SaudiAramco Acquires SABIC

[09-April-19]

Saudi Aramco acquires 70% stake in petrochemicals producer, SABIC, from Public Investment Fund (PIF), valued at $69.1 billion

On March 27th, 2019, when the news surfaced about one of the most awaited deal of the last 12 months, those in favour considered this a strategic move by the Kingdom to diversify its downstream operations. On the other hand, those in disfavour, argued that the deal is a mere camouflage to hide Saudi Crown Prince Mohammed bin Salman’s deviation from the reform agenda which he promised in 2016 – also known as Vision 2030. Nevertheless, what is sure is that both parties have decided that there will be no layoffs, change in management, or any impact on SABIC’s balance sheet, as confirmed by Yousef al-Benyan, SABIC’s CEO.

The Public Investment Fund (PIF), Saudi’s largest sovereign-wealth fund, is supposed to be the main instrument driving the economic reform agenda, underlying Vision 2030. PIF’s main aim is to increase nation’s wealth by investing in multi-billion projects, both, at home, and internationally, to create a multiplier effect for the economy. However, Vision 2030 also lays down a series of other structural reforms for the society, which has been entangled in its own rudimentary philosophy. The pace of implementation of such societal reforms is relatively slow.

Prince Mohammed’s reform agenda was supposed to kick-start with Saudi Aramco’s IPO, eventually providing the PIF much needed liquidity. Unfortunately, the proposed listing could never happen, triggering thoughts for an alternate route to fund the PIF and proceed ahead with the Prince’s idea of reforms. SABIC’s sale will provide PIF the required liquidity, almost similar to what the IPO would have fetched. However, the deal timing is still debated by many as SABIC’s share prices has almost doubled to SAR 123.39 (acquisition price), as compared to when it had fallen below SAR 60 in Jan, 2016.

Source: Yahoo Finance, accessed on April 2, 2019

Technically speaking, Aramco and SABIC are competitors in some parts of the value chain, however, Aramco has also been a cheap feedstock provider to SABIC for decades. Moreover, both entities are also engaged in some long-term strategic partnerships, such as their ambitious Crude-to-Chemicals (COTC) project, scheduled for commissioning in 2025, at the Yanbu Industrial Complex. CLG’s hydroprocessing technologies and CB&I’s (part of McDermott International) ethylene cracker technology will be combined with Aramco’s TC2C technology to convert around 70% to 80% of crude to chemicals. This project is expected to change the dynamics of Saudi’s downstream industry by creating a multiplier effect on the GDP. For Saudi Aramco, it also acts as a cushion by monetizing some of its crude inventories towards high value chemical products.

The new arrangement will make the joint entity much stronger, technically more capable, and, will provide a far outreaching effect in terms of new customer acquisition. This move also bolsters Kingdom’s capability of taking on direct competition from the likes of integrated oil and gas companies such as Shell, Exxon, Chevron, etc. Aramco, which has mega downstream ambitions of increasing its refining capacity from 4.9 MMBPD to around 8-10 MMBPD by 2030, wants to use this opportunity to further develop its chemicals business. At present, Aramco and SABIC has total petrochemicals production capacity of 16 and 62 million tons, respectively.

On one hand, SABIC’s integration can help Aramco boost its R&D capabilities even further, on the other side, SABIC can still be supplied cheap feedstock, which became dearer with price increasing to $1.75/MMBTU from $0.75/MMBTU, in December 2015, as a part of the subsidy rationalisation programme. Furthermore, WoodMac expects that the demand for chemicals will outpace the demand for transportation fuels in the next 5-7 years, as a result, many oil refiners are already betting high on chemicals, specially, olefins and aromatics, as a key target for crude oil demand. IEA’s recently published report on Future of Petrochemicals also emphasizes the same point, clearly stating, “Petrochemicals are set to account for more than a third of the growth in world oil demand to 2030, and nearly half the growth to 2050, adding nearly 7 million barrels of oil a day by then.

To continue its dominance in the global oil and gas industry, Saudi Aramco needs to deal with the dual challenge of declining oil consumption in the transportation sector, and, increased competition from the US, and Russia. But, the good news is, that it already has concrete plans on the Crude-to-Chemicals front, and, some refinery integration plans for its upcoming projects. SABIC’s deep experience in the petrochemicals space will be an added advantage.

According to Saudi Ministry, the proposed IPO gets deferred to no sooner than 2021, however, in the meantime, Aramco gets the much needed push, or at least, a playing ground to diversify its offerings, eventually increasing its valuation even further. Amin Nasser, CEO of Saudi Aramco, believes that moving deeper into chemicals will also help in lowering Aramco’s global carbon footprint, a key goal to which the Kingdom subscribed to during the Paris Agreement. However, given the nature of portfolio that both companies possess, the benefit of integration on its climate goals will have to wait for some time before it is visible to the larger community. As for now, the country will continue to fulfil its diversification programme, in a large manner, through proceeds generated from its hydrocarbon operations.