How can an oil and gas giant like Saudi Aramco boost its profile ahead of its planned share sale?
There are three areas where Aramco can work its magic to sweeten the initial public offering (IPO) for investors: Booking more reserves, finding more markets for its crude and becoming greener and an exporter of technology.
The issue of booking more reserves was the focus of a previous article. The focus here is on how Aramco can find more markets for its crude by building more refineries abroad. This is one of the strategic goals for the company that was announced under the Saudi government’s plan to revamp the economy, known as Saudi Vision 2030.
On the vision’s official website, the government states: “We believe that Saudi Aramco has the ability to lead the world in other sectors besides oil, and it has worked on a sweeping transformative program that will position it as a leader in more than one sector.”
Saudi Aramco has already initiated its transformation program into an integrated energy company that will maximize the revenues of each barrel of oil from the field until it becomes a finished product.
To achieve this goal, the company has announced that it wants to become a chemical maker and venture into areas like building industrial zones around its refineries or manufacturing some of its goods and equipment locally. The company also wants to become a technology exporter to better serve its transformation plan.
Focusing on the downstream operation (refining and chemicals), the company’s CEO Amin Nasser said on April 14 in a speech at Colombia University in New York that it is discussing several refining and marketing joint ventures in Southeast Asia, such as Indonesia.
With about 60 to 70 percent of its exports going to Asia, it is very much focused on growth in this area, which includes looking for investments within China’s downstream sector, he said. The company is also evaluating opportunities in the US as part of its plan to increase its global refining and marketing capacity to around 8 million barrels per day (bpd) and 10 million bpd.
Increasing the international reach of Saudi Aramco is important for the IPO, Energy Minister Khalid Al-Falih said in Malaysia late February after the signing of a new deal to partner on a refining and petrochemical complex between Aramco and Petronas in Johor, Malaysia.
The company is in talks with almost every single big energy consumer in the world and is on the search for refineries in several countries.
Why is this important? Saudi Arabia will likely not increase its production capacity of oil for the foreseeable future. The main area in which Aramco can grow is in refining.
Also, as other producers in the world are considering increasing their production capacities — like Kuwait, the UAE, Iraq and Iran — the quest for market share in emerging markets will become very competitive. The best Aramco can do is to build more refineries to secure shares in every big market. This is the area where other members of the Organization of the Petroleum Exporting Countries (OPEC) lag behind. With the exception of Kuwait, most of the OPEC members are sellers of crude oil with limited or no refining capacities abroad.
For investors, this is good news, as this means the company will not only have revenue from selling oil but it can now diversify its income. The only challenge is that the refining margin is subject to oil-price fluctuations but that is something Saudi Arabia can still control with the help of other producers.