Aramco Signals Chemical Ambitions Beyond $70 Billion Sabic Deal

(Bloomberg) -- Saudi Aramco’s chief executive officer said he has bigger ambitions in petrochemicals beyond the planned $70 billion acquisition of a strategic stake in local company Sabic, touting plastics as a key hedge against an electric-car driven slowdown in global oil demand growth.

"We still have to do more," Amin Nasser, chief executive officer of state-owned Aramco, said in an interview in Riyadh.

Nasser’s comments are the latest signal Aramco is transforming from a giant oil producer into a vertically integrated energy company, mirroring a shift that major publicly-listed companies such as Exxon Mobil Corp. and Royal Dutch Shell Plc performed years ago. The shift comes as the International Energy Agency forecast that demand for petrochemicals -- the building blocks for plastics -- will become the largest force in global oil demand growth, out-pacing consumption from cars, planes and trucks.

Aramco Signals Chemical Ambitions Beyond $70 Billion Sabic Deal

"Our strategy is to be the leader in energy and chemicals, not only in energy,” Nasser said while attending an investing conference in Riyadh. "We will be the leader in chemicals.”

The IEA, the energy watchdog for industrialized nations, forecast that petrochemicals will account for more than a third of the growth in global oil demand until 2030, and about half the growth to 2050.

Aramco Signals Chemical Ambitions Beyond $70 Billion Sabic Deal

In particular, Nasser wants to increase the percentage of each barrel the company refines that’s then transformed into petrochemicals.

"We are aiming for more integration," he said, referring to the chain running from oilfields through refineries and into petrochemical plants. "Instead of four to seven percent crude to chemicals, that’s the normal integration, we are looking at 25, 30, 35 percent. More integration is the way forward."

Within the oil industry, petrochemical units have often been marginal to the bottom line, but when oil prices plunged in 2015 and 2016, the calculus changed for majors like Exxon, Shell and Total SA. Producing petrochemicals is usually more profitable when energy prices fall, making the feedstock cheaper. Still, chemical businesses traditionally don’t deliver the fat margins that pumping crude and gas does.

Aramco is negotiating buying the 70 percent stake that the country’s sovereign wealth fund owns in Sabic, formally known as Saudi Basic Industries Corp. The stake is worth about $70 billion at current market prices. The other 30 percent of Sabic is listed in the Saudi stock market, the Tadawul, and Aramco doesn’t plan to buy it.

The Aramco-Sabic deal, which is unlikely to close until next year, would channel billions of dollars into the Saudi sovereign wealth fund, giving it the cash it had hoped to obtain from the now delayed initial public offering of Aramco. Riyadh has postponed the IPO, expected to be the world’s largest ever, from 2018 to late 2020 or early 2021.

Although Aramco isn’t buying the whole company, Nasser said that the 70 percent that it’s likely to purchase would secure significant cost-savings. "A lot of synergies will be extracted, because we already supply the feedstock. At 70 percent you can do a lot of synergies."

Nasser, a petroleum engineer who has run Aramco since 2015 when he took over from now energy minister Khalid Al-Falih, declined to comment on how much Aramco will pay for Sabic, saying the state-owned oil company was still performing due diligence on the chemical group.

On top of the Sabic deal, Aramco earlier this year paid about $1.6 billion for the 50 percent it didn’t already owned in a joint-venture with German chemicals group Lanxess AG. Earlier this month, it signed a preliminary deal with Total to invest $9 billion to build a chemical plant alongside a refinery in Saudi Arabia.

Last year, Aramco started the Sadara complex, a giant $20 billion chemical plant that it built in the kingdom in partnership with Dow Chemical Co.

When the company reshuffled its board of directors earlier this year, it appointed three people with experience in the sector, including the former CEO of Dow Chemicals, Andrew Liveris.

Still, Nasser said that pumping oil -- known in the industry as the upstream part of the business -- will remain the core of Aramco, which produces about one-in-ten barrels extracted worldwide everyday. "Upstream is still the major element in Aramco. We have an advantage in costs," he said.

©2018 Bloomberg L.P.