INSIGHT: Asia seals major oil, petchem deals during Saudi king’s state visits

26 March 2017 17:27 Source:ICIS News

(Clarification: recasts joint venture ownership stakes in paragraph 30)

By Pearl Bantillo

HOUSTON (ICIS)--Asia has sealed major oil & gas and petrochemical investment deals with Saudi Arabia during the rare state visit of Saudi King Salman bin Abdul Aziz Al-Saud, and these should translate to mutual benefits between the energy-hungry region and the deficit-laden world’s biggest crude exporter.

Saudi Arabia has an urgent need to diversify its economy following the sharp deterioration of its oil revenue from mid-2014 caused by the crude price slump, and Asia presents just the right opportunity for downstream investments.

King Salman – with a delegation of 1,500 according to media reports – paid visits to China and Japan, the world’s second and third biggest economies, respectively, as well as Indonesia and Malaysia, the two biggest economies in southeast Asia.

The rare visit to Asia by the reigning Saudi monarch – which kicked off in Malaysia on 26 February and ended in China on 18 March – according to media reports, was meant to strengthen ties with the countries, which are among the major importers of Saudi Arabian crude.

Salman ascended to the Saudi throne more than two years ago after the death of his predecessor Abdullah bin Abdul Aziz al-Saud on 23 January 2015.  It was the year when Saudi Arabia’s budget deficit surged to a record Saudi riyal (SR) 366bn ($97.6bn).

Saudi Arabia is heavily reliant on oil revenues, which have declined steadily over the past five years, with a marked 64% fall recorded from 2014 to a projected SR329bn at the end of 2016, according to the Saudi Arabia 2017 budget document released by its Department of Finance.

Oil’s share of Saudi Arabia’s government revenues had shrunk to 62.3% in end-2016, down from 87.9% in 2014. The country has had to borrow money to fund its expenses, causing it to incur hefty budget deficits.

Saudi Arabia Oil Revenue 2012-2016

Last year, the budget deficit is estimated to have declined from the peak in 2015 but remained huge at SR297bn. National debt at SR316.5bn was 12.3% of Saudi Arabia’s projected GDP and more than a sevenfold increase from SR44bn in 2014.

Fitch Ratings on 22 March 2017 downgraded Saudi Arabia’s long-term foreign and local currency issuer default ratings to “A+” from “A-“, with a stable outlook.

The downgrade reflects “the continued deterioration of public and external balance sheets, the significantly wider than expected fiscal deficit in 2016 and continued doubts about the extent to which the government’s ambitious reform programme can be implemented”, the credit ratings firm said.

Concerns about a global supply glut caused the plunge in crude oil prices from mid-2014 through to 2016, but Saudi Arabia – the world’s biggest crude exporter and is the de facto head of oil cartel OPEC – had refused to cut production despite mounting deficits, on concerns about losing market share amid the shale boom in the US.

OPEC finally bowed down to the pressure to expunge crude production by 1.2m bbl/day in the first half of this year, with Saudi Arabia implementing the biggest cut of 486,000 bbl/day, and freeze the oil cartel’s production at around 32.5m bbl/day.

It was against this backdrop that Saudi Arabia’s monarch decided to embark on his first-ever state visits to Asia, four of which – Indonesia, Malaysia, Brunei and Maldives – are predominantly Muslim countries. King Salman’s itinerary included Maldives but the trip was eventually cancelled because of a flu outbreak in the south Asian country.

In China, $65bn worth of deals involving 35 projects have been signed during King Salman’s first state visit to the country.

The deals include the strategic agreement between petrochemical giants Sinopec and SABIC to “study opportunities for joint projects in Saudi Arabia and China”, the companies said in a joint statement.

State-owned oil and gas giant Saudi Aramco has signed a memorandum of understanding (MOU) with China North Industries Corporation (Norinco) to develop downstream investment opportunities in the country; while it inked a separate deal with China’s Aerosun Corp to jointly increase production of thermoplastics compound pipes.

Of particular interest to Saudi Aramco in China is the crude oil-to-chemicals initiative, which aims to directly convert crude oil into petrochemicals, eliminating the entire refining step of the process.

“This could change the competitive dynamics of petrochemical feedstocks and assist in developing advanced new materials as well as new uses… And given China’s pioneering work on coal-to-chemicals, the case for collaboration in this area is perhaps strongest of all,” Saudi Aramco CEO and president Amin Nasser said.

China has developed the coal-to-chemicals technology because of its abundant coal resources. Most of Asia relies on the more expensive naphtha as feedstock for petrochemical production, while Saudi Arabia has enjoyed the cost advantage with the use of gas feedstock.

In Japan, where King Salman’s state visit took place on 12-15 March, it was agreed that the joint “Saudi-Japan Vision 2030” will be pursued.

”As Saudi Arabia seeks opportunities to diversify and strengthen its economy by capitalising on advanced and cutting-edge technologies, Japan is the ideal partner to comprehensively contribute to this development with its knowledge capital, and technological competitiveness,” according to a document posted on Japan’s Ministry of Foreign Affairs (MOFA) website.

“Similarly,  the Saudi-Japanese cooperation would help  the Japanese economy identify and develop opportunities  to further upscale Japanese investments in  Saudi Arabia, thereby enabling an accelerated spin of the positive economic cycle in Japan,” it stated.

Saudi Arabia is Japan’s “largest and stable oil supplier”, while Japan is one of the largest customers for the crude-producing giant.

Included in the areas of cooperation is the potential listing of Saudi Aramco on the Tokyo Stock Exchange (TSE), for which Japan’s Agency for Natural Resources (ANRE) and Saudi Arabia’s Ministry of Energy, Industry and Mineral Resources (MEIM) have held discussions, according to the MOFA document.

Saudi Aramco is widely expected to launch an initial public offering (IPO) sometime in 2018 but details have not been firmed up on where it would publicly list shares.

“As Saudi Aramco and TSE will evaluate the establishment of a joint study group for the IPO, Japan ANRE and Saudi MEIM decided to continue following up on the development of the discussions among both stakeholders,” it stated.

In Malaysia, Saudi Aramco has signed a deal to take a 50% stake in PETRONAS’s Refinery and Petrochemical Integrated Development (RAPID) project in Johor.

The investment was valued at $7bn, according to media reports. Under the deal, the Saudi energy giant is expected to supply up to 70% of the crude feedstock requirements of the RAPID refinery, with natural gas, power and other utilities supplied by Malaysian state-owned oil and gas firm PETRONAS.

The RAPID deal is expected to boost Saudi Aramco’s global refining capacity to 8m-10m bbl/day by 2030 from over 5m bbl/day currently, and grow its chemicals production capacity to 34m tonnes from 12m tonnes over the same period, according to the Saudi energy firm.

Meanwhile, Salman’s the state visit to Indonesia came months after the finalisation of a 45:55 joint venture development agreement between Saudi Aramco and Pertamina for the Cilacap refinery.

The Cilacap refinery is part of Pertamina’s Refinery Development Master Plan (RDMP) and its capacity is planned for an expansion to 400,000 barrels per day, with crude to be supplied by the Saudi Arabian firm.

The deal was signed two months before King Salman’s state visit to Indonesia, during which the investment commitment to the Cilacap refinery was confirmed.

All the project deals in Asia, as well as the expected recovery in crude prices this year due to the production cuts, bode well for Saudi Aramco’s planned public listing of about a 5% stake sometime next year. It is widely expected to be the world’s biggest IPO in history.

($1 = SR3.75)

By Pearl Bantillo