sinopec, another of China's oil and gas giants.

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Belt and Road

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