Saudi Arabia Turns Focus to Refining -- WSJ
January 27 2018 - 07:23AM
Dow Jones News
By Christopher Alessi
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (January 27, 2018).
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, according to Scottish energy
consultancy Wood Mackenzie. New facilities along Saudi Arabia's Red
Sea and Persian Gulf coasts are part of the increase, and the
kingdom has commissioned an additional refinery in its southwest
region that is 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 that of 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 -- including fuel and petrochemicals -- 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
fuel to Europe -- the world's largest market for diesel used in
passenger vehicles -- grabbing market share from the continent's
two longtime suppliers, Russia and the U.S. Saudi diesel sales to
Europe in October were up more than 50% from a year earlier, while
European imports of American diesel were off 34%, according to the
International Energy Agency.
Rising Saudi shipments of fuel products have helped soften the
financial blow of decreased crude-oil production and exports by the
Organization of the Petroleum Exporting Countries cartel. Saudi
Arabia's crude exports in November were down 15% from a year
earlier, but exports of refined products were up nearly 28%,
according to the Joint Organizations Data Initiative, an
international group that tracks energy markets.
Russia has passed Saudi Arabia as the world's biggest oil
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 to defend its market share in China against exports from
Russia, the U.S. and fellow OPEC members like Iraq.
The Saudi 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 said could be valued at as much as $2 trillion. The
prince has put the Aramco IPO, which could happen this year, 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, who heads the Middle East division for
political-risk consultancy Eurasia Group.
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 refines less than half of
its crude output, putting it behind nearly all the world's big oil
companies in that measure of how vertically integrated an energy
producer 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, Texas. 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.
Write to Christopher Alessi at christopher.alessi@wsj.com
(END) Dow Jones Newswires
January 27, 2018 07:08 ET (12:08 GMT)
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