Saudi Foreign Investment plans, including in Pakistan, India & China, risk provoking Iran.

Saudi Crown Prince Mohammed bin Salman’s recent week-long oil diplomacy tour through Pakistan, India and China, involving promises of billions of dollars-worth of energy sector investments, appears on the surface to be a win-win mission.

The oil-rich kingdom can use its huge financial resources to lock in buyers for its crude, expand its petrochemicals investments and increase access to fast-growing retail fuel businesses in sizeable Asian markets.

The oil-importing countries get a secure supplier of refinery feedstock, a deep-pocketed investor for downstream projects, and in some cases, easier payment terms for their oil purchases.

However, that sunny picture hides a dark cloud: the risk of importing deep into Asia the fierce, and sometimes violent, political rivalries between the Middle East’s oil and gas suppliers that go well beyond healthy commercial competition.

An aggressive push into refining and petrochemical joint ventures across Asia by rich Middle Eastern producers, notably Saudi Arabia but also the United Arab Emirates, is a clear challenge to Iran, endangering Iranian crude’s large market share in the region. Pakistan does not import Iranian crude but India and China together soak up nearly 50% of Tehran’s exports.

Saudi Arabia and Iran, leading powers on the opposite sides of the Shia-Sunni religious divide that splits the Muslim world, are engaged in lingering proxy wars across the Middle East.

Saudi Arabia and the UAE share strong political ties. The two have also aligned themselves against Qatar in a political and diplomatic blockade against the gas and liquefied natural gas (LNG) powerhouse since June 2017.

Meanwhile, all three capitals on the Saudi Crown Prince’s February tour Islamabad, New Delhi and Beijing have deep political and commercial ties with Tehran. They may find themselves on a tightrope walk in the coming years as a result of the growing Saudi involvement in their energy sectors.

Pakistan and Iran share a particularly porous border, which allows rampant smuggling of Iranian petrol, diesel and cylinders of liquefied petroleum gas into Pakistan. It also serves as a hidden gateway for Iran’s oil, locked out of western markets by U.S. sanctions.

India and China have been getting Iranian crude on sweetened payment terms as part of Tehran’s efforts to hold on to its traditional customers, especially in the face of the roadblocks put up by U.S. sanctions. India imported around 14% of its crude and China around 7% of its crude from Iran early last year, before the flows began shrinking in anticipation of U.S. sanctions.

The two Asian giants are keen investors in upstream oil and gas projects in Iran and other infrastructure developments. They have reaffirmed or even increased their commitments after European companies retreated from Iran last year.

As Saudi Arabia grabs stakes in new refinery projects across Asia, it is automatically reducing the importers’ purchase of Iranian crude. Existing refiners in Japan and South Korea that have Saudi Aramco as a stakeholder shun Iranian crude.

In Japan, a planned merger between refiners Idemitsu Kosan and Showa Shell Sekiyu dragged on for two years before being finally agreed in July 2018 because of the Idemitsu family’s decades-old history of close ties with Iran, and Aramco’s 15% stake in Showa Shell.

In South Korea, refiners S-Oil and GS Caltex are off limits to Iran because of their Saudi and U.S. Chevron shareholdings respectively. With Aramco making a move to buy up to 19.9% of South Korea refiner Hyundai Oilbank a preliminary agreement was announced last month the latter could drop its Iran crude imports too.

In India, Aramco and the UAE’s Abu Dhabi National Oil Company last year agreed to take a combined 50% stake in a 1.2 million barrels-a-day greenfield refinery project alongside three state-owned refiners, which will hold the remaining 50%.

Meanwhile, the Saudi energy minister Khalid al-Falih and senior Aramco executives accompanying MBS to India held discussions with the private-sector giant Reliance Industries for joint refinery and petrochemical projects. If such a partnership emerges, could the Kingdom exert pressure on Reliance to stay away from dealing with Iranian companies, even beyond the tenure of the U.S. sanctions? It is certainly a possibility.

A highlight of MBS’s visit to Pakistan was an agreement on a joint working group between the two countries for a planned $10-billion refinery of 200,000-300,000 barrels per day capacity and a petrochemical complex at the port of Gwadar.

Saudi officials accompanying MBS also discussed supplying LPG and other petroleum products to Pakistan on a deferred payment basis, after the Kingdom last year offered Islamabad help with financing crude imports.

In China, the final leg of MBS’s Asia tour, Aramco signed an agreement to set up a joint venture with state-owned Chinese defence contractor Norinco and Panjin Sincen, a local partner, to build a 300,000 barrels per day refinery and an integrated petrochemicals complex in the city of Panjin in Liaoning Province.

Just days before receiving MBS, China hosted Iranian foreign minister Mohammed Javad Zarif and Parliamentary Speaker Ali Larijani, who reaffirmed their country’s support for Beijing’s Belt and Road infrastructure initiative. China, one of the signatories to the 2015 multilateral Iran nuclear deal, has steadfastly stood by the accord and criticised Washington’s decision last year to withdraw and reimpose sanctions against Tehran.

Elsewhere, as new downstream projects involving Aramco across Asia fructify and Iran finds the new refining capacity inaccessible for its crude, the issue could become a political hot button. In Malaysia, for example, Aramco is a 50% stakeholder in the upcoming Refinery and Petrochemical Integrated Development (RAPID) project, which includes a 300,000 barrels per day refinery and petrochemical units. Aramco has rights to supply up to half the crude to a scheme that can be expected to steer well clear of Iranian oil.

Rapid Project
Photo: Aramco 50% Stakeholder in RAPID Project, pictured during construction.

Qatar, an important LNG supplier to China, India, Japan and South Korea, could also be in the Saudis’ sights. It is not yet locked out of supply deals in the region since it was ostracized by its Gulf Cooperation Council peers, but it could be at risk as Saudi Arabia’s investment ambitions in gas expand.

It will be bad enough if all this complicates life for Asian governments in managing their relationships with rival Middle Eastern energy suppliers. But it would be tragic if these deals end up triggering new proxy Saudi-Iranian wars, following the conflicts in Syria, Yemen, Lebanon and Iraq. Pakistan, which borders India, China, Iran and Afghanistan, looks particularly vulnerable.