BP BP Plc

By Christopher Alessi 

DUBAI -- Saudi Arabia's state oil company is building an oil-refining empire, a major shift for the world's No. 1 crude producer as it tries to shore up its balance sheet ahead of the world's biggest-ever IPO and make up for income lost to OPEC production cuts.

Over the past five years, Saudi Arabian Oil Co., known as Aramco, has boosted its global refining capacity by more than a third to 5.4 million barrels a day, helped by new facilities along the kingdom's Red Sea and Persian Gulf coasts, according to Scottish energy consultancy Wood Mackenzie. The kingdom also has commissioned an additional refinery in the southwest of the country, set to come online in 2019.

These moves and others including taking full control of the biggest U.S. refinery, in Port Arthur, Texas, have vaulted Aramco's global refining capacity beyond Western rivals such as Exxon Mobil Corp., Royal Dutch Shell PLC and BP PLC. But unlike Aramco, the international oil majors already had strong downstream businesses to bolster their earnings when crude prices plummeted just over three years ago.

Saudi Arabia is now one of the top three exporters of diesel to Europe -- the world's largest diesel market for passenger vehicles -- grabbing market share from the continent's two longtime suppliers, Russia and the U.S. Saudi diesel sales to Europe in October rose more than 50% year-over-year, while European imports of American diesel fell by 34% during the same period, according to the International Energy Agency.

Rising Saudi shipments of fuel products have helped soften the financial blow of slashing crude-oil production and exports with the Organization of the Petroleum Exporting Countries cartel. As of November, Saudi Arabia's crude exports were down 15% from a year earlier, but exports of refined products rose nearly 28% over the same period, according to the Joint Organizations Data Initiative, an international group that tracks energy markets.

Russia has passed Saudi Arabia as the world's biggest producer, and the U.S. is set to overtake Saudi crude output for the first time in a generation. At the same time, the kingdom is fighting off threats to its market share in China from Russia, the U.S. and fellow OPEC members like Iraq.

The refining investments were years in the making but were accelerated by 2014's historic oil-price collapse and the kingdom's subsequent plans to wean itself off dependence on crude exports for revenue.

The new refining capacity also helps bolster Aramco ahead of a planned initial public offering that Saudi Crown Prince Mohammed bin Salman has estimated could be valued at up to a record $2 trillion. The prince has put the Aramco IPO at the center of his efforts to energize and diversify his country's economy.

Aramco declined to answer questions for this article. Last April, in remarks at Columbia University, Aramco Chief Executive Amin Nasser said the company aims to increase its refining capacity to between 8 million and 10 million barrels a day in an effort to better balance the company's business.

For a company that lags behind Western peers in transparency and efficiency, Aramco's refining capabilities help it to be "more of an integrated global energy company" like the publicly listed oil giants, said Ayham Kamel, the head of political risk consultancy Eurasia Group's Middle East division.

BP, Exxon and others use their refineries to help them weather oil-market downturns because those parts of the business buy oil and do well when prices are low. Aramco still lags behind nearly all the world's big oil companies when it comes to how much of its own crude output it refines -- less than half -- which is a measure of how vertically integrated an oil major is, according to the IEA.

"It's important for the [Saudi] political leadership to have Aramco be more than just a crude exporter in order to maximize the value of the company," Mr. Kamel said.

Aramco's refining operations span the world, with joint ventures in South Korea, Japan and China, in addition to the giant Motiva refinery in Port Arthur, Tex. These facilities give the company a guaranteed outlet for its crude oil in its most important markets.

But its biggest base is in Saudi Arabia itself, where Aramco has capacity to refine about 3 million barrels of crude a day. That is more than any single European nation, though it falls far short of the country with the most refining capacity -- the U.S., with 18.6 million barrels a day, according Wood Mackenzie.

The Saudis have been exporting fuels like diesel at an opportune time. Since the summer, gasoil futures on London's Intercontinental Exchange -- a benchmark for diesel -- have soared by close to 30%, as a booming global economy has bolstered industrial demand for the fuel.

--Summer Said contributed to this article.

(END) Dow Jones Newswires

January 26, 2018 07:14 ET (12:14 GMT)

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