Saudi Aramco’s Asia investments to boost competitive edge

Saudi Aramco’s recent multi-billion investments in Asian refineries will give the oil giant an advantage over rivals ahead of its initial public offering (IPO) next year, analysts told Argaam.

“Due to increasing supply from countries such as Iran and Iraq, it is critical for Aramco to find buyers for its crude,” said Ehsan Ul-Haq, principal consultant at UK-based KBC.

While Saudi Arabia has already become a major refining center, the kingdom still needs to export huge volumes of crude, he added, noting that Asia will remain the largest demand driver for oil.

“As a result, Aramco's downstream investment in Asia will give the company not only a competitive advantage among key IOCs (international oil companies) and NOCs (national oil companies) but also pricing leeway in the refined product market.”

Gary Ross, founder and executive chairman at New York-based PIRA Energy Group, agreed that Aramco’s focus on Asia would be positive for the company.

“As part of a portfolio approach it makes a lot of sense, plus Asia is the highest netback market,” he said.

Saudi Arabia’s focus on Asia was highlighted during King Salman’s recent month-long tour of Asian countries, aimed at cementing ties with oil importers and securing investors for the upcoming listing of a 5 percent stake in Aramco, said to be worth $100 billion.

During the king’s visit, Aramco agreed to buy an equity stake worth $7 billion in an oil refinery to be built by state-run Malaysian energy firm Petronas. The new refinery in Johor, Malaysia, is part of Petronas’ planned $27 billion Refinery and Petrochemical Integrated Development (RAPID) project.  

Aramco will supply up to 70 percent of the crude feedstock for the project, giving the world’s top oil producer a key market for its crude in Asia.

“The kingdom and Aramco clearly identify Asia as their demand hub and most of the growth in demand is expected to come from non-OECD Asia in particular,” said Abhishek Deshpande, energy market analyst at Natixis.

“Investing in refining helps them to lock in demand for their own crude, which is critical in these times when competition from OPEC and non-OPEC is strong,” he added.

The Saudi oil company also signed a $6 billion deal with Indonesia’s PT Pertamina last December to speed up the upgrade of the Cilacap refinery in central Java. The project is expected to start up in 2021, and will be 45 percent owned by Aramco.

“Aramco needs to [be] something more than just a raw material producer. Extending downstream to refining and petchem is thus the natural thing to do,” Bjarne Schieldrop, chief commodities analyst at Sweden’s SEB, told Argaam.

“It only remains to make the strategy profitable, which is another matter and not so easy due to potential overbuilding of refinery capacity,” he cautioned.

Write to Jerusha Sequeira at jerusha.s@argaamnews.com