China wades into the Iran-Saudi swamp with Xi Jinping’s first visit to region

China is “at the center of a clash between Saudi Arabia and Iran,” WSJ wrote on Tuesday, as Xi Jinping makes his first visit to the Middle East as President.

The trip comes at a critical time for the region. Saudi Arabia and Iran are at each other’s throats following a series of unfortunate events that began with the execution of a prominent Shiite cleric and quickly escalated into an all-out diplomatic firestorm.

Now, the spat is on the verge of triggering a wider sectarian conflict that could further destabilise an already precarious security situation.

But it’s not all about the long-running ideological divide. The two regional powers are also at odds economically. 

In short, the regional balance of power is shifting in Iran’s favour and the return of Iranian supply to an already oversupplied global oil market means the economic rivalry between Riyadh and Tehran may soon become just as tense as the ideological rift.

Screen Shot 2016-01-22 at 13.11.12As WSJ notes, “China has a strong interest in seeing the regional rivals tamp down their recent war of words [as] the countries accounted for nearly one-quarter of Chinese total imports in the first 11 months of 2015.”

The lifting of international sanctions against Tehran triggered a $100 billion windfall for the Iranians and increased access to global markets means Iran will be able to pull in as much as five times more per month from crude sales than it did under sanctions.

Saudi Arabia is Beijing’s number one supplier of oil, but as China’s economy continues to decelerate, there are questions as to how long the Chinese will continue to snap up cheap crude.

On top of concerns about falling demand from the East, Riyadh is also worried that Beijing will look increasingly to other suppliers. Russia, for instance, surged ahead of Saudi Arabia as China’s top supplier on at least three occasions in 2015.

With Iran set to ramp up production by 500,000 barrels in Q1 and by 1,000,000 barrels by year end, the Saudis fear Xi may look increasingly to his ally in Tehran to satisfy China’s oil needs. After all, Beijing bought 40% of the oil Iran exported while international sanctions were still in place.

So, as Xi throws his diplomatic weight around in America’s sandbox in an effort to calm tensions between Riyadh and Tehran, the Saudis are keen on using his trip as an opportunity to strike deals aimed at securing market share in China.

On Tuesday, Saudi Aramco signed a cooperation agreement with Sinopec. Saudi Aramco will reportedly work alongside China National Petroleum Corp. and Sinopec on refineries in city of Qingdao and in the provinces of Yunnan and Sichuan.

“We are hoping for other projects with Sinopec, especially in China.,” Saudi Aramco Chairman Khalid al-Falih said on Wednesday. “We are hoping that Aramco will expand its investments in the refining, marketing and petrochemicals sectors.”

“Mr. al-Falih comments follow Tuesday’s visit by Chinese President Xi Jinping to Riyadh against a backdrop of evolving Chinese ties with the region,” WSJ writes, adding that “Aramco has been in years long talks with CNPC about building a 260,000-barrels-a-day refinery in Yunnan province, but little progress has been made.”

Yes, “little progress has been made,” but now that Saudi Arabia is desperate to retain its foothold in Asian markets, Riyadh is apparently looking to push a bit harder.

Recall that Saudi Arabia is also considering a stake in another CNPC refinery. As Reuters reported back in October, Riyadh is looking to spend some $1.5 billion on a minority stake along with 300 retail outlets.

“Most of the value for Saudi Aramco is in the refinery,” an unnamed source said. “This will place the Saudis in a favourable position to sell their crude at a time of increased supply from other countries.” Other countries like Iran.Screen Shot 2016-01-22 at 13.10.47Xi flies to Tehran today Friday where he’ll no doubt discuss the $30-$50 billion in foreign investment President Hassan Rouhani says his country needs to hit its 8% growth target.

The Iranians aren’t wasting any time when it comes to getting back to business as usual. As such, Aramco needs to move quickly. If the Saudis can’t manage to get the new projects with CNPC and Sinopec off the ground fast enough, Riyadh might well see its grip on the Asian market slip just as the kingdom loses its “regional powerbroker” title to its arch nemesis in Tehran.

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