Saudi Arabia Review

Saudi Aramco ... new strategies in place

Saudi Aramco ... new strategies in place

Boosting refining

Saudi Aramco’s strategy is to strike a better balance between its unparalleled upstream capacity of 12 mbpd and its current refining capacity of 5.4 mbpd

The world’s largest oil and gas company, Saudi Aramco, plans to raise its global refining capacity to 8-10 million barrels per day (mbpd), up from 5.4 mbpd currently, even as it has called for a new era of industrial diversification, anchored by speciality chemicals, and underpinned by a widespread and rapid in-kingdom expansion of small to medium enterprises that produce high-value finished and semi-finished products in the petrochemicals conversion sector.

"Saudi Aramco’s strategy is to strike a better balance between its unparalleled upstream capacity of 12 mbpd and its current refining capacity of 5.4 mbpd in-kingdom and worldwide," Saudi Aramco president and CEO Amin H Nasser says.

Aramco currently runs around 1 mbpd of wholly owned domestic refineries, along with another 1.9 mbpd from domestic joint ventures.

The latest downstream complex, the 400,000 bpd Yasref refinery, an Aramco-Sinopec joint venture located at the Yanbu industrial city, ramped up to full production last August.

The plant takes Saudi Arabia’s total refining capacity to 2.9 mbpd, hoisting it to sixth place in the global capacity rankings, replacing South Korea.

Riyadh also plans to add another 400,000 bpd with the completion of the Jizan refinery by the end of this decade, taking total capacity to 3.3 mbpd.

Aramco also has 2.464 mbpd of capacity from overseas refinery investments, such as its 63.4 per cent stake in South Korea’s third-largest refiner, S-Oil, and a 14.96 per cent interest in Showa Shell, one of the largest refiners in Japan.

Nasser says a supplementing downstream push will unlock opportunities for the kingdom’s economic diversification, job creation and innovation potential, and create a world-leading industry. "To date, the kingdom’s downstream economic growth has achieved global leadership in the manufacture and export of commodity products."

He says: "While Saudi Arabia certainly needs its commodities production strength, we also need to radically alter the downstream equation to derive greater benefits in-kingdom, through knowledge-based and innovation-driven small and medium sized enterprises."

Nasser says Saudi Arabia is already a global leader in petroleum and petrochemical commodities, but today "we have a tremendous opportunity to also become a leader in downstream conversion." With most of the kingdom’s petrochemicals presently being exported as commodities, major opportunities exist to add value by turning them into high-value, semi-finished and finished products. Diversification into speciality chemicals is expected to increase returns from the current level of about $500 per tonne to about $2,000 per tonne by 2040.

He says that Saudi Aramco’s vision for the creation of a world leading downstream sector in Saudi Arabia is built on four key drivers: maximising value for the kingdom’s crude oil production, including vertical and horizontal integration across the hydrocarbon chain; enabling the creation of conversion industries that produce semi-finished and finished goods to diversify the economy; developing advanced technologies and innovation; and, enabling the kingdom’s sustainable development.

Nasser ... challenges ahead

Saudi Aramco’s strategy is to strike a better balance between its unparalleled upstream capacity of 12 mbpd and its current refining capacity of 5.4 mbpd of crude oil in-kingdom and worldwide.

Saudi Aramco is collaborating with the Ministry of Petroleum and Mineral Resources, the Royal Commission for Jubail and Yanbu, and the Saudi Arabian General Investment Authority to build value parks and locate service providers adjacent to petrochemical facilities, such as Rabigh PlusTech Park at PetroRabigh on the west coast and the PlasChem Park adjoining Sadara in Jubail Industrial City 2.

Nasser calls on the industry to do much more to support the development of home-grown downstream technologies – an area in which the kingdom can make major advances – such as breakthrough crude oil-to-chemicals technologies that will make oil a viable petrochemical feedstock.

Saudi Aramco is currently developing and testing highly advanced oil-to-chemicals technologies, he says.

The oil giant also has plans to nearly double its gas production to 23 billion standard cubic feet per day (bscfd) in the next decade.

"The kingdom has managed to increase gas production from 3.5 bscfd in 1982 to more than 12 bscfd now and this figure is expected to double to around 23 bscfd during the coming decade," Nasser says.

"Work is under way to execute an ambitious plan to implement this during the coming 10 years," he says.

Saudi Aramco has embarked on a massive programme to boost gas output for electricity and petrochemical production by developing gas fields not associated with oil production.

For instance, it is exploring and developing unconventional gas in the north of the kingdom.

Nasser also says Aramco was moving ahead with its strategy "to achieve a better balance between the total exploration and production capacity, which stands at 12 mbpd of crude oil, and its refining capacity".

In another major development involving Aramco and its joint venture partners abroad, Royal Dutch Shell and Saudi Aramco have announced plans to break up Motiva Enterprises in a deal that ends a partnership of nearly two decades and hands control of the biggest US refinery to the Saudi state oil giant.

News that the two energy companies will divide assets in their oil refining and marketing joint venture had been expected by many as they navigated an often-frayed relationship where their respective interests sometimes diverged.

An early sign of a pending breakup emerged last summer when Motiva announced plans to set up its own oil products trading operation separate from Shell. The desk started up in January.

The divorce also comes as the Saudi government considers selling shares in the world’s largest oil firm.

Abdulrahman Al-Wuhaib, senior vice president of downstream at Saudi Aramco, says that the joint venture formed in 1998 served the partners’ downstream business objectives "very well for many years."

"It is now time for the partners to pursue their independent downstream goals," he says.

A US spokesman for The Hague-based Royal Dutch Shell says the breakup and split of Motiva’s assets were consistent with Shell’s plans to simplify its global portfolio. Motiva’s three refineries in the US Gulf Coast region have a combined capacity of over 1.1 million barrels per day, located within a 120-mile (195-km) radius of one another. The marketing operations support a network of about 8,300 Shell-branded gasoline stations in the Eastern and Southern US.

Aramco wants to boost its gas production

The partners say that under the terms of a non-binding letter of intent, Aramco would take over the Port Arthur, Texas, refinery and retain 26 distribution terminals as well as the Motiva name.

It will also have an exclusive licence to use the Shell brand for gasoline and diesel sales in Texas, the majority of the Mississippi Valley, the Southeast and Mid-Atlantic markets. Shell will solely own the Louisiana refineries in Convent and Norco, where it also operates a chemicals plant, as well as Shell-branded gasoline stations in Florida, Louisiana and the Northeastern region.

A Shell spokesman says the company would move forward with Motiva’s plan to integrate the Louisiana refineries to operate as a single 500,000-bpd plant.

While sources close to the situation say the relationship between Shell and Aramco has been troubled, that tension grew after an ambitious $10 billion expansion of Motiva’s flagship Port Arthur refinery. The project doubled its size to 603,000 barrels a day and surpassed ExxonMobil Corp’s Baytown, Texas, plant as the country’s largest.

A disastrous leak of caustic fluid in a new unit crippled the plant shortly after top executives from Shell and Aramco unveiled the expansion in May 2012, upping the cost that already had ballooned from $5 billion.

In February 2014, Motiva hired Dan Romasko, who had been the top operations executive at refiner Tesoro Corp, to replace former top Shell trading executive Bob Pease as chief executive.

Romasko told Reuters in an interview a year ago that Motiva was "coming into its own" after the company announced plans to integrate the two Louisiana refineries.

Sources familiar with the relationship also say Aramco was said to be angry at Shell when refinery workers at the three Motiva plants went on strike in early 2015.

Shell led negotiations with the United Steelworkers union representing the workers, and the strike ended three weeks after the Motiva walkout.

Meanwhile, Saudi Aramco has reportedly asked consultants to bid for a role advising it on which assets to privatise and how to execute a potential share sale, as the kingdom presses ahead with plans for an initial public offering.

People with knowledge of the matter say that Aramco sent the request for proposals to international strategy firms about three weeks ago to study scenarios for an initial public offering, including how long the process might take and which assets or joint ventures to include.

Results of the study will be submitted to the Saudi government during the first half of the year, according to the sources.

Options being considered include selling shares in the parent company, placing Aramco’s domestic and overseas downstream joint ventures into a holding company and selling shares in that, or grouping together the companies’ joint ventures and smaller refineries, one of the people say.

Request for proposals haven’t been sent to banks yet. Aramco currently pumps all of Saudi Arabia’s crude oil, with production at 10.2 mbpd in February.

The company could fetch a value of anywhere from $1 trillion to $10 trillion, potentially making it the most valuable company in the world.

The world was taken by surprise when Saudi Arabia suggested that it was considering selling a portion of its stake in the most valuable organisation in the world – Saudi Aramco.

"Personally I’m enthusiastic about this step," Prince Mohammad Bin Salman Bin Abdulaziz, Deputy Crown Prince, Second Deputy Premier and Minister of Defence of Saudi Arabia, told The Economist magazine in an interview. "I believe it is in the interest of the Saudi market, and it is in the interest of Aramco."

Saudi Aramco – which can be safely estimated to be worth upwards of $2 trillion dollars – is a symbol of power and influence. With crude oil reserves of about 265 billion barrels – more than 15 per cent of all global oil deposits – and about 290 trillion standard cubic feet of natural gas, Aramco is undisputedly the world’s largest oil producing company. Just an IPO (initial public offering) of the enterprise itself would exceed the GDP of most nations on earth in terms of value, analysts say.

The kingdom is in no hurry to go to market with its most prized possession, with Prince Mohammad telling The Economist that just the decision on whether to float shares of Saudi Aramco will be reached within the ‘next few months’.

Saudi Aramco chairman Khalid Al Falih also echoed Prince Mohammad’s words, telling The Wall Street Journal in an interview that there was no specific timeline yet for the listing, adding it ‘cannot be done overnight’. There is no plan that is concrete at this stage to do the listing. There are studies ongoing. Serious consideration," Falih said.

The energy heavyweight has been heavily burdened by the impact of declining crude oil prices, ever since it led Opec to decide (late in 2014) on pumping hard to sideline the US, Russia and other non-Opec oil producers from the world’s energy marketplace.

The horizon appears gloomy for oil prices – occasionally trading under $30 a barrel currently – as the US lifting its 40-year-old ban on oil exports and Iran vowing to drill 500,000 barrels each day in its post-sanctions era, are only set to worsen the global supply glut (not to mention the diplomatic standoff between Saudi and Iran, which has the potential to deal more blows to oil prices).




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