The industrial logic behind Saudi Aramco’s ‘chemical attraction’

Flames are seen at the production facility of Saudi Aramco's Shaybah oilfield in the Empty Quarter, Saudi Arabia, on May 22, 2018. (REUTERS/Ahmed Jadallah/File Photo)
Updated 27 July 2018
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The industrial logic behind Saudi Aramco’s ‘chemical attraction’

  • Aramco wants to become more than just a producer of crude oil.
  • SABIC was first conceived in 1976, and began production in 1981

DUBAI: News that Saudi Aramco, the world’s biggest oil company and the mainstay of the Kingdom’s economy, was in talks to buy a controlling stake in Saudi Basic Industries Corporation (SABIC), the diversified chemicals giant, caused some surprise.

Not only was the move, which could cost Aramco about $70 billion if it acquires the whole stake held by the Public Investment Fund, an apparent step outside the traditional energy business; it looks like a further distraction from the initial public offering (IPO) of shares in Aramco, the flagship project of the economic transformation of the Kingdom set in train by the Vision 2030 strategy.

One prestigious commentator talked of Aramco’s “strange chemical attraction” for a deal some said had been dreamt up by the armies of investment bankers hired by Aramco for the history-setting IPO but now underemployed as the deadline for the flotation has slipped.

Aramco chief executive Amin Nasser confirmed that a deal with SABIC could push the IPO, already delayed until next year, back further.

But experts on Saudi business have told Arab News that there is  a sound industrial logic to a potential move for SABIC, and that the effect on the IPO plans would not necessarily be negative. Long term, a deal with SABIC could make Aramco a more attractive proposition for global investors.

The move, which has been mulled over for some time by advisers at American investment banks JP Morgan and Morgan Stanley, which have reportedly been retained to see it through to transaction, should be viewed against the backdrop of Aramco’s long-term strategic goal: It wants to become more than just a pumper of crude oil for burning in car engines, but instead a high-value-added developer of advanced petrochemical products.

“Demand in the petrochemicals sector is twice as much as the transport sector, so for us it is very important as a strategy to look at other sectors and maximize the value of our resources such as converting crude directly into chemicals,” Nasser said recently.

Industry experts agreed that the move  fitted well into that long-term strategy. Ellen Wald, author of recently published “Saudi, Inc.” and president of US-based Transversal Consulting, told Arab News: “There is a business logic to explain the potential Aramco-SABIC deal.”

“From the SABIC perspective the deal could mean it would benefit from Aramco managerial expertise and maybe even Aramco talent and financing. Also, SABIC could benefit from Aramco’s experience and connections in international expansion. There is also a possibility that a strategic investment from Aramco could mean the return of preferential and cheaper feedstock for Sabic.

“From the Aramco perspective, the benefits are that it would help solve any questions about when or if Aramco’s own chemicals business is competing with SABIC. Also, acquiring a strategic interest in SABIC would immediately increase Aramco’s downstream business, bringing it closer to the profile of a typical independent oil company (IOC),” she said. 

That was echoed by Jean Francois Seznec, a political scientist specializing in Middle East business based in Washington DC.

“Aramco would buy a very extensive research portfolio and excellent chemical management, eventually allowing Saudi Aramco to ‘Saudize’ its chemical division. There could be rationalization of certain basic chemical production lines, which duplicate with Aramco’s and also within SABIC. Aramco would acquire an excellent marketing organization worldwide for its new and future products,” he said.

On the downside, Seznec said that “rationalization (in the form of an Aramco-SABIC merger) means job duplication, perhaps among expats, but also among Saudis.”

Jim Krane, author and fellow for Energy Studies at Rice University’s Baker Institute in Houston Texas, pointed to synergies from the deal. “Currently, Aramco provides SABIC’s feedstock at a cut-rate price and allows SABIC to export products made from that feedstock at the full international price. It reaps the profit, but with Aramco now in the petrochemical business itself, it no longer makes sense. Saudi Aramco is essentially subsidizing a competitor.

“The number-crunchers at Aramco probably figured it makes more sense to combine with SABIC and work together, so that both companies would see the benefits of Saudi Arabia’s cheap supply of natural gas.” 

But what of the financial implications of the deal, both for the Saudi economy and for the Aramco IPO?

Wald said: “It means that the IPO is at the very least delayed.”


Crisis at India’s Jet worsens as it grounds planes, faces strike

The debt-laden carrier has delayed payments to banks, suppliers, pilots and lessors. (Reuters)
Updated 18 min 21 sec ago
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Crisis at India’s Jet worsens as it grounds planes, faces strike

  • More than 20,000 people are employed in the company
  • The company had to stop more than 50% of their aircraft due to insufficient funds

MUMBAI: India's Jet Airways was fighting multiple crises Wednesday after grounding six planes, leaving it with only a third of its fleet flying, while pilots have threatened to walk out and a major shareholder is reportedly looking to offload its huge stake.

The problems at India's number-two carrier come as other airlines struggle to turn a profit despite the sector rapidly expanding in the country over recent years.

Jet, which employs more than 20,000 people, is gasping under debts of more than $1 billion and has now been forced to ground a total of 78 of its 119 aircraft after failing to pay lenders and aircraft lessors.

In a statement late Tuesday announcing its latest grounding, the firm it said it was "actively engaging" with lenders to secure fresh liquidity and wanted to "minimise disruption".

But with hundreds of customers left stranded, Jet's social media accounts have been flooded with often suddenly stranded passengers demanding information, new flight tickets and refunds.

"@jetairways We book our flights in advance so that we save on travel cost and you are sending cancellation (message) now?", read one irate tweet on Wednesday.

"I have sent a DM (direct message) regarding my ticket details. Please respond!", said Sachin Deshpande, according to his Twitter profile a design engineer.

Another, Ankit Maloo, wrote: "Received an email for all together cancellation of flight days before departure without any prior intimation or communication over phone!"

The firm is also facing pressure from its many pilots who have not been paid on time, with unions threatening they will walk off the job if salaries do not arrive soon.

"Pilots will stop flying jet planes from 1st April 2019 if the company does not disburse due salaries and take concrete decisions," a spokesperson for the National Aviator's Guild, a pilots union, told AFP.

India's aviation regulator on Tuesday warned Jet Airways to ensure that staffers facing stress are not forced to operate flights.

Meanwhile, Bloomberg reported that Etihad Airways of the United Arab Emirates has offered to sell its 24 percent stake in Jet to State Bank of India (SBI).

A collapse would deal a blow to Prime Minister Narendra Modi's pragmatic pro-business reputation ahead of elections starting on April 11.

India's passenger numbers have rocketed six-fold over the past decade with its middle-class taking advantage of better connectivity and cheaper flights.

The country's aviation sector is projected to become the world's third-largest by 2025.

But like other carries, Mumbai-based Jet has been badly hit by fluctuating global crude prices, a weak rupee and fierce competition from budget rivals.

Alarm bells for Jet first rang in August when it failed to report its quarterly earnings or pay its staff, including pilots, on time. It then later reported a loss of $85 million.

In February, it secured a $1.19 billion bailout from lenders including SBI to bridge a funding gap, but the crisis has since deepened.

"Jet Airways is rapidly reaching a point of no return and running out of assets to keep itself afloat," Devesh Agarwal, editor of the Bangalore Aviation website, told AFP.

"The only solution is equity expansion by diluting its stakes but Jet is just trying to cut losses and running out of options," Agarwal said.

Shares in Jet Airways were down more than five percent on Wednesday.