Saudi Arabia claims its oil production infrastructure, 60% of which was knocked off-stream in a pre-dawn drone attacks on September 14, will be running at full throttle again by month’s end, an assessment few energy industry analysts view as feasible.

While the Middle East waits to see how the US and Saudi Arabia ultimately respond to the attacks blamed on Iran, the impact on Asia’s oil markets is coming into clearer view, with China looking the most vulnerable to any prolonged disruption to Saudi supplies.

Saudi Arabia is the world’s largest oil exporter, the de facto leader of the Organization of Petroleum Exporting Countries (OPEC) cartel and the world’s third largest crude oil producer after the US and Russia. The Asia-Pacific, home to some of the world’s largest net oil-importing nations, is increasingly dependent on Saudi oil to fuel their fast-growing economies.

Last year, China imported 459.3 million tons (mt) of crude oil, a 10.1% year on year rise worth a record-breaking US$239.2 billion. That represented a 20.2% share of total global consumption, according to China’s National Bureau of Statistics (NBS).

In 2018, the US imported 247.8 mt of crude oil, while India was the third largest crude oil importer at 226.6 mt, followed by Asian industrial heavyweights South Korea (151.3 mt), and Japan (149.3 mt), according to industry data.

But the attacks have put China’s reliance on Saudi Arabian crude oil exports into particularly sharp relief. In 2018, Saudi Arabia was China’s second largest oil supplier, providing 12.4% of its imports at a value of around $30 billion.

Source: Twitter/China Customs/Refinitiv Eikon

Over 40% of China’s oil supplies are delivered by Gulf countries, meaning China is especially vulnerable to a similar type of future attack on oil production facilities. Russia was China’s largest supplier at 15.8%, and Angola its third biggest at 10.4%.

China has traditionally relied on oil imports from Saudi Arabia, Iran, Russia and, more recently, the US. China’s imports of US oil, however, plunged 76% in the first half of 2019, due largely to the two sides’ escalating trade war.

US sanctions re-imposed last year against Iran’s energy sector have also forced China – though it is clearly finding ways to circumvent the restrictions – to cut at least 50% of its oil imports from Iran, according to ship tracking data firms.

That has further weakened Beijing’s stated drive to diversify its foreign sources of oil. Indeed, the Saudi oil production outages are showing just how vulnerable China has become to foreign oil supplies, a dilemma that vexed the US for decades until the shale oil revolution of recent years.

“China…will be the biggest victim of the attacks on the oil facility in Saudi Arabia,” Lin Boqiang, director of Xiamen University’s China Center for Energy Economics Research, said in a China Daily report just after the drone attacks.

China could soon be hard-pressed to replace not only quantities of Saudi oil, but also its particular crude oil blends that are better suited for most of China’s refineries.

The Abqaiq field, the Saudi oil hub knocked out of commission by last week’s attack, was the key hub processor for Arab Light and Arab Extra Light crude blends coming from the Ghawar, Shaybah and Khurais fields.

Image of the immediate fiery aftermath of the missile and drone attacks at Abqaig on September 15, 2019, in Saudi Arabia. Photo: Screengrab

Arab Light and Arab Extra Light crude oil grades make up about one-third of China’s total Saudi oil imports, according to Seng Yick Tee, a senior director with the SIA Energy consultancy.

On September 19, state-run oil giant Saudi Aramco informed multiple Chinese refineries that some of the buyers’ September and October term crude oil supplies would be affected by the attacks.

Japan also was informed by Aramco that it won’t be able to export the same grade of oil starting in October, according to Japanese media, signaling the Saudis are not exactly certain when the repairs will be finished.

According to media reports, several Chinese refineries said last week that Saudi supplies would be delayed by at least one or two weeks, while others reported that they would receive different crude oil blends than originally ordered.

Another refinery in southern China operated by Chinese state-run oil and gas major Sinopec received a notice from Saudi Aramco that it will be unable to supply Arab Extra Light crude, according to industry sources.

Its monthly contract for Arab Light crude will be switched to Arab Heavy as a substitute grade for September loading, a company source told global commodities data provider S&P Global Platts.

Switching crude oil feedstock for refineries could cause significant time delays, higher costs and technical problems since each individual refinery is usually configured to process specific crude oil types.

Sinopec said in a report earlier this year that, in response to the upgrading of the quality of oil imports, refineries in China are becoming more complex in their capacities.

A satellite image showing damage to oil and gas infrastructure at Abqaig on September 15, 2019, Saudi Arabia. Photo: US Government / AFP

If Saudi oil production operations can be brought back online by the end of the month, as Saudi Aramco claims, the problem for Chinese refineries will be limited.

But if repairs at the two damaged oil- producing installations take much longer, as some analysts speculate, China will have to reformulate its plans, including cutting refinery run rates and importing more refined fuel products from other countries, including significantly the US.

That will conceivably give the US another pressure point on the Chinese economy as the two sides enter another round of negotiations in their trade war.

US crude oil exports, mostly derived from shale production in the Permian Basin in west Texas and eastern New Mexico and the Eagle Ford Shale in south Texas, consist mostly of lighter and sweeter crude oil, with less sulfur content than medium and heavier crude blends.

Lighter crude blends allow for the production of higher quality refined products and hence trade at a premium over heavier, more sour crude oil blends.

The attacks on Saudi supplies have also highlighted another market trend: the emergence of US dominance in both global oil and gas markets, coincident with a decline in Saudi Arabia’s decades-long role as the world’s swing producer.

If the US had not ramped up its oil production capacity in recent years, bringing millions of extra barrels per day onto global markets, oil prices would have spiked way more than they did in the immediate aftermath of the attacks on Saudi Arabia.

As it happened, prices for global oil benchmark Bench crude jumped $12 per barrel to $69 per barrel, but then fell back to around $64, where prices have been trading for much of the US summer season.

Conceptual image of Chinese bank notes and oil wells. Photo: Twitter

If a similar scenario would have ensued a decade ago, before the US shale oil revolution, oil prices could have jumped by as much as 30-40% and not retreated as quickly as they did, industry analysts say.

The more moderate market response, the analysts say, can be largely attributed to US oil production dominance. In just six years, US crude oil production rose so rapidly that it surpassed that of both Russia and Saudi Arabia, increasing from 5.5 million bpd to now over 12 million bpd.

The International Energy Agency (IEA) said earlier this month that booming shale production already allowed the US to briefly overtake Saudi Arabia as the world’s top exporter of oil and refined products in June, after US crude exports surpassed 3 million bpd.