How Saudi Arabia's Oil Deal With China Threatens The Petrodollar
EDITOR'S NOTE: Saudi Aramco's announcement of a $10 billion oil refinery complex in China hasn;t quite sent shockwaves through the global economy yet, but it’s a quiet development that may permanently seal the dollar’s fate. The petrodollar system that has been strongly supported by the world’s nations since the 1970s. Under this system, oil-producing countries priced their oil exports in US dollars, creating demand for the currency and cementing its position as the world's reserve currency. However, the new refinery complex will allow China to purchase Saudi oil directly in yuan, bypassing the petrodollar system and diminishing the dollar's importance as a reserve currency.
The ramifications of this deal are still unclear, but it could lead to a shift in the balance of economic power from the US to China. With Saudi Arabia, a longtime US ally, moving closer to China, the deal could also have geopolitical implications, with China potentially gaining more powerful in the Middle East as a result
SINGAPORE — Saudi Aramco signed an agreement with Chinese partners on Sunday for an oil refinery and petrochemical project in northeast China that is expected to start in 2026 to meet the country’s growing demand for fuel and chemicals.
The project in Liaoning province’s city of Panjin will be Aramco’s second major refining-petrochemical investment in China and follows the world’s top oil exporter reporting a record profit of $161 billion in 2022.
Joint venture Huajin Aramco Petrochemical Company (HAPCO) will build and operate the complex that will house a 300,000 barrels per day (bpd) oil refinery and a cracker with annual production capacity of 1.65 million tonnes of ethylene and 2 million tonnes of paraxylene, state-owned Aramco said in a statement.
The project is expected to cost 83.7 billion yuan ($12.2 billion), partner Panjin Xicheng Industrial Group said in a statement on WeChat on Sunday.
Construction at the complex will start in the second quarter after the project secures the required administrative approvals, Aramco said. The plant is expected to be fully operational by 2026, it added.
Aramco will supply up to 210,000 bpd of crude oil as feedstock for the plant.
State-owned NORINCO Group, a Chinese military equipment maker, owns 51% of HAPCO while Aramco and Panjin Xincheng hold stakes of 30% and 19%, respectively.
Separately, Aramco on Sunday signed a memorandum of understanding with the southern Chinese province of Guangdong to explore cooperation in sectors including energy, finance, research and innovations, according to a post on the provincial government’s website.
Guangdong, China’s largest provincial economy, has drawn global firms like Exxon Mobil and BASF, each building large-scale petrochemical complexes producing high-value chemicals.
Before the pandemic, Aramco signed two other initial agreements for refinery-petrochemical investments in China.
These include one with the Zhejiang provincial government to invest 9% in Zhejiang Petrochemical Corp, which operates China’s single largest refinery that can process 800,000 bpd of oil.
The other is with Shandong Energy that includes a potential crude supply agreement and chemical products offtake deal, as well as exploring collaboration on an integrated refining and petrochemical complex in China.
Earlier in March, Saudi Aramco also broke ground on a $7 billion project to produce petrochemicals from crude oil at its South Korean affiliate S-Oil Corp’s refining complex in the port city of Ulsan. ($1 = 6.8778 Chinese yuan renminbi)
Originally published by: Florence Tan, Chen Aizhu, Andrew Hayley, Sonali Paul, and Christian Schmollinger on Financial Post
