Saudi Aramco to Go for IPO After Building Up Value-Added Downstream Assets Worldwide

BE2C2 Report (Oct 31, 2018): Saudi Arabia would likely carry out an initial public offering for Saudi Aramco in 2021 after it builds up some downstream assets including petrochemical production locally and globally, Khalid Al-Falih, the country’s energy minister, said.

“If you look at the downstream of Aramco it is significant, but is not at the same level as upstream. Our petrochemical portfolio also is not so large, and is not so strong in terms of technology and global reach. So the decision was made that Aramco needs to balance its portfolio,” Al-Falih told Russian state news agency Tass.

While Aramco is the world’s largest company in the upstream, with production of about 14 million barrels of oil equivalent per day and 260 billion barrels of oil, as well as 300 trillion cubic feet of gas as reserves, the downstream needs development, he said.

“If in the next oil cycle the prices for the upstream go down, the downstream will be able to create a very healthy return,” Al-Falih added.

But analysts say if the oil prices hover in the vicinity of $70 and $80 a barrel, the Kingdom may likely hedge on the IPO.

Next week, the Trump Administration’s announced sanctions against Iran kicks in. Market watchers expect crude oil prices to spike. The sanctions could push oil prices above $100 a barrel, strategists say.

While the worrisome spike could rake in more revenues for the Kingdom as OPEC members including the kingdom increase oil production to stabilize the supply side, Aramco will still build up its value-adding downstream businesses  in the kingdom and overseas.

A barrel of crude oil could fetch as much as 3 to 5 times in revenue from a downstream project such as oil refinery, petrochemical complex, etc., according to analysts.

Earlier this month, the Saudi-based global oil giant signed an agreement to invest in a 400,000-bpd refinery and associated petrochemical plants in eastern China to expand its downstream business and secure additional markets for its oil.

Talks are also underway between the Saudi government and the Pakistani government for setting up an oil refinery and petrochemical complex at the proposed 80,000 acres Gwadar Oil City in Balochistan –Pakistan has also invited Saudi Arabia to invest in other oil related and energy projects under the multibillion dollars China Pakistan Economic Project (CPEC) program.

Saudi Arabia’s plans for an IPO of Saudi Aramco were halted in August amid reports that it aims at developing chemical production infrastructure as the Kingdom seeks to add value to its crude oil and natural gas output.

Recently, Saudi Aramco signed 15 memoranda of understanding (MoUs) and strategic/commercial collaborations with 15 international companies from eight different countries.

Total value of the contracts is more than $34 billion.

The MOUs will support Aramco’s forward plans, including offshore and engineering. Some will assist the In-Kingdom Total Value Add (IKTVA) program–Aramco’s initiative to improve the domestic supply chain and employment potential through greater engagement with local businesses.

Its aim is to achieve 70% of locally supplied goods and services by 2021 as per Saudi Vision 2030 and the associated National Transformation Plan 2020 (NTP 2020).

Among the MOUs are a collaboration with Hyundai Heavy Industries concerning the latter’s potential investments in the King Salman International Maritime Complex for Industries and Services at Ras Al Khair.

Others include:
MOUs with Baker Hughes GE, Schlumberger, Halliburton, and Oilfield Supply Center
MOU with Flex-Steel to invest in an RTP reinforced thermoplastic pipe facility
MOU with NPCC (National Petroleum Construction Company, UAE) to invest in a fully integrated fabrication yard and marine base
MOU with SeAH Changwon Integrated Specialty Steel Co to invest in localization of engineering steel
MOU with GumPro (India) to invest in a drilling chemicals facility.

The global oil giant in April singed memorandum of understanding with a consortium of oil companies in India outlining a refinery and petrochemical complex with a cost of around $44 billion. The project would be a key part of Aramco’s global downstream strategy.

The Indian agreement followed a similar arrangement between Aramco and French supermajor Total, who committed to invest $9 billion on a petrochemical complex in Saudi Arabia.

Recent memoranda were also signed in New York between the Saudi entity and U.S. drilling services companies, defense contractor Raytheon and the Center for Strategic and International Studies. The U.S. agreements are worth a combined $10 billion.

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