Saudi Arabia bulks up in Asia to boost appeal before oil IPO

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  • Wednesday, 01 Mar 2017

Fitch positive on Saudi Arabian Oil Company's investment in Petronas' RAPID project

KUALA LUMPUR: Saudi Arabian Oil Co. bought half of a Malaysian oil refinery and petrochemical plant as it prepares for what may be the biggest ever initial public offering by bulking up its business in Asia, its largest market.

The Middle Eastern oil giant, known as Saudi Aramco, signed a deal with state-owned Petroliam Nasional Bhd to develop an oil refinery and naphtha cracker in Malaysia’s southern state of Johor and provide up to 70% of the crude requirements, the companies said at a briefing Tuesday.

Saudi Aramco will invest US$7bil for its stake in the integrated oil and petrochemicals complex and plans to finalise a similar deal in Indonesia on Wednesday.

“This will strengthen the equity story for Saudi Aramco,” Khalid Al Falih, the kingdom’s energy minister, said in Kuala Lumpur.

“Investors will be looking for a company that has breadth in its portfolio.”

The deal is part of Saudi Aramco’s long-standing strategy of investing in refining to help lock in demand for its crude, as it has done in markets including the U.S., Japan and South Korea.

The company is battling for global market share amid challenges posed by U.S. shale oil producers, Russia and even fellow members of the Organisation of Petroleum Exporting Countries (OPEC).

“Saudi Arabia, as OPEC’s largest producer and exporter, wants to secure outlets in the world’s most dynamic and fastest growing energy market,” said John Driscoll, the chief strategist at JTD Energy Services Pte, who has spent more than 30 years in the petroleum trading industry in Singapore.

“A US$7 billion deal positions the kingdom as Malaysia’s largest single investor and provides the basis for future partnerships and collaboration.”

For Petronas, the deal is a boost for the US$27bil development, known as Refinery and Petrochemicals Integrated Development, or RAPID, in Pengerang. The project, bordering the traditional Asian oil trading and refining center of Singapore, was announced in 2011 and originally scheduled to come online last year.

RAPID will include a 300,000 barrel-a-day refinery, scheduled to start in 2019, which can produce fuels that meet Euro 5 emissions standards and provide feedstock for a connected 3.5 million tons-a-year petrochemical plant, according to a joint statement from both companies.

The deal significantly reduces the financial burden on Petronas and will allow it to allocate capital to other businesses such as liquefied natural gas and petrochemicals, according to a Feb. 28 note from BMI Research. The agreement also helps lock-in future demand for Saudi crudes, according to the note.

“Malaysia offers tremendous growth opportunities and today’s agreement further strengthens Saudi Aramco’s position as the leading supplier of petroleum feedstock to Malaysia and Southeast Asia,” Saudi Aramco President Amin Nasser said in the statement.

The deal coincides with a visit to Malaysia by Saudi Arabia’s King Salman bin Abdulaziz, who is leading an entourage on a tour of Asia to strengthen ties with the region. Malaysian and Saudi Arabian companies signed memorandums of understanding worth a total RM9.74bil (US$2.19bil) in areas including construction, aerospace, halal, and hajj-related industries, according to a statement from Malaysia’s trade ministry.

Saudi Aramco is also scheduled to sign an agreement this week with PT Pertamina, Indonesia’s state energy company, to expand the capacity of its Cilacap refinery in central Java to 400,000 barrels a day, from 348,000.

As part of deal, Saudi Aramco will take a 45% ownership stake in the Cilacap refinery, with Pertamina, which hasn’t built a new refinery since 1997, holding the rest, the companies said in December. Additionally, the Cilacap refinery will allocate up to 70 percent of its refining capacity for Saudi Arabian crude. - Bloomberg

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