The Fuse

Despite U.S.-Saudi Tensions, Aramco Looking to Purchase Gulf Coast Refining Asset

by Matt Piotrowski | September 30, 2016

Aramco is seeking assets in the U.S. in an effort to diversify its economy but also take advantage of its position as the world’s top crude producer.

Earlier this month, reports surfaced that Saudi Aramco is interested in buying a major refinery on the U.S. Gulf Coast. A potential purchase of a plant owned by LyondellBasell Industries appears to be a prudent move on the Saudi’s part. Buying another refinery in the world’s top oil consuming country would serve as a major step to hold onto market share in the U.S., which is under threat from shale output and demand measures such as more stringent fuel economy standards. Saudi Aramco, which still exports some 1 million barrels per day to the U.S., is already part owners of the joint venture Motiva, a downstream alliance with Shell, guaranteeing them a small customer base in the American market. But protecting market share in the U.S. might be difficult to maintain in coming years since the joint venture (JV) is breaking up, making the purchase of another downstream asset a savvy move. Meanwhile, the current political environment, with Saudi-U.S. relations deteriorating amid the passage of the 9/11 bill and other geopolitical matters, could make purchasing assets in the U.S. more difficult, but is not likely to undermine any deals.

“Trying to purchase this refinery is very telling,” David Weinberg of Foundation for Defense of Democracies (FDD) told The Fuse. “It’s not something they absolutely need, but it’s a strategic move at a time many would think the Saudis would be turning away from the U.S.”

Aramco is seeking assets in the U.S. in an effort to diversify its economy but also take advantage of its position as the world’s top crude producer.

Why Lyondell?

Aramco’s bid for the 270,000 b/d Lyondell refinery in Texas helps the Saudis retain the same amount of refining capacity in the U.S. after it splits with Shell. With Motiva breaking up, Shell will own two of the refineries, while Aramco will hold onto the 600,000 b/d Port Arthur, Texas plant. The Lyondell facility will make up for losing some of the Motiva capacity. Overall, with the Lyondell purchase, Aramco would own 870,000 b/d of downstream capacity in the U.S., allowing it to have a strong guaranteed outlet for its crude. Moreover, Lyondell can process heavy crude, making it a good fit for the Saudis. The refinery is also attractive because it specializes in petrochemicals. “Aramco wants to develop significantly in petrochemicals and grow its business in the U.S.,” Jean-Francois Seznec, a Middle East scholar and a Senior Fellow at the Atlantic Council, told The Fuse.

Snapping up refining capacity allows the Saudis to develop guaranteed outlets for its crude supply at a time the oil market is oversaturated and becoming more competitive.

Expanding its petchem portfolio, which includes a massive $20 billion JV with Dow Chemical, is another example of Aramco shifting its focus beyond oil. “Aramco wants to move away from just being a crude producer,” said Seznec. Although the Kingdom is looking to diversify its economy, oil will remain the main pillar for decades to come. Snapping up refining capacity allows the Saudis to develop a guaranteed baseload for its crude supply at a time the oil market is oversaturated and becoming more competitive.

marketshare

In fact, Aramco is building its downstream portfolio at home and globally in order to expand its customer base. The state-owned company has JVs in Japan, Korea, and China, with plans to grow even more in Asia. As of now, the Saudis hold some 5.3 mbd of refining capacity and could ultimately have 6.5 million-7 million b/d if and when current plans are realized. There is even talk that Aramco is seeking to boost its downstream footprint longer term to 10 mbd. Whatever the case, the more refining capacity it has, the more solid its customer base is for its crude exports, which are now around 7.5 mbd. “The Saudis want a baseload for its crude independent of the dynamics of the oil market or OPEC,” said Seznec.

The state-owned company is positioning itself for an IPO, and having more diversity through petchem and refining, it can show investors that it is more than simply a crude producer that is dependent on the whims of the oil price.

Backlash from the 9/11 bill?

The relationship between Saudi Arabia and the U.S. is not on good terms right now, with Congress this week overriding President Obama’s veto of a bill that allows victims of the September 11 terrorist attacks to sue the Kingdom. This comes on top of strained relations because of the nuclear accord last year made with Iran, Saudi Arabia’s regional nemesis. Moreover, disagreements over Washington’s Syrian policy, strains over the Saudis’ airstrikes in Yemen, and tension over how to fight the terrorist group ISIS could reflect a relationship in terminal decline.

Despite the rift between the two countries, it should not undermine any potential deals between U.S. companies and Aramco or other Saudi firms.

Despite the rift between the two countries, it should not undermine any potential deals between U.S. companies and Aramco or other Saudi firms. Simply put, economics and business interests will trump geopolitics in this regard. Besides Aramco, SABIC, a Saudi manufacturing company, is looking to build a facility on the Gulf Coast with ExxonMobil in order to further take advantage the North American petchem boom that has resulted from U.S. shale output growth.

“There’s been a lot of talk from the Saudis about consequences [from the 9/11 bill],” said Weinberg, “but there are no indications they are changing their business in the U.S.”

The Saudi-led OPEC cut

This week’s announcement that OPEC is planning to implement a production cut won’t win it any favors in the U.S. and other consuming countries, but it’s clear that the Kingdom’s economy needs higher prices for now. This week, in a reflection of how much the country’s economy is suffering, the government said it would cut minister salaries by 20 percent and take other austerity measures. Meanwhile, the reversal in its oil market strategy from pumping at high levels to weed out non-OPEC supply to reining in output to rebalance the market was a confession that their original plan was not working.

The reversal in the Saudis’ oil market strategy from pumping at high levels to weed out non-OPEC supply to reining in output to rebalance the market was a confession that their original plan was not working.

The move this week was a risky bet as it puts Saudi Arabia’s (and OPEC’s) credibility on the line. It also forced the Kingdom to give into foe Iran and heightens the possibility of a resurgence of U.S. shale production. The decision, which will ultimately put the onus on the Saudis to do most of the production cuts, shows how economic matters are trumping nasty geopolitics. A positive development could emerge from the OPEC meeting, as the two enemies put differences aside and reached an agreement. The slight thaw could possibly lead to an understanding on Syria and other conflicts in the region—but that might be wishful thinking.

Saudis in disarray

It’s clear that Saudi Arabia is undergoing a lot of stress right now, both economically and diplomatically. In its attempts to diversify its economy away from oil, it is aggressively seeking opportunities outside its borders, including those in the U.S. Buying the Lyondell fits well into that plan. But in the meantime, it has to contend with a weak oil market, which has been in place for more than two years. The OPEC cut may remedy that situation, but there’s the chance it may backfire and more economic pain will ensue.

 

 

 

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