DUBAI/SINGAPORE/BEIJING- Rising Russian and U.S. competition has pushed Saudi Aramco to find new buyers for its oil in China, encouraging a shift towards independent refiners and newcomers to the business.
It reflects a new strategy for the Saudi Arabian oil giant after years of dealing almost exclusively with major state-owned Chinese energy firms, industry sources say.
But the change in tack may not offer the same returns. Aramco's new partners lack the scale and marketing reach of PetroChina and Sinopec Corp, the state-run firms that dominate China's refining, petrochemical and retail fuel business, analysts say.
Aramco had been talking to PetroChina for years about a refining venture in Yunnan province in the southwest, but industry sources said the plans had been effectively shelved due to poor economics and disagreement over marketing rights.
Aramco, which did not immediately respond to a Reuters request for comment for this report, has instead turned to new and independent players in China's refining and petrochemical industry.
In February, it agreed to form a venture with Chinese defence conglomerate Norinco to develop a $10 billion refining and petrochemicals complex in the city of Panjin, in the northeast province of Liaoning.
It also signed memorandums of understanding to expand its activities in Zhejiang province in the east. The plans include buying 9 percent of Zhejiang Petrochemical to secure a stake in a 800,000 barrel per day (bpd) refinery and petrochemicals complex in the city of Zhoushan, south of Shanghai.
The deals are part of a strategy shift to court new buyers, including smaller, independently run refiners, known as "teapots", industry sources say.
"The private players are more open and entrepreneurial. They also need the oil and the experience," said one source familiar with the recent deals in China.
The strategy has helped put Saudi Arabia on track to lift oil exports to China to 1.5 million bpd in the first quarter, catching up with Russia which has been China's No. 1 supplier for three years in a row.
In 2018, Russia exported the equivalent of 1.43 million bpd to China, while Saudi Arabia exported 1.135 million bpd, customs data showed. U.S. shipments are still much smaller but have risen fast, surging 25 percent in 2018 to just under 250,000 bpd, although a trade row made them stall in December.
A change of management in Chinese state-run PetroChina and Sinopec, as well as tougher competition from rival crude suppliers, have made it harder for Aramco to secure deals, such as the Yunnan refining venture, industry sources said.
Aramco signed a memorandum of understanding in 2011 with PetroChina to supply oil to the Yunnan plant. But talks on the deal hit a roadblock in mid-2018, the sources said.
"Yunnan went on for five years and it is dead now," one of the industry sources said.
The deal was undermined by the cost of sending crude by pipeline across Myanmar and because PetroChina was not keen to share its marketing rights with Aramco, the sources said.
Aramco aims to expand refining and petrochemical output in China through long-term contracts and access to retail and marketing rights with other firms. But analysts say its new partners may not offer the same reach as the big, state players.
"Independents have a smaller footprint across the value chain and less experience in trading," said Michal Meidan of Energy Aspects. "The challenge of partnering with independents is precisely the limits of access to the retail market."
Sinopec and PetroChina control about two-thirds of retail sales in China, while independents together have about a quarter, industry experts say.
The Norinco deal includes a plan to set up a fuel retail business and a marketing venture between Aramco, North Huajin and Liaoning Transportation Construction Investment Group Co.
The refining complex is in a region dominated by PetroChina and has one of China's slowest economic growth rates. But it lies close to North Korea, offering scope in future to expand beyond China, sources familiar with the deal say.
Liaoning Transportation leases fuel stations to PetroChina and Sinopec, so the new venture might still need to buy the Chinese majors out or wait until the leases end, said a Huajin oil executive, who asked not to be named.
Norinco declined to comment.
In Zhejiang, alongside taking a stake in a refining and petrochemical complex, Aramco would utilise an oil storage facility to serve Aramco's Asian customers and set up a retail network in the province with Zhejiang Energy.
Securing retail rights proved a challenge for Aramco when dealing with state firms.
Zhejiang Energy was not immediately available for comment.
A Zhejiang-based executive, who asked not to be named, said Zhejiang Petrochemical had similar memorandums of understanding for retail cooperation with Western energy firms, suggesting Aramco faced competition in the market.
The executive also said the Chinese partners had yet to pick a site for setting up the storage facility and associated crude terminal.
Zhejiang Petrochemical declined to comment.
(Editing by Edmund Blair) ((email@example.com; +971 562 160 434; Reuters Messaging: firstname.lastname@example.org ; Twitter: https://twitter.com/Rania_ElGamal))