Overview and takeaways on Chinese commercial activity in the Middle East and beyond #2
Overview and takeaways on Chinese commercial activity in the Middle East and beyond #2
7 Feb - 28 Feb 2022
CONTENTS
1) Algeria’s Sonatrach Signs Storage and Liquefication Deal with Sinopec to Facilitate Exports to Asia
2) Saudi Aramco (2222.SR) in Talks to Increase Investments in China
3) Chinese Companies Step Up Involvement in Iraq’s Once Neglected Gas Sector
4) Citic Dicastal Revs Up Production in Morocco to Capitalize on Speedy Automotive Sector Growth
1) Algeria’s Sonatrach Signs Storage and Liquefication Deal with Sinopec to Facilitate Exports to Asia
https://www.ennaharonline.com/سوناطراك-توقيع-عقد-مع-الصين-لدعم-قدرات/
On 18 February, Algeria’s national hydrocarbons company Sonatrach signed contracts with units of Chinese state-owned Sinopec; namely, Sinopec Luoyang Engineering (LPEC) and Sinopec International Petroleum Services Corporation (SIPS) to build a 150,000m3 storage tank at Algeria’s eastern gas export terminal of Skikda.
This is a 40-month contract worth approximately USD 178 million and includes supply and installation of equipment as part of the oil terminal expansion in Skikda. The development of port capabilities will enable export of LNG[1] to distant Asian and South American markets, in particular China given the country’s high appetite for energy imports. Algeria sits 5th largest in terms of LNG export capacity in operation worldwide as of 2021. While China only accounted for 1.7% of Algeria’s gas exports in 2020, this figure is anticipated to increase rapidly with China’s gas demand growing at a 13-year CAGR of 3.1%.
[1] LNG export facilities receive natural gas by pipeline and liquefy the gas for transport on tankers (LNG carriers).
The deal also re-iterates the goodwill and longevity of China’s relationship with Algeria, which dates back to as early as December 1958, when China became the first non-Arab country to recognize Algeria’s provisional government during its independence movement which involved a guerrilla war with French forces. Algeria remains a key strategic partner under Beijing’s Belt and Road framework. Chinese companies such as China National Petroleum Corporation, Sinopec and China State Construction and Engineering Corporation have closed multi-billion dollar deals in Algeria. The deal is consistent with their guiding principles of bilateral relations, which includes expanding trade and technology cooperation in the energy sector, particularly nuclear, satellite and renewable, and infrastructure investments.
2) Saudi Aramco (2222.SR) in Talks to Increase Investments in China
Another interesting development that caught our attention was the opening session of the International Petroleum Technology Conference (IPTC) in Riyadh, Saudi Arabia on 21 Feb 2022, where Amin Nasser, President and CEO of Saudi Aramco mentioned that the company is in talks with its Chinese partners on further investments in Saudi Arabia. Saudi Aramco is the state-owned hydrocarbons producer which controls Saudi Arabia’s oil reserves, the second-largest in the world. We also note from our previous newsletter (on 9 February 2022) that geopolitical developments in 2021 have injected new urgency into China’s efforts to strengthen its economic ties with the GCC. Saudi Arabia recognizes that China is a far more significant oil importer than the US now. While Nasser remained tight-lipped on the nature or size of potential investments, Nasser expects opportunities in downstream projects in China to meet their requirements for heavy transport, chemicals, lubricants, and non-metallic materials.
Saudi Aramco became the world’s largest listing after raising USD 29.4 billion on the Tadawul (Saudi Stock Exchange) in late 2019. At one stage, there were discussions of a primary listing in Hong Kong (HKEX), which would have been a huge source for Chinese demand for the stock. The listing was eventually shunned in favour of the Tadwul due to pandemic-related travel restrictions and an uncertain political environment in Hong Kong. With that said, a partial/secondary listing is not off the table given China’s importance to Saudi Aramco’s base and the need for Saudi Aramco to further allocate its capital towards boosting maximum sustained capacity and gas supply.
We think it is possible that more shares of Saudi Aramco will be offered to the public. Dow Jones reported that the Company may sell as much as USD 50 billion (2.5% stake) at current levels. The stock is up 33.8% since inception. A secondary listing in Hong Kong would be synergistic to the two major sovereign partners, particularly when it comes to broader financial and strategic investment decisions. However, we neither have insight nor expect a potential decision to be made soon. In any case, it would be up to the Saudi government’s discretion as a major shareholder (98%) of Saudi Aramco to further sell down its shares.
3) Chinese Companies Step Up Involvement in Iraq’s Once Neglected Gas Sector
On 19 February 2022, the Iraqi Ministry of Petroleum announced that the natural gas extraction project at the Halfaya field in Masyan province was 51% complete. The project is being implemented by the China National Petroleum Corporation, which was one of the early players in the post-2003 oil boom in Iraq. The lead contractor for this gas project is China Petroleum Engineering & Construction Corporation (600339.SS, “CPECC”). The first phase of the oil field was completed in 2012, increasing production from 3000 bpd to 100,000 bpd, with an eventual production target of 530,000 bpd, making it one of the largest fields in the world. The oil field project is a joint venture between CNPC’s listed entity, Petrochina (0857.HK), and several other international players.
Iraq has long squandered its natural gas reserves, simply flaring gas as a by-product of oil production. However, with the long-sustained increase in gas prices (much of which is led by Chinese demand) and a pressing electricity shortage, Baghdad is turning its attention to this sector. The planned completion date for the Halfaya gas project is mid-2023. The gas field is targeting production of 300 million cubic feet per day, which is sizable but doesn’t compare with some of the largest fields in the region which are producing over 2 billion cubic feet per day. However, the Halfaya project comes amid a slew of similar deals with foreign gas companies in Iraq. although it remains to be seen if Iraq can ramp up exports given the more pressing need to address its crippling electricity shortage at home. Despite being the sixth-largest oil producer in the world, Iraq ranked 33rd among gas producers as of 2021, although production is expected to rise significantly (see below).
Barring a major conflict, we see a healthy upside for Chinese and international players willing to invest in Iraqi gas production. The majority of the fields are in Iraq’s southern region, which, despite being affected by civil unrest and the presence of several Iranian-backed militias, does not face the same magnitude security threats of the north, namely Sunni Islamist insurgency and Kurdish separatist movements.
4) Citic Dicastal Revs Up Production in Morocco to Capitalize on Speedy Automotive Sector Growth
On 17 February, Moroccan media outlets reported that China’s Citic Dicastal Group had broke ground on its third manufacturing facility in the Atlantic Free Zone of Kenitra with a budget of MAD 1.8 billion (USD 193 million). Citic Dicastal is primarily engaged in producing aluminum automotive parts, including rims, powertrains, and chassis. The facility is projected to open in six months and provide over 700 jobs. Citic Dicastal already runs two production facilities in Morocco, employing 1,200 staff locally. Interestingly, in January 2022, Morocco became the second North African country after Egypt to sign up to China’s Belt and Road initiative. Both Morocco and Egypt seek to position themselves as hubs for Chinese manufacturers seeking to export to Europe and Africa.
These investments are likely aimed at supplying Morocco’s growing automotive manufacturing cluster, already the largest in Africa, with exports reaching USD 8 billion in 2021 (12.8% yoy growth). Morocco’s main export market is Europe, and the likes of Renault-Nissan, Peugeot, and more recently China’s BYD, have been lured by the country’s political stability, relatively developed infrastructure, free trade agreements with Europe, and generous tax, customs, and financial incentives offered by Rabat. This sector is a strategic priority for the Moroccan government, already one of the more economically progressive states in the region, with the automotive sector forming around 19% of the country’s GDP in 2019. A key priority for Rabat is to bring a greater share of component production onshore, with Renault already claiming to source 60% of parts locally. Citic Dicastal’s Moroccan investments show foresight in capitalizing on the favorable regulatory environment, warming bilateral ties, and a rapidly growing local vehicle production base.