SABIC, Aramco, and the Future of Downstream
Last month, Saudi Aramco announced the acquisition of SABIC, increasing the share of downstream assets within the Saudi oil giant’s portfolio. By purchasing the world’s fourth-largest petrochemical company with $88-billion-worth of assets, and by concluding its own multibillion-dollar investment projects in Asia (China, India, Malaysia, and Pakistan) and the United States, Saudi Aramco is set to become one of the largest players in the downstream sector. To make sure of this fact, Saudi Aramco released, for the first time ever, a prospectus for the bond sale showing the company is the largest in the world with a net income of $111 billion dollars. No doubt the deal is looking to be a wise one for the Saudis.
Once the regulatory procedures are completed, the Kingdom’s main sovereign wealth fund (SWF)— the Public Investment Fund (PIF)— will receive $70 billion in return for 70 percent of its stake in SABIC; the remaining 30 percent will remain in the hands of private investors. The PIF is chaired by Crown Prince Mohammad bin Salman (MbS), who has played a decisive role in outlining Saudi Aramco’s strategy.
Last year, MbS foresaw the absorption of SABIC by Saudi Aramco as part of the country’s emphasis on energy futures. Since 2016, Saudi Aramco has substantially increased its downstream portfolio by investing both domestically and internationally. Petrochemicals and refining industries are expected to account for most demand growth both due to lower oil prices, as well as macroeconomic factors such as industrial growth, urbanization, growing population, and increasing per capita income in China and India. An inexpensive oil price environment has also contributed to the growth of the downstream since 2014. As prices plummeted in 2014 and 2015, vertically integrated companies rushed to increase the share of downstream production in their portfolio in order to cushion their balance sheets from plunging oil prices.
Throughout this period, both SABIC and Saudi Aramco have diversified their downstream portfolio and geography. In 2017, Saudi Aramco acquired full ownership over Motiva, the operator of the largest U.S. refinery-Port Arthur. The Saudi energy giant also pledged to invest an additional $6.6 billion in downstream projects in the United States. In addition, last year SABIC partnered with Exxon to build a 1.8 million tonne ethane cracker plant in San Patricio, Texas. SABIC made headlines in the United States after acquiring General Electric Plastics in 2007.
More recently, during MbS’s recent trip to Pakistan, India, and China, Saudi Aramco signed $70 billion in petrochemical and refining projects. In India, Saudi Aramco has joined forces with the UAE’s ADNOC to build a $44-billion petrochemical and refining complex. In China, Saudi Aramco, which already co-owns the Fujian refinery-petrochemical complex with Sinopec, has recently signed a $10-billion agreement to build a petrochemical complex in cooperation with Chinese state-owned defense conglomerate Norinco. The mix of energy and defense companies between these states is an emerging trend line to watch. Many of the countries involved in energy downstream futures are also states that own the means of production for their respective defense armaments production.
Nevertheless, by integrating SABIC into its value chain, Saudi Aramco aims to take full advantage of being a vertically integrated company. As feedstock accounts for the considerable share of the production cost in downstream, streamlining of the feedstock supply will undoubtedly increase the profitability of SABIC, and consequently will improve to the overall appraisal of Saudi Aramco when/if it is ready for IPO in 2021 most likely in Hong Kong.
Once regulatory procedures are finished, Saudi Aramco will have to wait for another financial year before offering five percent of Saudi Aramco to the potential buyers. In his interview with Bloomberg last year, MbS revealed that Saudi Aramco’s IPO would take place in 2021, calling SABIC’s potential acquisition as one of the concluding elements before Saudi Aramco’s long-awaited and much debated IPO takes place. It is thought that with this deal, a better, more transparent picture can be provided to potential investors depending on the scope of the IPO rollout.
Investing petrochemical and refining facilities in lucrative markets such as India and China will also help Saudi Aramco to secure supply contracts with main buyers of its crude oil. Significantly, since 2017, Saudi Aramco has lost its lead in the Chinese market to Rosneft. However, this has not stopped Saudi Arabia from signing multi-billion-dollar energy contracts with Russia, including in the petrochemical sector. Saudi Aramco has shown interest in acquiring shares in SIBUR, the largest petrochemical entity in Russia. Furthermore, SIBUR and Saudi Aramco signed a memorandum of understanding to build a $1.1 billion petrochemical plant in Saudi Arabia.
Meanwhile, once the deal is approved by the regulatory authority, the PIF will make a $70 billion profit from the sale of its stake in SABIC to Saudi Aramco. PIF serves as a financial tool/conduit for Saudi Arabia’s investment projects abroad especially in Russia. Together with its Russian counterpart, RDIF, the PIF has established a $6 billion investment fund. The PIF is planning $10 billion worth projects in Russia in various industries including food security and infrastructure.
The merger of the largest oil company in the world with one of the largest petrochemical producers in the world will contribute to the consolidation of power in the hands of Saudi Aramco. It will also help to diversify Saudi Arabia’s economy, which remains heavily reliant on crude oil exports. Many observers argued that the SABIC-Aramco deal is ill-conceived and will not improve the Kingdom’s economy. This gloomy outlook is not necessarily reflective of reality. Clearly, there is a bigger picture emerging that shows how Riyadh will look for future growth opportunities wherever it can.