Aramco/Reliance deal shows Saudi drive to Asia

Jonathan Lopez

16-Aug-2019

Saudi Aramco’s deal with India’s Reliance Industries for the supply of crude oil to a key refinery in the 1.3bn-strong country shows to what extent the Kingdom is trying to both diversify its customer base and expand into downstream industries set to boom in coming decades.

Reliance, an industrial conglomerate with presence in several sectors, including petrochemicals, said the move was part of its strategy to become a debt-free company in the medium term. The company’s stock rose nearly 10% on Tuesday.

Under the non-binding letter of intent (LoI) with Saudi Aramco, Reliance would sell a 20% stake in its oil to chemicals division to the Saudi state-owned crude oil major, with an estimated cost of $15bn.

The second part of the LoI would include Aramco supplying 500,000 bbl/day of crude oil in a long-term basis to Reliance’s Jamnagar refinery, the largest in the world, located in the western state of Gujarat and with capacity to process 1.2m bbl/day.

LOOKING EAST

Saudi Arabia has been living off crude oil for too many years.

The economy has tilted toward a stiff economic system, heavily subsidised, where nationals enjoy decent living standards while the majority of jobs are fulfilled by foreign workers.

Crown Prince and de facto ruler Mohammad Bin Salman wants to create a more diversified economy in order to give opportunities to the nearly 26% of unemployed young people in the country, according to the World Bank.

Saudi Aramco , which effectively provides nearly all the state’s income, has been charged with finding new markets and new industries to make inroads into.The deal with Reliance responds to that logic.

Traditionally a large consumer of Saudi crude, the US is on course to become self-sufficient and even exporter of crude, so Aramco’s eyes are on Asia’s fast-growing emerging countries.

The emergency of climate change is increasing efforts in Asia to install green energy capacities, but economic growth and the consumerism attached to it will make crude oil still an essential commodity in the decades to come.

India, on the other hand, has so far been too reliant on Iranian and Venezuelan supplies, two countries currently under US sanctions and subject to more geopolitical risks than the iron-fisted, stable Saudi monarchy.

Saudi Arabia produced 10m bbl/day in the first half of 2018, Aramco’s financial results published on 12 August show.

The deal with Reliance, which both parties said is only in the early stages, would absorb 5% of the total output.

“[The Reliance deal] is part of our efforts to advance our global downstream, growth strategy,” said Aramco’s CFO Khalid Al-Dabbagh in a press conference on 12 August.

“India is a large country with… growing demand. What has been announced is a letter of intent, we are at the early stages of the deal to allow us to conduct due diligence going forward.”

LOOKING DOWNSTREAM

Prince Bin Salman’s Saudi Vision 2030 project aimed to liberalise the economy and kick off some social changes, allowing the country to gain the necessary appealing among international investors.

While social changes have been limited, those in the economy are starting to show what sort of diversification Bin Salman had in mind – and petrochemicals are playing a big role.

The agreement with Reliance for 20% of its oil to chemicals division adds to a long list of investments by Aramco in the industry.

In India, the company is part of the $44bn Ratnagiri and Petrochemicals project, which is expected to boast an annual production capacity of 18m tonnes of petrochemicals products.

It will be 50%-owned by Aramco and the Abu Dhabi National Oil Corp (ADNOC), with the other half being held by Indian Oil Corp, Hindustan Petroleum Corp and Bharat Petroleum Corp. The company has also been active in Europe, buying up the 50% stake in its synthetic rubber joint venture with Germany’s LANXESS it did not already own in December ‘18.

The joint venture, called ARLANXEO, served mostly the tyre industry, under pressure on the back of the wider automotive crisis. With higher feedstock costs than competitors in overseas markets, LANXESS was quick to dispose ahead of time its stake at the venture.

With Aramco as an owner, however, cheaper feedstock is guaranteed to help overcome that competitive disadvantage.

At home, Aramco has embarked in the $69bn acquisition of the 70% it does not own of SABIC, the petrochemicals major, which at the same time owns 24.99% of Swiss chemicals producer Clariant.

Also in Saudi Arabia, Aramco is considering a $5bn joint venture with France’s major Total for a new complex next to its SATORP refining and chemicals site.

LOOKING AT THE FINANCES

Aramco issued earlier this year a $12bn bond, which proceeds would be used to finance the SABIC acquisition.

At same time, Aramco said on 12 August, at the presentation of its first ever financial results, that plans to partially list the company on the stock exchange through an initial public offering (IPO) were still going ahead, after several delays and doubts on where the listing should take place.

However, the company’s CFO did not set a potential date for the listing, neither financial targets. Investors and pundits were thrilled to gain access to Aramco’s financial insights, however, although more questions than answers seemed to stream from the press conference held by the CFO.

While it said free cash flow stood at nearly $38bn in the first half, it also said that it would pay its “shareholder” – the Saudi government – a dividend of $46.4bn. In practical terms, that would imply the company is borrowing to pay dividends, an untenable proposition. ■

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