Sector News

Saudi Arabian Oil Co. has been the world’s single largest crude producer for decades. It wants to be a lot more than that now, as a new petrochemical complex shows.

Among the Dutch corn fields here is a tangle of pipes, vats and catalyzers that the company uses in its Arlanxeo plant to transform what was oil into synthetic rubber for products ranging from auto-engine hoses to plastic wine corks.

Aramco, as it is commonly known, until recently focused on pumping great quantities of oil and, like the Standard Oil companies of John D. Rockefeller, processing it through its refineries. Aramco now aims to vastly expand its petrochemical operations, turning itself into a modern integrated energy company along the lines of Exxon Mobil Corp.

Thousands of miles away, near the Saudi Arabian city of Al Jubail on the Persian Gulf, an army of workers is finishing the $20 billion Sadara petrochemical complex, an Aramco joint venture with Dow Chemical Co. Sadara will use ethane refined by Aramco nearby to make a petrochemical called butadiene to ship world-wide to facilities, likely including its Dutch plant.

Aramco, one of the world’s most powerful and secretive companies, is undergoing an unprecedented makeover, as the oil-price rout hurts its revenue and uncertainty clouds the future of fossil-fuel demand.

Its transformation is intertwined with a long-term plan to diversify the Saudi economy. That plan, led by a powerful deputy crown prince who wants his nation to grow beyond being a petrostate, is accelerating the Aramco shift in ways now becoming clear. By positioning the company to generate more domestic jobs and non-oil revenue, Aramco aims to help provide the funding needed to carry out the prince’s vision.

Aramco’s strategic goal is to create a global network of refining and petrochemical plants that let Saudi Arabia turn its biggest asset into hundreds of higher-value products crucial to modern life, from chewing gum to auto parts.

To extract capital from oil still in the ground, Aramco plans another ambitious gambit: an initial public offering in 2018 that may become history’s biggest. Aramco says it has 261.6 billion barrels of oil left to pump, roughly 20 times as much as Exxon Mobil.

“Aramco’s capabilities will be fully unleashed,” Saudi oil minister and Aramco Chairman Khalid al-Falih said in a briefing with several reporters this year. “The company will be able to go global in multiple ways.”

Aramco declined to answer detailed questions, referring instead to speeches such as one by Aramco Chief Executive Amin Nasser in September. He signaled why the company was interested in a growing petrochemical industry. He said the Gulf region was home to only 2.5% of global petrochemical revenue and less than 1% of the industry’s jobs.

“Considering the Gulf’s endowment of oil and gas, as well as our geographic proximity to major markets in Europe and Asia,” he said, “both those figures should be much, much higher.”

New jobs, revenue
Aramco’s moves position it for a future when crude demand may peak and when owning reserves won’t be as attractive. Even if electric-vehicle adoption and alternative-fuel use soar, cutting global thirst for fuel, demand for petrochemicals is likely to remain strong. By developing more chemical manufacturing of its own, Aramco could attract jobs and revenue to the kingdom, which recently issued $17.5 billion in bonds to shore up its finances.

Aramco’s reinvention as a public company invested in producing gasoline, diesel and specialty chemicals could mean abdicating Saudi Arabia’s traditional role as de facto head of the Organization of the Petroleum Exporting Countries. Historically, the kingdom, through Aramco, has opened the spigot when prices rise too high and restricted supply when they fall too far. To do this, Aramco has kept unused spare production capacity, which shareholders would frown on, say some oil-industry consultants.

It isn’t clear how much of the change will come to pass at Aramco or in the Saudi economy. The government relies on oil for the vast majority of its revenue and has for decades talked about needing to diversify, without much change.

Richard Mallinson at Energy Aspects, a London global-energy-market consultant, says he thinks the diversification plan “will fall a long way short of the lofty ambitions” and “is just too much of a jump from where they are today.”

The strategy of directly owning more petrochemical plants to create outlets for crude and refined products has long been pursued by large firms such as Exxon Mobil and Royal Dutch Shell PLC. “Aramco is the powerhouse in the area of oil. They want to get bigger in chemistry,” says Matthias Zachert, chairman of Aramco’s German joint-venture partner Lanxess AG. “But you don’t create a leading chemical company overnight.”

Several advisers involved in the IPO planning say the transformation will be so complex it could go beyond 2018. The 5% stake targeted for the IPO is so large—Aramco has been valued at $2 trillion to $3 trillion—that finding a deep enough pool of investors may require Aramco to float the stock on several stock exchanges and to face multiple sets financial-disclosure rules, they say. It is a special challenge for bankers, they say, because the company and the kingdom are so deeply intertwined in ways that aren’t public.

A prince’s role
The company has said it will begin disclosing financial statements in 2017. Its operations are shrouded in secrecy and wouldn’t meet governance requirements of most exchanges, such as board diversity. Its board includes no women and few outsiders.

King Salman bin Abdulaziz has already shaken up the kingdom’s ruling elite by empowering his son, Deputy Crown Prince Mohammed Bin Salman. Prince Mohammed is moving ahead with a plan drawn up by McKinsey & Co. consultants to wean the country off its oil dependence. In May, he proposed the IPO and the transfer of proceeds to a sovereign-wealth fund that will invest in other sectors.

By taking on the transformation, the 31-year-old Prince Mohammed is challenging the established order in ways that could prove difficult to implement, say people close to the current establishment. Even giving shareholders partial control over Saudi Arabia’s oil reserves would be tough because taking control of those assets was a defining moment for the kingdom.

The prince is working with Mr. Falih, Aramco’s chairman, and a tight circle of advisers to map out the future of Aramco and the Saudi economy, say people familiar with the discussions. They are making many decisions surrounding Aramco with little input from the company’s bureaucracy, these people say.

Members of the company’s board learned of the IPO plans from media reports, rather than from Mr. Falih or Mr. Nasser, Aramco’s CEO, one Aramco official says. “In some occasions even the chief executive is not fully aware of the latest update,” the official says of Mr. Nasser. Aramco didn’t make Mr. Nasser, Mr. Falih or other executives available for interviews. A spokesman for the prince declined to comment.

Aramco owns directly or through joint ventures plants capable of processing 5.4 million barrels a day in markets that are its biggest crude customers: the U.S., South Korea, Japan, China and Saudi Arabia.

Making Aramco’s integrated model more lucrative, its operating costs for extracting oil remain among the world’s lowest—perhaps $6 a barrel, compared with an average of $10 in Texas’ Permian Basin, according to oil consultant Wood Mackenzie.

“The idea of control of the end market is very important to them,” says Anas Alhajji, an independent energy economist in Dallas. “This is their outlet to the market.”

That philosophy led Aramco earlier this year to break up a strategic partnership: Motiva, its two-decade-old joint venture with Shell. A key asset was a Port Arthur, Texas, refinery, North America’s largest.

Motiva had begun buying American crude oil, which was competing with Saudi oil, say people familiar with the Motiva relationship.

Shell spokesman Ray Fisher says ending such a long venture with numerous assets and liabilities is “a very complex process, involving various adjustments and changes along the way before final agreements can be reached.”

The breakup will let Aramco cement its U.S. foothold. From Port Arthur, it could ship gasoline, jet fuel and diesel to military bases in Virginia, airports in the Washington, D.C., area and service stations in New York.

The split will free Aramco from certain limits imposed by the Motiva deal, allowing it to expand, for instance, on the West Coast. The Saudi company has looked at buying a large refinery along the Gulf Coast or a stake in a refinery, say people familiar with the company.

Aramco is negotiating with the Malaysian national oil company, Petronas, to work together on a $21 billion refining-and-petrochemicals project near Singapore, The Wall Street Journal reported in October. The project would operate as a joint venture and serve as another major Asian beachhead for Saudi oil.

Aramco owns a stake in the giant Fujian Refining & Petrochemical complex, supplying oil that is turned into gasoline and plastics for China.

Aramco’s roots
Aramco has its roots in Texaco and Standard Oil of California, which formed a partnership that found enormous oil deposits on the Arabian Peninsula. In the early 1970s, the kingdom bought a stake in Aramco and by the 1980s had acquired it all.

In 1991, Aramco began looking overseas when it bought a stake in a South Korean refiner. In terms that Aramco would repeat, it agreed to supply the refinery with crude for two decades. Over the years, it bought and built more refineries.

Still, Aramco remained a company almost entirely focused on producing crude. The first inklings of a new strategy emerged in 2011 when Aramco and Dow Chemical agreed to create Sadara, among the world’s largest petrochemical complexes.

After signing the deal, Mr. Falih, then Aramco’s CEO, explained his vision. Aramco, he said, will “become the world’s leading integrated energy company by the year 2020.”

Saudi Arabian crude sales faced new pressures starting in about 2012 as Nigeria and Angola, forced out of the U.S. market by a flood of shale oil, began competing with Aramco in Asia. Demand was stagnating, and countries were moving to limit fossil-fuel use.

Soon after oil prices began falling in 2014, Mr. Zachert, chairman of Lanxess, the chemical firm, suggested a European deal with Aramco. “They saw the strong strategic rationale,” he says. “The transaction was completed in record time.”

Aramco paid $1.2 billion to Lanxess to cleave off half the German company and create a partnership, Arlanxeo, 50%-owned by Aramco and based in a Netherlands industrial park dubbed Chemelot.

Three Aramco executives moved to Holland to help run a company with 20 factories in Latin America, North America, Europe and Asia. “They’re very interested in how we do things,” says Jan Paul de Vries, the Lanxess executive who heads the venture.

Arlanxeo’s synthetic-rubber facility is a neat fit for the Sadara project, which shipped its first chemicals in December. When fully running, Sadara will be able to supply feedstock to Arlanxeo. The plant is a key link between Aramco’s aspiration of building a petrochemical empire and the kingdom’s diversification plan.

One recent afternoon, workers wearing protective masks painted arrows on new roads near the complex’s edge. Beyond a chain-link fence, trucks lined a half-built road on a patch of desert that is part of a planned five-square-mile industrial park.

The goal is to attract manufacturers that would use Sadara’s chemical output while benefiting from the infrastructure. That would complete a circle, allowing Aramco to use its oil extraction, refining and processing chain to supply more Saudi-based manufacturing—one of eight sectors the economic-diversification plan targets for expansion.

Robert W. Jordan, U.S. ambassador to Saudi Arabia under President George W. Bush, says changes Aramco is making are preparing the country to depart from the past.

“Saudi Arabia may have enough oil for the oil age,” he says. “But the oil age may be ending.”

By Bill Spindle and Summer Said

Source: Wall Street Journal