Saudi Aramco's shifting strategy
Saudi Aramco has big plans for expanding its refining capacity and it won’t let oil-price volatility stand in the way, Abdulaziz Judaimi, the company's downstream vice president, says
PE: Moving downstream is historically considered a smart move in an era of low-priced oil. It allows integrated companies to capture more value from oil as a commodity. Does Saudi Aramco believe we're in a long period of relatively low-priced oil markets?
AJ: During market downturns, upstream earnings suffer significantly more than downstream businesses do. In fact, downstream margins and earnings usually benefit from low-priced crude feedstock. So, integrated companies, with both upstream and downstream units, normally perform better over the long-term, and are better positioned to negotiate soft market patches.
Saudi Aramco's downstream expansion strategy also reflects the above factors. As far as oil prices are concerned, they are expected to strengthen as the market balances, and especially as inventories begin to shrink towards more normal levels. The long-term equilibrium of the market is expected to reflect prices that result in a reasonable supply-demand balance. This price range would be neither high nor low. However, it is not productive to debate any specific price figure that would be dictated by multiple factors impacting the market.
The Saudi National Transformation Program envisages domestic refining capacity rising from 2.9m b/d to 3.3m b/d by 2020. How important is the Jazan refining project in achieving this goal?
The Jazan Refinery will play the main role in providing the Western and Southern Regions with their requirements for refined products, and the excess volumes will be exported. Jazan Refinery and Terminal Project means so much more for the Jazan Region. This project will form the backbone of the Jazan Economic City, playing a key role in its development and providing the city with a competitive advantage—in the availability of feedstock for downstream industries as well as energy and fuel—thus creating an industrial city capable of attracting investors.
The refinery will be capable of processing Arabian crude oils to manufacture approximately 75,000 barrels per day of gasoline, 100,000-160,000 b/d of ultra-low-sulfur diesel (10 parts per million), and 160,000-220,000 b/d of fuel oil, depending on the crude mix processed, and will produce approximately 1m tonnes per year of benzene and paraxylene petrochemical products. It is envisioned that the proposed refinery will ultimately be integrated with a future nearby world-scale power and water facility.
The marine terminal will have the capability of receiving Very Large Crude Carriers for the supply of crude to the refinery and will have berths to support product exports from the refinery. Construction of the refinery is now more than 70% complete and we expect it to be operational by 2020.
Saudi domestic refineries processed an average of 2.459m b/d in 2016, up 12.8% from a year earlier. Do you expect to see domestic refining capacity plateauing after 2020, given the Kingdom's aim to end "the addiction to oil"?
The refineries throughput is driven by many factors such as planned shutdowns, market demands, prices and margins. We are using sophisticated optimisation models to determine the company's refining throughput considering these factors simultaneously.
Our plan always is to maximize the refining economics while optimising the throughput and costs. This will support the Kingdom's strategies to increase its income resources.
To what extent do you expect Saudi Aramco's focus to shift to petrochemicals in the years ahead? Are you planning any joint ventures with Sabic?
Saudi Aramco's strategic intent is to create more value from its crude oil stream through refining, marketing, lubes and chemicals, and we have done that with partners within the kingdom and overseas.
We are maximising the refining integration with Petrochemicals. Some examples include Petro-Rabigh, Satorp, Yasref and S-Oil—each of these refineries are producing different petrochemical products. In addition, we have full conversion petrochemical plants such as Sadara and Arlanxeo.
We expect a gradual shift into new areas of business including petrochemicals under the larger aspiration of diversifying Saudi Aramco's overall portfolio in becoming a truly and leading integrated energy company.
As for the last part of your question, yes, in fact we signed an agreement with Sabic a year ago for a potential joint venture in oil-to-chemicals. This agreement reflects our vision to build on Saudi Arabia's global leadership in crude oil production and commodities export by producing more chemicals based on oil feedstocks while also optimising value across the entire hydrocarbons chain and deriving greater benefits within the kingdom. Saudi Aramco and Sabic have independently pursued crude oil to chemicals initiatives, with the same intent: leveraging Saudi Arabia's immense hydrocarbon resources to produce high-value petrochemicals.
Together, we have identified opportunities to collaborate on innovative technologies for processing petrochemicals directly from crude oil. Accordingly, this agreement outlines our plans to determine the project's feasibility, and potentially pursue a joint venture.
Overseas, Saudi Aramco has refining interests in the US, China, Japan and Korea—with Malaysia and Indonesia to be added to the list. What is Saudi Aramco's strategy going forward—to expand current investments or seek new ones?
Saudi Aramco has a long-term strategy for downstream growth. This strategy drives us to adopt a more balanced approach to participate across the petroleum value chain allowing us to balance our activities from the well-head to the car fuel tank. One of the objectives of our new strategy is to have deeper vertical integration across the petroleum value chain with refining acting as crude placement vehicles and retail creating captive demand for the refining systems. Our goal is to raise our global refining capacity to 8m-10m b/d. Our downstream expansion in this direction will be continued, making use of organic growth as well as acquisitions at the right time.
How do you expect Saudi Aramco's energy relationship with China and other Asian nations to develop in the wake of King Salman's recent tour of the region?
Saudi Aramco is expanding its customer base around the world including China, Malaysia, Indonesia, and India. The company has flexibility to supply various five grades of crudes to its customers. The long-standing relationship between Saudi Arabia, China and other Asian nations can be further amplified with a host of new business and economic opportunities ranging from energy collaboration, knowledge and technology transfer, as well as innovation-driven industries, benefiting all countries and beyond.
Do you see Aramco's downstream focus to be on Asia, which is the world's growth market and scale back interests in North America, for example?
Saudi Aramco has a multi-pronged strategy to ensure availability of reliable markets for its crude. This includes focus and marketing in all major enclaves, competitive pricing and long term relations.
Expansion of refining and chemical businesses also helps in securing long term markets for our crude, besides adding value, reducing earnings' volatility, and imparting greater robustness to the business portfolio. This strategy is being continued and we do not eliminate future expansions from any regions, including North America.
Saudi Aramco is becoming more open in doing business globally. Are there any planned partnerships between Saudi Aramco and other global oil and gas companies?
We have always had partnerships with global companies where the strengths of international companies creates additional value. For example, we have refining joint ventures, Sasref and Samref, with Shell and ExxonMobil respectively. Similarly, PetroRabigh with Sumitomo and Sadara with Dow Chemicals. Similarly, we have international partnerships, besides using international companies in the oilfield services and engineering, procurement and construction areas. International companies have been good partners. And we also continue to explore opportunities in Asia. Of course, we also recently signed an agreement with Petronas for the Refinery and Petrochemical Integrated Development in Pengerang which will help to grow our global refining capacity from more than 5m b/d currently to 8m-10m b/d by 2030. Similarly, the partnership with Petronas will help to grow our share of chemicals production capacity, across our global operations, from 12m t/y, to over 34m t/y over the same period.
This interview appeared in the AOGC daily newsletter, produced by Petroleum Economist for attendees of the 19th Asia Oil and Gas Conference held in Kuala Lumpar.