Easwaran Kanason

Co - founder of NrgEdge
Last Updated: June 18, 2017
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Business Trends
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The plans for the initial public offering of the world’s biggest oil producer Saudi Arabian Oil Co. has been supposed delayed because of disagreements over where to list the firm, the Wall Street Journal reports. Executives at Saudi Aramco, are pushing to list a slice of the enterprise on the London Stock Exchange, while Saudi Arabia’s ruling family prefer the New York Stock Exchange, because of the kingdom’s longstanding political ties to the U.S. and because the American market represents the deepest pool of capital in the world. Meanwhile, Saudi Aramco’s management is concerned that a New York listing would expose the company to greater legal risks, including from potential class-action shareholder lawsuits. A decision on where to list Aramco is expected by some to come before the Islamic month of Ramadan, but is now not expected until the end of July or longer. As a massive team of consultants, accountants, lawyers and strategists frantically scramble to prepare Saudi Aramco for what could possibly be the largest IPO ever, the shape of the company’s future is beginning to emerge. Only 5% of the company will be floated, but even that is enough to be valued at US$2 trillion for the world’s largest crude oil producer.

The future of Saudi Aramco, however, looks to lie further down the supply chain, in the downstream. It may be sitting on at least 250 billion barrels of proven crude reserves – with another 100 billion barrels more expected to be added – and it still holds mighty sway over crude oil prices, but the prize is in diversification. Because as a publicly-traded company, Aramco will be subject to vagaries of market movements in a way that it never used to be, so risk has to be spread. The government of Saudi Arabia has already announced that it would retain sole control over upstream production – ‘production is sovereign’ – so the only way to counterbalance unexpected swings is to strengthen its other areas.

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And that’s exactly what Saudi Aramco has been doing since late last year. Crude will always be its cash cow, but since October 2016, it has announced a series of giant projects that offers a hint of what its operational future will look like. In October last year, it announced a partnership with SABIC to create a massive oil-to-chemicals project in Saudi Arabia. Then in February 2017, it confirmed its participation in the US$27 billion RAPID project by Petronas in Malaysia. In May, it teamed up with China’s NORINCO, a defence manufacturer, to build a 300 kb/d refinery in Liaoning. Talks with Indian state refiners are ongoing, which is expected to yield yet another mega-refinery. In the USA, Aramco completed its divorce from Shell, now wielding sole control of Motiva – and the largest refinery in the Americas in Port Arthur – announcing plans to invest up to US$30 billion to expand the site and create additional downstream operations.

This would give Aramco silos in the most important energy markets in the world – USA, China, India and Southeast Asia (through Malaysia), as well as back home. Together with its existing tie-ups in China, this ensures that Saudi crude can continue to flow to a captive refining base without having to battle with the likes of Iran and Iraq. All the projects also have massive petrochemicals components, where demand growth is the strongest and the margins highest. This massive expansion of downstream will balance out the currently overweighted presence that upstream has in Aramco, creating a more balanced structure. Traditionally, Aramco is not a major natural gas or LNG producer, but it has already signalled that gas will receive significant investment post-IPO, aiming to build a global portfolio that can be traded and sold.

In essence, Aramco is aiming to become the vertically-integrated behemoth that Standard Oil once was, and what ExxonMobil currently is. Except Aramco will be supersized. With the supermajors adapting to the current environment by retreating to specialised areas and excising fat, Aramco is doing the opposite. It certainly is a compelling proposition to consider, and one that will produce a blockbuster IPO.

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Chevron’s recent efforts have focused on biomethane, through a partnership with global waste solutions company Brightmark. The joint venture Brightmark RNG Holdings operations focused on convert cow manure to renewable natural gas, which are then converted into fuel for long-haul trucks, the very kind that criss-cross the vast highways of the US delivering goods from coast to coast. Launched in October 2020, the joint venture was extended and expanded in August, now encompassing 38 biomethane plants in seven US states, with first production set to begin later in 2021. The targeting of livestock waste is particularly crucial: methane emissions from farms is the second-largest contributor to climate change emissions globally. The technology to capture methane from manure (as well as landfills and other waste sites) has existed for years, but has only recently been commercialised to convert methane emissions from decomposition to useful products.

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Market Outlook:

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