The Saudi oil giant said in a written statement on Sunday that its subsidiary Aramco Overseas Company (AOC) signed a memorandum of understanding on March 17 with CNPC subsidiary PetroChina Co. Ltd. to build a 10-million metric tons per annum “grassroots full conversion refinery” in Yunnan province.

Saudi Aramco manages the largest proven reserves of conventional crude oil — 260.1 billion barrels — and the fourth-largest gas reserves in the world — 275.2 trillion cubic feet.

The proposed refinery will be designed to process 200,000 bpd of Arabian crude oil and will produce high-quality refined products, such as ultra low-sulfur gasoline and diesel that meet current and future China products specifications.

The project represents an opportunity for Saudi Aramco to partner with CNPC, a leading Chinese petroleum company, to support growing demand for high quality refined products and capture an investment opportunity in China’s promising refining industry.

Additionally, it enhances a strategic partnership of close cooperation between a major producer and a major consumer of hydrocarbons while also presenting an opportunity for additional energy security and increased industrialization in the inner part of China.

“This agreement is a significant step forward in our expanding relationship with CNPC and in our global downstream strategy,” said Saudi Aramco President and CEO Khalid A. Al-Falih. “We don’t consider ourselves simply sellers of oil to China, but rather strategic partners whose many relationships in that important country are founded on mutual respect, interdependence and mutual benefit.”

He said Saudi Aramco is proud to contribute to China’s steady economic growth and continued social development “through our strategic long term investment and reliable supply of energy.”

CNPC President Jiang Jiemin agreed with Al-Falih. “As the national oil company of the world’s largest developing country, CNPC joins hands with Saudi Aramco to establish a longterm, stable and reliable partnership between the two companies.”

Saudi Aramco will supply PetroChina with up to 200,000 barrels per day of Arabian crude oil via a longterm contract while PetroChina will contribute its refined products retail network assets in the targeted market to Saudi Aramco.

AOC is a subsidiary of Saudi Aramco, based in The Hague, the Netherlands.

It operates primarily in Europe, Asia, Australia and Africa, providing its affiliates in the Saudi Aramco global oil and gas enterprise with a wide range of services including finance support, supply chain management, technical support services and a variety of administrative support services.

PetroChina Co. Ltd. is the largest oil and gas producer and distributor in China. It is one of the largest companies in China by revenue and one of the largest oil companies in the world.

PetroChina was established as a joint stock company with limited liabilities by China National Petroleum Corporation in1999. With its headquarters in Beijing, PetroChina is China’s biggest oil producer and as of September 2010 is the world’s largest company by market value.