With bond issue, Saudi Aramco embarks on major transformation

Aramco is taking strides toward opening its’ books as it plans its’ first ever international bond in the second quarter of this year, which could help in financing the $70 billion takeover of the world’s third largest diversified petrochemicals company or Saudi Basic Industries Corporation (Sabic).

The acquisition of Sabic is expected to help Aramco in its ambition to become a global integrated energy giant, along the lines of ExxonMobil or Royal Dutch Shell. Indeed, Saudi Aramco began the New Year by announcing a series of news that could represent a road map for the future and radically change the nature of the largest oil producing company in the world forever.

Importantly, it is likely to have future implications for Saudi Arabia’s leading role in the Organization of Petroleum Exporting Countries (OPEC).

Aramco is undergoing strategic transformation in responding to shifts in global energy as almost all forecasts believe that demand for transportation fuels could reach its peak in the coming decade, particularly with the acceleration of energy efficiency, a growing share of gas and renewable energies, as well as increasing use of electric vehicles.

In this context, Aramco’s leadership recognizes that it needs to change the company in a way that increases its readiness for the coming competition and the expected shifts in the structure of the global energy sector. This includes diversifying its product portfolio and taking the lead. As a result, three main trends can be identified in Aramco’s future path:

Firstly, Aramco in its latest annual review its determination to become the world’s leading integrated energy and chemicals producer. This, in turn, requires increasing transparency, financial control, improved corporate governance practices, and facilitating the company global partnership.

 

Aramco is undergoing strategic transformation in responding to shifts in global energy as almost all forecasts believe that demand for transportation fuels could reach its peak in the coming decade

Naser al-Tamimi
Saudi Arabia announced last week the official results, its first independent audit (conducted by a well-respected US Dallas-based consultant DeGolyer & MacNaughton Corp.) of its vast oil and gas reserves since it nationalized its energy industry more than four decades ago.

Then Saudi Energy Minister and Aramco Chairman Khalid al-Falih reiterated Saudi Crown Prince Mohammed bin Salman’s previous statement that the Kingdom expects the initial public offering (IPO) for Aramco to take place in 2021.

Riyadh is still hoping to attract a $2 trillion valuation and raise $ 100 billion in order to move forward with Crown Prince’s economic transformation plan, Vision 2030.

Secondly, Aramco aspires not only to produce crude oil but also to become a leading integrated energy and chemical company in the world, focusing on maximizing income, facilitating sustainable and diversified expansion and increasing its global competitiveness.

In its World Energy Outlook 2018 (WEO), the International Energy Agency (IEA) is expecting the petrochemicals to become the largest driver of global oil consumption accounting for more than a third of the growth by 2030. Aramco is already proceeding with plans to expand and integrate its’ refining and petrochemical units.

The company is working on chemicals investments of more than $100 billion over the next 10 years inside and outside the Kingdom, according to Saudi Aramco President and CEO Amin Nasser. Aramco plans to double its integrated refining and marketing capacity to 8-10 million barrels per day over the next decade.

The company also plans to invest in new refineries petrochemical plants to cement its position in fast-growing overseas markets such as China, India Indonesia, Malaysia and Vietnam, as well as the United States.

In this context, Aramco aims to convert about 2-3 million barrels of crude oil per day directly into petrochemical products. The company is developing a proprietary technology, based on thermal cracking of crude to produce chemicals, which promises a 70-80 percent yield of chemicals.

Aramco and Sabic have already announced a large crude-oil-to-chemicals project of 400,000 barrels per day capacity, which is expected to come on stream in the mid-2020s.

Finally, Aramco is likely to focus its efforts on upgrading technology and diversifying product offerings. The company will also have to increase its investments in research and development activities in order to compete globally.

Dedicated crude-oil-to-chemicals technologies, being developed by Aramco, Sabic and ExxonMobil, confirms these trends. If successful, this could give Aramco a cost advantage for producing petrochemical and downstream derivatives.

Yet despite this optimistic outlook, there are significant challenges awaiting Aramco’s plans regardless of the IPO’s outcome. A new collapse in oil prices may prompt another painful fiscal adjustment and volatile global financial conditions could increase borrowing costs.

At the international level, weak petrochemical prices and increasing competition from US petrochemicals exports, as well as shrinking opportunities on the increasingly self-sufficient Chinese market will challenge Saudi petrochemical exports.

Meanwhile, costs are rising at home, with subsidies for feedstock, fuel and electric power cut to help the government plug its fiscal deficit.

Above all, as Aramco is channelling new millions of barrels into refining and petrochemicals, while the Saudi Arabia’s total crude production capacity or domestic oil consumption rates unchanged, it will become increasingly difficult for Riyadh to continue playing its traditional role as a swing producer, unless it moves to adopt other options.

The Kingdom will be able to increase its oil production capacity to about 15 million barrels per day, but this requires investing tens of billions of dollars amid uncertainties about the future of global demand.

Or move aggressively toward a sustainable option that requires a two million reduction in domestic consumption through energy efficiency, as well as increased input from other sources such as gas and renewables.

All indications suggest that the Saudi government is adopting the second option, while it is certain that Aramco is on the verge of major changes that could reshape the role of Saudi Arabia within OPEC and the world oil markets.

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