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A satellite image shows thick black smoke rising from Saudi Aramco’s Abqaiq oil processing facility in Buqyaq after the drone strikes on Saturday. Photo: Planet Labs via AP

Drone strikes in Saudi Arabia may push China to diversify oil supply, analysts say

  • Country has become increasingly reliant on crude from the gulf state over past year as it reduced imports from suppliers like the US and Iran
  • That could leave Beijing in a precarious position, according to experts
Saudi Arabia
Drone attacks on two Saudi Arabian oil facilities over the weekend – which knocked out half of the country’s output and 5 per cent of the global supply – could push China to diversify its oil import partners, experts say.

China, the world’s largest importer of crude oil, has grown increasingly reliant on Saudi crude over the past year, official figures show, as it has reduced imports from other large suppliers like the United States and Iran in recent months amid trade tensions with Washington and US sanctions on Iran.

The gulf state – which was the victim of attacks on the Abqaiq processing facility and the Khurais oilfield on Saturday, claimed by Yemen’s Houthi rebels – is China’s second largest source of crude oil after Russia, supplying the fuel-hungry country with over a million barrels a day.
Saudi Arabia exports 7 million barrels of crude oil daily, according to Reuters.

For now, Beijing is monitoring the situation, with a spokesperson for the National Bureau of Statistics on Monday saying the overall impact “remains to be seen”.

Analysts agreed it was too early to tell what impact the attacks would have on China’s crude oil supply as it depended on how quickly Saudi Arabia could get a large proportion of its damaged oilfields back online. But concerns over instability and the length of time the oil facilities remained down could prompt Beijing to look for alternatives, they said.

“The recent events in Saudi Arabia are expected to cause substantial geopolitical reconsideration in China,” said energy economists Julian Inchauspe and Roberto Aguilera, from Curtin University in Australia. “It’s a reminder of the importance for China to diversify their sources of imported supply while continuing to invest in domestic production capacity.”

Akihisa Mori, an associate professor in the graduate school of global environmental studies at Kyoto University in Japan, also said the situation would push Beijing to diversify.

“These attacks will actively accelerate China’s quest for new crude exporters,” Mori said.

The drone attacks may prompt China to look for new crude oil suppliers. Photo: Reuters

The energy relationship between China and Saudi Arabia – seen as a stable partner in the region – has been carefully cultivated by both sides in recent years, with the two countries forging closer diplomatic and economic ties during a number of high-level meetings since 2016, according to Jonathan Fulton, an assistant professor of political science at Zayed University in Abu Dhabi.

But he said the changing geopolitical situation had increased China’s energy reliance on Saudi Arabia, and that could leave Beijing in a precarious position.

“For China … they have really had to cut back on their imports from Iran, meanwhile China’s oil imports from Saudi Arabia more than doubled between last July and this August, which creates a reliance that I wouldn’t be comfortable with if I were Beijing,” Fulton said, citing a media report using data from TankerTrackers.com, which monitors crude oil exports from the world’s leading producers.

According to the data, China’s imports from Saudi Arabia in July were at a two-year high of 1.8 million barrels a day, up from 663,000 the same month a year ago.

Virendra Chauhan, a Singapore-based analyst at Energy Aspects, said China would be insulated from the supply disruption in the short term by its own petroleum reserves and Saudi Arabia’s own stock, which it could use to stabilise global oil markets following the attacks.

“[China is] not going to have to go scrambling around the world for crude, but as more and more detail emerges on the length of the outage then they will be able to make more of an assessment,” said Chauhan, noting that if production remained at 50 per cent for the next couple of months, China may have no choice but to look elsewhere.

“US crude is obviously very difficult given the climate with the trade war between the two partners, so are they going to go to Iraq, are they going to go to Latin America, where in Latin America is it going to be – Brazil, Venezuela, Colombia, somewhere in the North Sea? These are all questions which will emerge over time once we know the extent of the outages,” he said.

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Some analysts pointed to Iran as a potential source of more imports to China, but they said it would need to be a carefully calculated decision. Amid escalating tensions between Washington and Tehran, US Secretary of State Mike Pompeo has accused Iran of being behind the strikes – further complicating the situation for China, which has not completely stopped importing crude from the country since the US reimposed sanctions last year.

Chinese foreign ministry spokeswoman Hua Chunying on Monday emphasised the lack of conclusive evidence as to who was responsible for the attacks and called on the parties concerned to “refrain from escalating regional tensions”.

China is especially concerned about such tensions in a region on which it has become increasingly dependent to supply its growing energy needs, according to Kevjn Lim, a doctoral researcher with the political science, government and international affairs school at Tel Aviv University.

“Within the Mideast, China may seek to further diversify its sources, but rising tensions could also prompt China or give it a justification to adopt a more assertive role in regional diplomacy – something it has largely refrained from so far,” Lim said.

Additional reporting by Catherine Wong

This article appeared in the South China Morning Post print edition as: Oil strikes ‘may push China to diversify’
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