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.”


Saudi Arabia seeks stable, not soaring, oil prices

Updated 22 September 2018
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Saudi Arabia seeks stable, not soaring, oil prices

  • Due to market tightness, Brent rose to nearly $80 per barrel but deteriorated to $78.80 on Friday.
  • The average price for Brent crude per barrel over the past five months has been between $72.11 and $76.98

RIYADH: Oil prices rose this week on continuing market tightness. With the price rise, some Saudi-bashing has begun. Bloomberg reported that increasing prices were due to Saudi Arabia’s comfort with Brent crude above $80 per barrel. Such “analysis” is hogwash.

Due to market tightness, Brent rose to nearly $80 per barrel but deteriorated to $78.80 on Friday. WTI rose above $70 per barrel for the first time in three months and settled at $70.78 per barrel by the week closing.
The average price for Brent crude per barrel over the past five months has been between $72.11 and $76.98. As may be noted in those numbers, the Brent crude price has been resisting the psychological barrier of $80 per barrel. The fact is that, since October 2014, the Brent monthly average has never gone above $80.
The oil price outlook might be raised as a result of this upward tendency and the continuing tight oil market. For instance, with the latest numbers in hand, HSBC has revised its oil price forecast upward with Brent to average $80 per barrel in 2019 and $85 in 2020, before settling at about $75 in 2021.
Bloomberg was inaccurate about Saudi Arabia’s comfort with a Brent price above $80 per barrel. The Kingdom has never been among the bulls when it comes to oil prices. Again and again, Saudi Arabia has been a major advocate for stable oil prices, not increasing oil prices, which it views as unsustainable and damaging to the global economy. Bloomberg is also predicting that Saudi Arabia will follow its allegedly bullish nature and refrain from ramping up production to compensate for the oil lost once the US sanctions on Iran come into effect.
US Secretary of Energy Rick Perry has confirmed that Saudi Arabia, Russia and the US are well able to add enough crude oil supply into the market to compensate for Iran. Indeed, the Kingdom has begun to increase output to adjust for market needs, from 9.87 million barrels per day (bpd) in April to 10.42 million bpd in August.
The upward movement in oil prices came after strong fundamentals showed market tightness that spurred record levels of speculative traders, with nearly all betting on higher prices. The price rise also recognized that total US inventories are below the five-year average for the first time since May 2014. Oil prices have been gradually trending upward with gentle fluctuations. There have not been any steep surges or declines. There is nothing artificial about the trend. In reality, it is boringly predictable.
Last month, the International Energy Agency (IEA) reported OECD commercial crude oil inventories at 32 million barrels below the five-year average. Stocks at the end of Q2 2018 were up 6.6 million barrels versus the end of 1Q 2018, the first quarterly increase since 1Q 2017. The IEA also noted that global refinery throughputs in the second half of 2018 are expected to be 2 million barrels higher than in the first half of the year. These refined products stocks will draw down before building again in 4Q 2018.
Global crude oil inventories peaked in 2016. The OPEC+ agreement that worked for market balance was the reason for a fall in inventories. Since May 2017, global oil stocks have been on the decline and now global crude oil stocks are below the five-year average. Product stocks are also below that level, with strong demand and healthy refining margins.
Inventories have kept falling despite American producers pumping at all-time highs last month. It is only the massive flood of oil from the US which has kept crude oil prices at low levels from early 2015 to the end of 2017 — along with a resulting lack of upstream investment in the oil industry. Therefore, the IEA predicts that in 2022 spare production capacity will fall to a 14-year low.
Global oil markets are rebalancing. Oil prices started their upward momentum from the end of October 2017. They went above the psychological barrier $60 a barrel after 10 consecutive months of tireless efforts by OPEC and non-OPEC nations that started on January 2017. The market rebalancing will continue through the end of 2018, and beyond.
Such upward momentum in oil prices isn’t artificial movement because it came after many months without steep price fluctuations. In 2016, the Brent price average was $43. The 2017 Brent price average was $54, and prices just surpassed $60 in October 2017. The Brent average surpassed $70 in late March 2018 and has been hovering between $72 and $78 since. There is no evidence of a steep fluctuation or an artificial movement.
The claims of an artificial price movement have come just at the time when OPEC and the world are reaping the positive outcomes of 24 nations collaborating in output cuts that managed to successfully rebalance the oil market in a situation where global oil inventories were running at record highs. Also, these false claims came when the oil industry needs capital inflows to reactivate upstream investments for major international oil companies. Such investments are essential for the price stability that benefits oil producers and consumers globally. Low oil prices result in low investment in discovery and production of petroleum resources, which damages various industry sectors and energy needs. That leads to a vicious cycle of up-and-down price fluctuations.