RIYADH: The budding relationship between Riyadh and Moscow is faced with a reality check.

In the rapidly changing geopolitical environment, Saudi Arabia and Russia are forging ahead — fostering a closer relationship. When the Saudi Deputy Crown prince Mohammad bin Salman, accompanied not only by foreign minister Adel bin Jubeir but also petroleum minister Ali Al-Naimi, called on Russian President Vladimir Putin in St. Petersburg on June 18, six major deals were signed between the world’s two top crude producers.

The deals ranged from agreement in defence sector to enhanced cooperation in energy development. It also covered greater cooperation on nuclear energy development.

Interestingly during the visit, the two sides also announced forming a working group for joint energy projects. Given that the US and EU sanctions limit the transfer of new oil and gas technology to Russian state oil firms, reports indicate that Russia could be seeking enhanced oil and gas recovery and advanced drilling technology from Saudi Arabia, especially for use in the older fields in West Siberia.

With a growing list of global research centers in Beijing, Houston, Aberdeen, Massachusetts and others, Saudi Aramco is today regarded as the biggest global investor in new oil and gas technologies.

But while Saudi Arabia and Russia seem to be expanding their relationship, they continue to compete, rather fiercely, for crude market share. In May, Russia’s oil output reached a record 10.78 million barrels a day, pretty close to the Soviet era production of 1987. This was significantly up from May last year, when Russian production stood at 10.08m bpd. And the world’s leading crude exporter, Saudi Arabia’s output is also in top gear. Saudi output went up by 697,000 bpd between February and May, this year, rising to 10.3m bpd in May 2015, as against 9.69m bpd a year earlier.

And there are indications this could go up further. Oil Minister Ali al-Naimi said in St. Petersburg the country has about one and a half million to 2m bpd of spare capacity, and is ready to raise production if demand calls for such an action. Goldman Sachs and Citi Group are also now projecting that Riyadh will likely start to push production to 11m bpd in the second half of 2015.

And China remains the focus of attention. From Moscow to Riyadh and Tehran to Baghdad, all major stake holders seem to be concentrating on Beijing to ensure a healthy pie of the Chinese cake. For now though, Moscow seems to have pipped Riyadh as the top supplier to Biejing.

In May, China imported a record 3.92m tonnes from Russia, Bloomberg reported. That’s equivalent to 927,000 barrels a day, a 20 per cent increase from the previous month. Russian exports to China have more than doubled since 2010. As western sanctions over the Ukraine crisis started to bite, Moscow has had to seek alternative markets.

A number of other factors too seem to be aiding Moscow in its bid to expand it crude sales to China – at the expense of Saudi Arabia and others. Moscow’s decision to accept the proceeds from oil sales in Chinese currency yuan seems to have helped significantly in the rise in exports to Beijing. Further, in 2013, Russia’s largest oil producer, Rosneft, signed an $85 billion deal with China’s Sinopec to deliver 100m tonnes of crude over 10 years. And then Rosneft also struck a 25-year contract, worth $270bn, with Chinese state-owned oil company CNPC for the delivery of 365m tonnes of oil.

Consequent to the development, Saudi crude exports to China, slumped by 42pc last month from April, to 3.05m tonnes - 722,000 bpd.

However, one needs to underline here, with brute summer around and the Saudi domestic consumption on rise, its crude exports could get compromised during the months. Less export to China may also be a manifestation of that.

Yet the fact remains that despite growing cooperation, Russia and Saudi Arabia continue to fiercely compete in the global crude markets. And that is the dichotomy of this otherwise burgeoning relationship.

Published in Dawn, June 28th, 2015

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