IN 2013, Tan Sri Shamsul Azhar Abbas, then president and CEO of Petroliam Nasional Bhd (Petronas), played host to several key personnel from Saudi Arabia’s state-owned oil company Aramco when they visited Malaysia.
He hired several helicopters, taking the group to get an aerial view of the upcoming 22,000-acre Pengerang Integrated Petroleum Complex (PIPC) in Johor in the hope of convincing them about the huge potential of the development.
According to an industry insider, Shamsul was hoping to replicate the business model adopted by Canada’s oil giant Progress Energy Resources Corp – which is famed for having a successful strategy in diversifying risk and improving the viability of its projects by paring down stakes in its 100%-owned projects to other significant oil players – on Petronas’ projects in Pengerang.
So, after showering the Aramco’s people with some Malaysian hospitality, the insider says, Shamsul began to share his vision for Petronas’ Refinery and Petrochemical Integrated Development, or Rapid, project.
But it was not until about a year later that the idea of a Petronas-Aramco partnership was proposed.
According to Datuk Wan Zulkiflee Wan Ariffin, who took over the helm of Petronas in April 2015 from Shamsul, the idea of a partnership with Aramco was officially mooted in August 2014, when the Petronas team met Aramco’s then-CEO (now chairman) Khalid Al-Falih, in Geneva, Switzerland.
It was “a culmination of many months of hard work and goodwill from both parties” since that meeting, which ultimately led to a successful deal between Petronas and Aramco, Wan Zulkiflee reveals.
The two national oil companies over the week signed an agreement to facilitate Aramco’s proposed acquisition of a 50% equity in the refinery and cracker assets at the Rapid project.
The investment, worth US$7bil (RM31.1bil), makes Aramco the single-largest investor in Malaysia to-date.
Under the deal, Petronas and Aramco will equally own some facilities, including the 300,000-barrels-per day (bpd) processing capacity, and a steam cracker plant capable of producing three million tonnes of petrochemicals annually.
Rapid is part of the US$27bil project known as the Pengerang Integrated Complex (PIC). The 6,242-acre development by Petronas is located within the PIPC.
PIPC, in turn, is an ambitious project to turn Johor into a regional hub for oil storage, fuel refining and petrochemical production, as well as imports and exports of liquefied natural gas (LNG). The development is one of the components of Malaysia’s Economic Transformation Programme aimed at significantly boosting the country’s economy in the years to come.
As it stands, the PIC development is almost 60% complete and is on track for refinery start-up in the first quarter of 2019, Petronas says.
One industry expert notes the worldwide media coverage on Aramco’s entry into the Rapid project has raised the profile of the PIPC in the international market.
“Now, everybody knows where is Pengerang. The deal has made the district famous, and raised international awareness over its strategic location close to one of the busiest international shipping lines in the region,” he says.
“This will likely enhance confidence among oil and gas companies to establish their operations and businesses in PIPC,” he adds.
Importantly, the Aramco-Petronas deal, which obliges Aramco to provide as much as 70% of the refinery’s feedstock requirements, has increased the certainty of the Rapid implementation without financial and crude supply problems.
“This means the Rapid project becomes bankable from Day One,” an industry analyst points out.
“And the availability of feedstock from the steam cracker plant may attract more downstream petrochemical plants to be constructed within PIPC,” he adds.
Easing Petronas’ burden
Financially speaking, Petronas has much to gain from its partnership with Aramco.
With pressure mounting on its cash reserves and earnings amid the current weak oil price environment, Petronas will see its financial burden to sustain its capital expenditure (capex) and dividend payment to the Government somewhat eased with the investment from Aramco.
As BMI Research puts it, Aramco’s participation will potentially help free up capital to be allocated to Petronas’ other core businesses, such as LNG and petrochemicals.
“While we believe the Rapid project would have gone ahead with or without the addition of Aramco, given its significance to both Petronas and Malaysian Prime Minister Datuk Seri Najib Tun Razak, a tie-up with Aramco considerably improves the project outlook,” it says.
Similarly, Hong Leong Investment Bank (HLIB) points out that Aramco’s investment will provide Petronas more cash buffer to maintain its dividend payment to the Malaysian Government, even as its relieves the national oil company partially from its heavy capex commitment on Rapid.
“With this deal, Petronas will be able to self-sustain payments to Government without further cash drain,” HLIB says.
As at end-September 2016, Petronas operating cashflow stood at RM36.1bil, which was just sufficient to cover for its RM35.9bil capex spending. Dividend of RM12bil during that period had to be financed from its cash reserves.
Recall, Petronas has committed a dividend of RM16bil to the Government for 2016.
As for capex, the group has allocated a sum of RM60bil for 2017.
For Aramco, which is planning a 2018 listing in what could be the world’s largest initial public offering, its partnership with Petronas fits its agenda of establishing a strong presence in Malaysia.
In a recent joint press conference with Petronas, Khalid said Aramco’s investment into Rapid would add value to the company’s planned listing by enhancing its downstream portfolio.
“This will strengthen the equity story of Aramco when it goes public next year. Investors will be looking for a company that has breadth in its portfolio and balanced exposure across the value chain,” he said.
According to BMI, Aramco’s participation in Rapid would help lock-in future demand for Saudi crudes, while strengthening the company’s position in the Asian crude market.
In general, the tie-up between Petronas and Aramco signals deepening bilateral ties between Malaysia and Saudi Arabia, while creating a win-win scenario for a strategic relationship between two national oil companies to position Malaysia as a downstream oil and gas hub in Asia. And that’s a big deal.