Amid confusion over whether the massive Saudi Aramco IPO is on hold until 2019, or permanently shelved in favor of a private placement, Reuters suggests the latter is now more likely as 'sources familiar with the matter' say China is offering to buy up to 5 percent of Aramco directly (offering the Saudis the lack of transparency they may have been nervous of with a public placing).

As we noted previously, China has been very actively diversifying its sources of energy...

China has understandably played the leading role in Russia’s attempts to broaden its role as an energy supplier in Asia. Rosneft recently sold 14.16 percent of its shares to CEFC China Energy for about $9 billion by way of the Qatar Investment Authority and Glencore. The move reflected the challenges financial sanctions have created for the firm as well as China’s growing clout as an importer. Chinese demand hit 11.67 million barrels per day (bpd) and had risen 6 percent year-on-year in July. Rosneft was smart to finalize supply agreements with PetroChina set to boost its daily exports to China from 400,000 bpd to 600,000 bpd next year. Rosneft also signed an agreement with CEFC to jointly explore for Eastern Siberian reserves and increase direct deliveries to China.

These deals play into Russian-Saudi competition for the Chinese market. China’s oil imports are up 12.3 percent year-on-year, but cuts haven’t hit Russian exports. Saudi oil exports to China hovered at 1.03 million bpd so far this year, a 1.7 percent drop. Russia’s stood at 1.16 million bpd, a 13.2 percent increase. After closing the CEFC deal, Rosneft announced it expected to deliver 40 million tons of oil to China by year’s end, a 9 million ton increase on their expected deliveries. That would average out to around 800,000 bpd from Rosneft alone, assuring Rosneft’s dominant control over Russian supplies to the Chinese market. The increase in supplies has paralleled a long-standing project to develop a refinery in Tianjin. But the project, first announced in 2009, has no clear end date despite a press release concerning its implementation with CNPC in January.

Saudi Arabia has disproportionately lost share in China for several reasons. For one, it bears the burden of cut compliance. Angola overtook it because of China’s dominant position there and didn’t feel the need to comply. For another, Russian firms have built up new assets and export capacity in Eastern Siberia and the Far East. Russian blends have more physical access to Asia-Pacific markets, making them more competitive than they’ve historically been. Finally, spreads on the market between light and heavy crude have narrowed, making Russia’s lighter crudes more competitive against Saudi heavy crudes. But Saudi Arabia is not without a means of responding.

Saudi Aramco reached a refinery deal with state-owned China North Industries Group Corp. in May around the Belt and Road summit. Though the refinery is smaller than that proposed in Tianjin, Saudi Aramco has one considerable advantage over Rosneft: it lacks the same messy history Rosneft has with China’s state firms and it’s not sanctioned. CEFC was a logical partner for Rosneft in China because, unlike CNPC and state-owned players, it could more easily afford to take the sanctions risk. It can also dangle shares to China. Further, the refinery deal signals a willingness to work with China’s independent refiners. These so-called “teapot” refineries have driven demand growth and provide Aramco greater diversity in business opportunities longer-term than Rosneft’s relationships with CNPC and CEFC afford it.

Ever since the company started talking about an IPO of 5 percent of its shares, China has been a logical partner. A sale to Chinese firms in exchange for investments into China’s downstream would be huge win. The Kingdom also signed a similar agreement for an investment platform with China worth $20 billion in late August, just as it became clear CEFC would acquire stakes in Rosneft. That throws a fair bit of shade on Russia’s $1 billion fund agreed to this last visit. Topping it all off, King Salman and Aramco also signed deals reportedly worth $65 billion with China in March.

And than last week, headlines hit regarding delays/shelving of the IPO...

The FT notes that talks about a private sale to foreign governments - including China - and other investors have gathered pace in recent weeks, according to five people familiar with the IPO preparations, amid growing concerns about the feasibility of an international listing.

The Saudi state oil company has struggled to select a suitable international venue for its shares, as New York and London have vied for what has been billed as the largest ever flotation.

The company would still aim to list shares on the kingdom’s Tadawul exchange next year if they pursue the private sale, the people said.

The latest proposal by the company’s financial advisers was described by one of the people as a “face-saving” option for Saudi Aramco, which has worked on plans to list its shares internationally for more than a year.

A Saudi Aramco spokesperson said:

“A range of options, for the public listing of Saudi Aramco, continue to be held under active review. No decision has been made and the IPO process remains on track.”

The planned listing of a 5 per cent stake in Saudi Aramco is the centrepiece of an economic reform programme led by Saudi Arabia’s powerful crown prince Mohammed bin Salman, who is keen for a 2018 IPO. He has said the company could be worth $2tn although a Financial Times analysis put the valuation figure at around $1tn.

An economic recession in the kingdom is piling pressure on the prince, the king’s son and next in line for the throne, amid calls for the government to increase investment and ease austerity.

And now, as Reuters reports, perhaps the king has options...

Chinese state-owned oil companies PetroChina and Sinopec have written to Saudi Aramco in recent weeks to express an interest in a direct deal, industry sources told Reuters. The companies are part of a state-run consortium including China’s sovereign wealth fund, the sources say.

Saudi Arabia’s Crown Prince Mohammed bin Salman said last year the kingdom was considering listing about 5 percent of Aramco in 2018 in a deal that could raise $100 billion, if the company is valued at about $2 trillion as hoped.

“The Chinese want to secure oil supplies,” one of the industry sources said. “They are willing to take the whole 5 percent, or even more, alone.”

PetroChina and Sinopec declined to comment.

Two senior industry sources said Riyadh was keen on China, its biggest buyer of oil, becoming a cornerstone investor in Aramco.

But no decision has yet been taken on whether to accept China’s offer, or how much stock could be offered to cornerstone investors, the sources said.

Two sources told Reuters that sovereign wealth funds from South Korea and Japan, which are also major buyers of Saudi oil, were also interested in acquiring a stake in Aramco.

Critically though, as The Wall Street Journal reports, the oil rally could have the legs kicked out from under it if Saudi Aramco opts to forgo a public listing of its shares.

“I think the market is clinging to the IPO as the rationale,” said Robert McNally, president of the Rapidan Group.

Conventional wisdom has it that “the Saudis, as long as they were planning this IPO next year, they had almost no choice but to unilaterally, if necessary, cut production to keep oil prices from falling.”

Mr. McNally and other analysts said a delayed or canceled IPO wouldn’t necessarily weaken Saudi Arabia’s resolve. The kingdom needs higher oil prices to shore up its budget–not just to ensure the success of its offering.

But convincing investors of that may be a tougher sell.

“It does seem like a large number of people put significance on that Saudi IPO,” said Kyle Cooper, a consultant at ION Energy Group.

Bill O’Grady, chief market strategist at Confluence Investment Management, has said that prospect of a 2018 IPO was part of the reason he believed U.S. crude futures could climb as high as $60 a barrel. But the market may have been pricing in some skepticism.

“It is bearish news, but the market hasn’t seemed to put 2+2 together on this issue,” he said in an email Friday.

“If the market had discounted that the Saudis would do whatever necessary to get oil to $60 for the IPO, it would already be there.”