Securing the Demand for Oil

Much has been made of China’s Belt and Road Initiative, the attempt to create a modern Silk Road through an interconnected series of overland and maritime trade and infrastructure routes. Fuelled by China of course. But something similar is happening in the oil world, specifically in the downstream segment. A major country has created and continues to expand a network of interconnected oil refining and petrochemical hubs in key strategic geographically locations, all in the name of establishing a dominant supply chain for its oil.

That country is Saudi Arabia.

Through its state oil firm Saudi Aramco, the Kingdom’s ambitions to push further downstream is not a secret. This goes way back to 2011, when the Arab Spring swept through most of the Middle East. In Saudi Arabia, this was quashed by offering economic sweeteners to its citizens, afforded by oil prices well above US$100/b. The oft-quoted figure is that Saudi Arabia’s attempts to placate its population required US$90/b crude prices to work. That worked fine until oil prices crashed in late 2014, which then exposed another weakness: the major dependence on crude oil for the Kingdom’s fortunes and continued existence.

So a plan was hatched to diversify the economy, which itself has roots in the Arab Spring policies. Saudi Aramco would need to reduce its exposure to upstream and diversify into refining and petrochemicals, with an eye to an eventual (and now confirmed to be delayed) IPO. A series of deals were struck. Saudi Aramco invested to become equal partners in Malaysia’s massive 300 kb/d RAPID refinery. It bought out partner Shell to become the sole owner of American refining subsidiary Motiva and its 600 kb/d Port Arthur facility, the largest in the US. Tie-ups with several Chinese refineries were made, a key move in a market where Saudi Arabia was rapidly losing out to Russia for market share. And Aramco is also part of the giant new 1.2 mmb/d oil refinery planned in India’s Maharashtra state.

All this has been done in the name of securing fixed demand for its oil. In a fast-evolving world where the tide of US light sweet crude is inexorably rising, the battle for market share is heating up. What better way to secure demand than by buying it? Sure, there have been a few instances where Saudi Aramco walked away from potentially large deals – like in Indonesia’s messy refining sector – but over the past month, it has announced even more deals that hint that its expansion is unlikely to stop. Aramco is now officially in ‘talks’ to acquire an up to 25% stake in the Reliance 1.24 mmb/d Jamnagar refinery – one of the most complex refineries in the world - for up to US$10-15 billion. It wants to help build a new refinery for Pakistan by 2024, and has acquired a 17% stake in South Korean refiner Hyundai Oilbank to complement its existing investments in China and Japan. After buying out Shell from Motiva, Aramco is now also looking into taking over Shell’s 50% stake in the 305 kb/d SASREF refinery in the Kingdom’s Jubail City. It is taking over fellow Saudi chemical giant SABIC. It has even started trading LNG even though Aramco doesn’t produce a single drop of LNG yet.

Taken together, that’s a portrait of a company aggressively expanding. Aramco’s global refining network was already strong at the end of 2018; by 2023, with these and perhaps even more investment to come, this could be the largest, strongest refining network in the world. A quick back-of-the-envelope calculation shows that if all these investments pan out, Aramco will have access to over 8 mmb/d of global refining capacity. That’s enough to account for half of the Kingdom’s current crude output levels, and a good hedge against the threat of US shale.

 Saudi Aramco’s Downstream Plans

• Double global refining capacity, from 5 mmb/d to 8-10 mmb/d
• Double global petrochemicals production by 2020
• Be a ‘global leader’ in petrochemicals by 2040

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