Thursday 11, October 2018 by Bloomberg

Saudis look past crude with $100 billion in downstream projects

 

The Kingdom is pushing into the industry’s less glamorous corners—refining and petrochemicals—to ensure crude keeps paying the bills.

As Saudi Arabia looks to its oil reserves to underwrite a record share sale, even the kingdom’s crown prince is backing a push into the industry’s less glamorous corners—refining and petrochemicals—to ensure crude keeps paying the bills.

State-run Saudi Aramco is working on more than $100 billion of refining and chemical projects, according to Bloomberg calculations, and a pledge to invest in a $9 billion complex with Total SA is just the latest step in this expansion. Such downstream investments “create huge opportunities for economic growth and jobs,” according to Crown Prince Mohammed bin Salman.

The world’s biggest oil exporter is seeking to transform its economy to diversify away from a decades-long reliance on crude. The crown prince is leading the effort to prepare Saudis for a day when electric cars, solar and wind power and better energy efficiency erode global oil demand. Aramco’s plan for what could be the largest initial public offering will help bankroll the transformation, even as the IPO date recedes into the future.

“Saudi Arabia sees petrochemicals as a way to diversify,” said Mustafa Ansari, a senior economist at the Arab Petroleum Investments Corp. “They’ve been lagging in development of refining and petrochemicals because they’ve been so focused on oil production, so this is low-hanging fruit.”

Demand for petrochemicals will rise faster than for any other segment of the oil industry, according to the International Energy Agency. Chemicals produced from crude will account for about one-third of the increase in oil use by 2030 and half of the growth in demand by 2050, the IEA said.

“Aramco has to invest a lot in downstream,” Prince Mohammed said in an interview last week in Riyadh. “We know that the new demand for oil 20 years from now, it will be from petrochemicals.”

Aramco, known formally as Saudi Arabian Oil Co., didn’t immediately provide its own figures for downstream investments, when asked by Bloomberg.

Middle Eastern crude producers that historically supplied refiners and chemical makers overseas have been expanding their capacity to process oil and make the products at home. While the region’s expansion into chemical manufacturing benefits from access to cheap natural gas, producers are looking increasingly for alternative types of feedstock.

One way forward is to integrate refining with petrochemicals. Aramco plans to use gases and fuels from its refineries to boost output of higher-value chemicals, Chief Executive Officer Amin Nasser said on Monday. The project with Total, for example, will produce raw materials and plastics for the medical, construction and automotive industries, he said.

Nasser is also responsible for Aramco’s planned purchase of the government’s majority stake in Saudi Basic Industries Corp., the Middle East’s biggest chemical maker. The deal, which could be valued at about $70 billion, would create a conglomerate with income from crude to plastics. The plan necessitated a delay in Aramco’s IPO until 2020 or 2021, Prince Mohammed said in the interview.

“Diversifying away from risky oil assets—which maybe over 15 or 20 years would end up being stranded—is very good policy for Saudi Arabia,” said Nasser Saidi, a former Lebanese economy minister who heads Dubai-based consultant Nasser Saidi & Associates.

Aramco wants to more than double refining capacity by the middle of the next decade, an expansion that would make it one of the world’s biggest oil processors. The company also wants to transform three million barrels of crude a day into chemicals.

“Definitely, the future of Aramco has to be in downstream,” the crown prince said.

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