An initial deal by China Petrochemical Corp., or Sinopec Group, to invest in a proposed refinery in Saudi Arabia shows the drive by China's energy companies to expand overseas is so far trumping any concerns over rising tensions in the Middle East.

Sinopec will take a 37.5% stake in the Red Sea Refining Company joint venture that will build the Yanbu refinery once its agreement with Saudi Arabian Oil Co., known as Saudi Aramco, becomes binding. Aramco will hold the remaining interest, the companies said.

This marks the first move by Sinopec--Asia's largest refiner by capacity--to become a global player in oil processing after focusing its overseas expansion up to now in acquiring stakes in producing crude oil and natural gas fields.

"It will advance Sinopec's overseas operations, enhance its strategic planning of refining, and further guarantee China's energy supply security," Su Shulin, the company's general manager, said.

The Yanbu refinery will process 400,000 barrels a day of Arabian Heavy crude oil, a type of crude produced in Saudi Arabia, and is expected to begin operations in 2014.

The refinery will produce 90,000 barrels a day of gasoline, 263,000 barrels a day of ultra-low sulfur diesel, 6,300 metric tons a day of petroleum coke and 1,200 tons a day of sulfur, and will supply these products to both the international and domestic markets.

Sinopec is playing catchup with domestic peer PetroChina Co. (PTR), which has plowed billions of dollars into building up a refining and distribution network that includes hubs in North America, the Caribbean and Europe.

In a major deal in January, PetroChina offered around $1 billion to British petrochemicals firm Ineos Group Holdings PLC for shares in two proposed joint ventures that would conduct crude-oil refining and trading at Scotland's Grangemouth refinery and France's Lavera refinery.

Given the ongoing turmoil in the Middle East and North Africa, Sinopec's move looks much riskier than the PetroChina-Ineos deal. Saudi troops have been deployed in Bahrain, creating a potential flashpoint in a state that's strategically important to another regional rival--Iran.

Analysts are already talking of tensions escalating in the region, which calls into question the logic of any new energy investment in the Middle East.

"The present crisis may well worsen, perhaps even to the dimensions of 1973-1974, when contradictions of the Saudi-American relationship reached a breaking point as officials in Washington openly threatened the possibility of seizing Gulf oil fields or even beyond, given the absence of the Cold War framework," says Helima Croft, an analyst at Barclays Capital.

But Sinopec's deal is potentially extremely lucrative, as it enables the Chinese company to forge closer ties with Saudi Aramco, which controls the world's biggest oil reserves. Up to now, the business relationship has centered around crude trading and Aramco's investment in a Sinopec-run, 240,000-barrel-a-day refinery in China's Fujian province.

Saudi Arabia is China's biggest supplier of crude oil, shipping nearly 900,000 barrels a day last year, according to data from China's General Administration of Customs.

Although neither Aramco nor Sinopec have disclosed the cost of the Yanbu plant on the Red Sea coast, it will run into billions of dollars. U.S. oil major ConocoPhillips (COP) last year pulled out of the Yanbu project as it decided to cut back on refining and marketing activities.

Copyright (c) 2011 Dow Jones & Company, Inc.