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Aramco rethinks downstream priorities

Riyadh's stuttering attempt to attract international investors to state oil firm Saudi Aramco's chimeric initial public offering (IPO) is forcing a re-evaluation of downstream projects

A declaration of intent some three years ago by state oil giant Saudi Aramco to nearly double global refining capacity to 8-10mn bl/d over the following decade was swiftly followed by agreements to invest in a raft of international downstream ventures, primarily in Asia. 

At home, an ambition to convert an ever-higher proportion of the company’s oil into value-adding petrochemicals was enshrined in plans for a landmark plant in Yanbu, on the west coast, processing crude directly into chemicals in joint venture (JV) with soon-to-be subsidiary Saudi Basic Industries Corporation (Sabic). 

However, as the oil firm and its heavyweight banking advisory team courted investors anew during the fourth quarter to buy into the revived IPO—at a price approaching the $2tn on which Crown Prince Mohammed bin Salman (MbS), the kingdom's de facto ruler, has staked his reputation—demands for a reduction in capital expenditure in areas deemed non-core look likely to relegate some of the putative projects to the backburner. On the other hand, those in major Asian demand centresthe anticipated bedrocks of future consumption of the company’s crude—are expected to proceed, despite teething problems. 

Asian paper tigers?

As has been common for proposed downstream investments by Mid-East Gulf firms in Asia over the past decade, some of Aramco's proposed projects seem destined never to progress beyond paper. One scheme that remains nominally under discussion is a JV provisionally agreed in November 2015 with Indonesian state oil company Pertamina to upgrade, and expand from 348,000bl/d to 400,000bl/d, the latter's Cilacap refinery in Central Java—but the two sides have proved unable to agree on a valuation. 

A senior Indonesian presidential adviser told a press conference in late October that negotiations had recently been extended until December, but the Saudi firm's involvement looks increasingly doubtful. Indonesia is a relatively minor market for its crude, insufficient to justify the project’s $6bn price tag, and the ‘enterprise value’ figures cited by the parties are widely divergent. 

Demands for a reduction in capital expenditure look likely to relegate some projects to the backburner

A more novel venture first floated last year, and resurfacing in more concrete form in January, would see Aramco making a maiden downstream investment in Africa—an intent stated for several years—by way of a refining and petrochemicals complex in South Africa. Then-chairman and energy minister Khalid al-Falih—dismissed from both roles in September, allegedly over lack of commitment to the IPO and the corollary shift in corporate priorities—announced an agreement with South Africa’s Central Energy Fund (CEF) to carry out feasibility studies, with a 300,000bl/d facility at the Richards Bay coal hub on the east coast and costing around $10bn a front-runner. 

However, the scheme was among those that attracted scepticism from potential IPO subscribers and the suspicion that the project has been placed low in the Saudi firm's priorities appeared confirmed in early November by the CEF's chief executive Kholly Zono—who put the likely completion date at 2027-28. Aramco’s 658-page share prospectus, released on 9 November, made no mention of the scheme.  

Indian ambitions

By contrast, the company's plans to develop the world's largest refinery, with capacity of 1.4mn bl/d, on India's west coast are being pursued despite an escalation in the project’s already-enormous costs—from the $44bn envisaged when the investment agreement was signed in April 2017 with a trio of Indian parastatals to the $60bn sum now floated—and the enforced relocation of the scheme to a different area within Maharashtra state due to strength of local opposition. 

The commitment is a reflection of the venture's strategic importance. India is expected to be the world's single largest source of incremental crude demand over the next two decades and the ability to secure long-term captive demand is thus highly-prized. Moreover, a collaboration between the two governments' leading energy companies coheres with their deepening political ties. Indian prime minister Narendra Modi made his second state visit to the kingdom in late October for talks with MbS, emerging to hail the Maharashtra project as an exemplar of the countries’ enhanced energy links. Earlier that month, Aramco was linked to a bid for a stake in Bharat Petroleum Company, one of the three partners in the refinery venture. 

Potentially as part of a hedge against the mega-project’s failure—although never billed as such an alternativethe Saudi giant also signed a non-binding agreement in August to acquire 20pc of the downstream business of India’s Reliance Industries conglomerate, with its 1.4m bl/d of refining capacity. Financial close was said at the time to be due by March. Aramco also trod the corporate acquisition route to new downstream assets in June, when it completed the purchase of a 17pc stake in Hyundai Oilbank, a South Korean refiner with 650,000 bl/d of refining capacity in the countrya major and growing importer—in a deal that includes a 20-year, 150,000bl/d crude supply agreement. 

Slow boat to China

Two proposed Chinese downstream investments—an avenue pursued relatively slowly given the Asian giant’s existing status as the biggest customer for Aramco's crude—are also expected to make the cut by dint of the market's long-term strategic value. ln common with India, China’s relative importance as an oil demand centre is likely to grow as fossil-fuel intensity falls in major Western economies. 

India is expected to be the world's single largest source of incremental crude demand over the next two decades

MbS visited Beijing in February and signed agreements on two long-mooted deals for Aramco to invest in two refining and petrochemicals complexes—one in Liaoning province in the north-east with state conglomerate Norinco and the other in the eastern Zejiang province with the independent Zejiang Petrochemical. In September, the latter deal was firmed up in a memorandum of understanding said to "solidify" the Saudi firm's investment in the 400,000bl/d refinery at the Zhoushan complex, due for commissioning next year, which will be integrated into a 1.2mn t/yr ethylene complex. The Norinco JV foresees a 300,000bl/d refinery and a 1.3mn t/yr cracker scheduled for completion in 2024—to which the Saudi partner will, crucially, supply up to 70pc of the feedstock. Aramco's crude oil sales to China hit a record 1.74mn bl/d in the third quarter,  accounting for around a quarter of total sales. 

But, somewhat anomalously, the largest Asian downstream project agreement that has actually been consummated in the drive into the international is with the state oil firm of a net oil exporter—in the form of the February 2017 reported $7bn acquisition of a 50pc stake in the integrated refining and petrochemicals complex being developed by Malaysia’s Petronas on the country’s southern Pengerang peninsula. Whether the deal would have passed today’s stricter profitability tests—and to what extent the Saudi commitment depended on close personal relations between now-deposed prime minister Najib Razak and the kingdom’s royal family, which saw King Salman present in Kuala Lumpur to witness the signing—is now somewhat of a moot point. 

However, the vast facility, comprising a 300,000-bl/d refinery and 1.3mn t/yr cracker, is strategically located on the Strait of Malacca, a key shipping route for Aramco’s east Asian customers, while the agreement includes a provision giving Aramco the right to supply at least 50pc and up to 70pc of the crude oil feedstock. The commissioning process, which began in late 2018, was delayed by a fire in April and full start-up is now targeted for the second half of next year. 

Surprisingly, given the fanfare surrounding Aramco and Sabic’s first-ever JV in Yanbu’s crude-oil-to-chemicals (COTC) scheme when first announced in mid-2016, the project was apparently one of those being closely questioned by prospective IPO investors. The partners were already said to have recently paused the front-end engineering and design work—contracted last year to the UK’s Wood Group and the US’ KBR—to allow time to develop technologies allowing elimination of the refining step for nearly all the planned petrochemicals products, in an effort to reduce costs from the initial $25bn estimate to under $20bn. 

Provisional scope envisages a facility processing 400,000 bl/d of crude into around 9mn t/yr of chemicals. Neither company has lately said much about the scheme, increasing suspicion that it may have moved onto the backburner.

Name Location Capacity ('000 bl/d) Partners Equity Interest (pc)
S-Oil refining and petrochemicals complex South Korea 669 S-Oil 61.6
Motiva (Port Arthur refinery)  US 635  -  100
Idemitsu Showa Shell six refineries Japan 945 Idemitsu-Showa Shell 7.7
Fujian Refining and Petrochemical Company China 280 Sinopec, ExxonMobil 25
PRefChem Malaysia 300 Petronas 50
Hyundai Oilbank South Korea 650 Hyundai Heavy Industries 17
Source: Aramco share prospectus 9/11/19
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