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Saudi Aramco set to spread its wings

The firm’s industrial slate will be broadened and its global reach extended when the Sabic deal is complete

Saudi Aramco's acquisition of a 70pc stake in Sabic, the kingdom's giant petrochemicals group, for $69bn has industrial logic in that it gives the upstream purchaser a massive downstream hedge against oil price volatility. But no less interesting is what Saudi Arabia's Public Investment Fund (PIF), the seller and current holder of that 70pc share, intends to do with the money.

Officially, the line is that it gives the PIF, headed by crown prince Mohammad bin Salman (MbS), funds to diversify the Saudi economy to make it less dependent on oil in line with his much-touted Vision 2030. That means two things. First, focusing domestically on sectors such as tourism, entertainment and the development of new high-tech cities and ports.

A second focus is foreign investment, mainly in new technologies where technology transfer to the kingdom could one day reap dividends. The overseas drive is being stewarded by the ambitious Masayoshi Son, head of Japan's Softbank and high-tech Vision Fund. The PIF, its biggest investor, has pumped in $45bn.

The PIF has become "a sort of turbo-charged private equity fund, a trophy asset hunter" since the crown prince took charge in 2015, says David Butter, a Middle East expert at London's Chatham House think tank. A big issue for it is how to assess risk, "as well as calculate 'realistic' revenue streams that will, or will not, flow from these investments".

Whether some of the proceeds from the PIF's Sabic sale could be used to plug holes in the Saudi budget in the event oil prices dive again is also unclear, reinforcing the kingdom's need to improve its sluggish foreign direct investment (FDI) record-still less than 1pc of GDP in 2018

The business argument

The other way to look at the Saudi Aramco-Sabic deal is through a purely business lens, where opinion is broadly positive. Analysts at Fitch Ratings note that Saudi Aramco is less integrated into natural gas and the downstream than some of its international peers. It is also less diversified geographically as its upstream assets are located in a single country, whereas Sabic's operations are global.

Adrian Del Maestro, oil and gas strategy director at consultancy PwC Strategy&, says refiners such as Sabic are experiencing waning demand, particularly for diesel and gasoline:

"With the growth of electric vehicles and increased fuel efficiency measures, they can see that demand for some of their products is going to weaken. One way to alleviate the impact is for refiners to integrate their downstream refining operations more closely with petrochemicals."

According to the IEA, about a third of future oil demand growth will come from petrochemicals, so the sector is viewed as an increasingly important area for energy groups. Additionally, Saudi Aramco sees a tie-up with Sabic as an opportunity to get scale in its much smaller petchems business. By going down the petrochemical integration route, they are diversifying their revenues, making them better able to deal with the vagaries of a very cyclical industry, adds Del Maestro.

Steve Zinger, senior petchems analyst at Wood Mackenzie, says "buying Sabic quickly vaults Aramco to become one of the largest chemical-producing companies in the world". And the deal chimes with moves by global oil majors and national oil companies to integrate further into downstream and petrochemicals. Refining and petrochemical margins are countercyclical to oil prices and represent a hedge against low oil prices, says Fitch.

The deal will close in 2020 when Aramco must pay 50pc of the asking price, with the remainder to be paid over a two-year period.

 

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