Saudi Aramco looks downstream, and East  04/17/2019 14:54:54 

IN MOST WESTERN eyes Saudi Aramco inspires either awe or disdain. Financiers are in the first camp. They gobbled up the state-owned behemoths first-ever global bonds last week, gasped at its $111bn annual profit and, for all their professed concern about climate change, gushed over how cheaply it can pump oil for decades to come. The second group, which includes some American congressmen and chattering classes, liken Aramcos accomplishments to sticking a straw in the ground and sucking. They attribute its earnings partly to OPECs price-fixing racket. And they are squeamish about Muhammad bin Salman, the crown prince into whose hands much of its money flows and who, Western spooks believe, ordered the murder last October in the kingdoms consulate in Istanbul of a Saudi journalist, Jamal Khashoggi.

Western rivals view Aramco differently. These days they think less about its oil, and more about its shift into natural gas, refined products, chemicals and plastics. As they see it, Aramco is no potentates piggy bank. It is an increasingly formidable competitorespecially in Asia, where much of the future demand for petroleum products will come from.

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Aramcos ties to the West, particularly America, run deep. It is named after the Arabian-American Oil Company. It still carries the DNA of its former shareholders, the forerunners of Chevron and ExxonMobil. Besides geological good fortune, it is imbued with Western-style business discipline. And Saudi Arabia remains a staunch American ally.

Yet the relationship is changing. America produces more of its own oil. As recently as April 2014 Aramco provided more than a fifth of Americas crude imports. In January the share was less than a tenth. A big reason behind the kingdoms decision to postpone an initial public offering of Aramco were potential legal snags it faced if it listed in New York. The killing of Khashoggi, who lived in America and wrote for the Washington Post, has strained relations with the West. Under such circumstances, it is small wonder that Asia looms larger.

The aim of Aramcos Asian pivot is not merely to sell more oil. Even as fuel efficiency and electric vehicles crimp global demand for petrol, China, India and South-East Asia will still consume plenty of fuel to run lorries, ships and passenger jets. Aramco predicts that consumption of chemicals made from oil will increase even faster in Asia than demand for refined products. It hopes to strike big deals soon to become one of the worlds largest producers of liquefied natural gas (LNG) in Russia and elsewhere. It has discussed its first shipments of LNG to Pakistan.

The scale of these downstream ambitions, and the financial firepower behind them, was laid bare in its $12bn bond issue. It will help finance the $70bn acquisition of 70% of SABIC, Saudi Arabias biggest petrochemicals company, which would make Aramco the worlds leading downstream concern, as well as its largest upstream one.

It is already throwing petrodollar promises around like confetti. Last year it spent $8.7bn downstream, including on a giant refinery and petrochemical complex in Johor, Malaysia, adjacent to Singapore. In February it struck a $10bn deal with a Chinese defence contractor, Norinco, to develop a similar complex in the northeastern Chinese city of Panjin. Last year it announced a $44bn joint venture with ADNOC, its Abu Dhabi peer, to build an even larger complex on the west coast of India. Like Mr McGuire in The Graduate, Aramcos chief executive, Amin Nasser, appears to have just one word for Asia: plastics. He notes that the typical Indian uses scarcely 10kg of the stuff a year, one-tenth as much as a Canadian, and wants to pour $100bn into chemicals over the next decade, on top of the SABIC splurge.

There is a cold logic to the strategy. The collapse in oil prices in 2014-16 reminded the industry that refining and chemicals are a useful hedge against volatility. As the warming world burns fewer hydrocarbons, Aramco is keen to secure captive markets for its crude feedstock.

Even with SABIC, it has plenty of room to grow. Dmitry Marinchenko of Fitch, a rating agency, reckons the combined entitys downstream activities will still provide no more than 9% of earnings before interest, tax, depreciation and amortisation, one-third the share at BP, a British firm. It can tap credit freely to fund big bets. Its returns on capital last year were a staggering five times the average of ExxonMobil and Chevron and their three European rivals, Royal Dutch Shell, Total and BP. With piles of cash on hand at the end of last year, it is aiming for net debt to rise to a modest 5-15% of capital. Were it to aim for BPs level of 30%, it could borrow almost $150bn. That is more than BPs market value.

Winning the battle for Asia will be scrappy. ExxonMobil is mulling a reported $10bn investment into downstream production in China. It is an efficient refiner and chemicals producer and will compete aggressively with Aramco, as will Shell. But Aramco enjoys two advantages besides its chequebook, says Jim Krane of Rice University. One is the worlds cheapest feedstock. The other is geopolitics. It does not have to focus exclusively on the bottom line if business benefits the kingdom strategically.

But geopolitics could come back to haunt Aramco. If oil prices continue to rise, President Donald Trump may resume his criticism of OPEC. Congress could revive a bill dubbed the No Oil Producing and Exporting Cartels Act, or NOPEC. This would hurt Aramco. The kingdom has hinted that should America turn against it, it may sell oil in other currencies besides the dollar, such as the yuan, which would challenge the greenbacks hegemony. These are probably empty threats. Neither side wants a fight. Aramco may yet try to resurrect its New York listing. Even if it did, the Saudi colossus and the West are growing apart.

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