Easwaran Kanason

Co - founder of NrgEdge
Last Updated: May 3, 2019
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Business Trends

Much has been made of China’s Belt and Road Initiative, the attempt to create a modern Silk Road through an interconnected series of overland and maritime trade and infrastructure routes. Fuelled by China of course. But something similar is happening in the oil world, specifically in the downstream segment. A major country has created and continues to expand a network of interconnected oil refining and petrochemical hubs in key strategic geographically locations, all in the name of establishing a dominant supply chain for its oil.

That country is Saudi Arabia.

Through its state oil firm Saudi Aramco, the Kingdom’s ambitions to push further downstream is not a secret. This goes way back to 2011, when the Arab Spring swept through most of the Middle East. In Saudi Arabia, this was quashed by offering economic sweeteners to its citizens, afforded by oil prices well above US$100/b. The oft-quoted figure is that Saudi Arabia’s attempts to placate its population required US$90/b crude prices to work. That worked fine until oil prices crashed in late 2014, which then exposed another weakness: the major dependence on crude oil for the Kingdom’s fortunes and continued existence.

So a plan was hatched to diversify the economy, which itself has roots in the Arab Spring policies. Saudi Aramco would need to reduce its exposure to upstream and diversify into refining and petrochemicals, with an eye to an eventual (and now confirmed to be delayed) IPO. A series of deals were struck. Saudi Aramco invested to become equal partners in Malaysia’s massive 300 kb/d RAPID refinery. It bought out partner Shell to become the sole owner of American refining subsidiary Motiva and its 600 kb/d Port Arthur facility, the largest in the US. Tie-ups with several Chinese refineries were made, a key move in a market where Saudi Arabia was rapidly losing out to Russia for market share. And Aramco is also part of the giant new 1.2 mmb/d oil refinery planned in India’s Maharashtra state.

All this has been done in the name of securing fixed demand for its oil. In a fast-evolving world where the tide of US light sweet crude is inexorably rising, the battle for market share is heating up. What better way to secure demand than by buying it? Sure, there have been a few instances where Saudi Aramco walked away from potentially large deals – like in Indonesia’s messy refining sector – but over the past month, it has announced even more deals that hint that its expansion is unlikely to stop. Aramco is now officially in ‘talks’ to acquire an up to 25% stake in the Reliance 1.24 mmb/d Jamnagar refinery – one of the most complex refineries in the world - for up to US$10-15 billion. It wants to help build a new refinery for Pakistan by 2024, and has acquired a 17% stake in South Korean refiner Hyundai Oilbank to complement its existing investments in China and Japan. After buying out Shell from Motiva, Aramco is now also looking into taking over Shell’s 50% stake in the 305 kb/d SASREF refinery in the Kingdom’s Jubail City. It is taking over fellow Saudi chemical giant SABIC. It has even started trading LNG…. even though Aramco doesn’t produce a single drop of LNG yet.

Taken together, that’s a portrait of a company aggressively expanding. Aramco’s global refining network was already strong at the end of 2018; by 2023, with these and perhaps even more investment to come, this could be the largest, strongest refining network in the world. A quick back-of-the-envelope calculation shows that if all these investments pan out, Aramco will have access to over 8 mmb/d of global refining capacity. That’s enough to account for half of the Kingdom’s current crude output levels, and a good hedge against the threat of US shale.

 Saudi Aramco’s Downstream Plans

  • Double global refining capacity, from 5 mmb/d to 8-10 mmb/d
  • Double global petrochemicals production by 2020
  • Be a ‘global leader’ in petrochemicals by 2040

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Aramco Saudi Silk Road Belt refinery petrochemical india
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In 2021, the makeup of renewables has also changed drastically. Technologies such as solar and wind are no longer novel, as is the idea of blending vegetable oils into road fuels or switching to electric-based vehicles. Such ideas are now entrenched and are not considered enough to shift the world into a carbon neutral future. The new wave of renewables focus on converting by-products from other carbon-intensive industries into usable fuels. Research into such technologies has been pioneered in universities and start-ups over the past two decades, but the impetus of global climate goals is now seeing an incredible amount of money being poured into them as oil & gas giants seek to rebalance their portfolios away from pure hydrocarbons with a goal of balancing their total carbon emissions in aggregate to zero.

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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.

This is an arena that another supermajor – BP – has also made a recent significant investment in. BP signed a 15-year agreement with CleanBay Renewables to purchase the latter’s renewable natural gas (RNG) to be mixed and sold into select US state markets. Beginning with California, which has one of the strictest fuel standards in the US and provides incentives under the Low Carbon Fuel Standard to reduce carbon intensity – CleanBay’s RNG is derived not from cows, but from poultry. Chicken manure, feathers and bedding are all converted into RNG using anaerobic digesters, providing a carbon intensity that is said to be 95% less than the lifecycle greenhouse gas emissions of pure fossil fuels and non-conversion of poultry waste matter. BP also has an agreement with Gevo Inc in Iowa to purchase RNG produced from cow manure, also for sale in California.

But road fuels aren’t the only avenue for large-scale embracing of renewables. It could take to the air, literally. After all, the global commercial airline fleet currently stands at over 25,000 aircraft and is expected to grow to over 35,000 by 2030. All those planes will burn a lot of fuel. With the airline industry embracing the idea of AAF (or Alternative Aviation Fuels), developments into renewable jet fuels have been striking, from traditional bio-sources such as palm or soybean oil to advanced organic matter conversion from agricultural waste and manure. Chevron, again, has signed a landmark deal to advance the commercialisation. Together with Delta Airlines and Google, Chevron will be producing a batch of sustainable aviation fuel at its El Segundo refinery in California. Delta will then use the fuel, with Google providing a cloud-based framework to analyse the data. That data will then allow for a transparent analysis into carbon emissions from the use of sustainable aviation fuel, as benchmark for others to follow. The analysis should be able to confirm whether or not the International Air Transport Association (IATA)’s estimates that renewable jet fuel can reduce lifecycle carbon intensity by up to 80%. And to strengthen the measure, Delta has pledged to replace 10% of its jet fuel with sustainable aviation fuel by 2030.

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Market Outlook:

  • Crude price trading range: Brent – US$71-73/b, WTI – US$68-70/b
  • Global crude benchmarks have stayed steady, even as OPEC+ sticks to its plans to ease supply quotas against the uncertainty of rising Covid-19 cases worldwide
  • However, the success of vaccination drives has kindled hope that the effect of lockdowns – if any – will be mild, with pockets of demand resurgence in Europe; in China, where there has been a zero-tolerance drive to stamp out Covid outbreaks, fuel consumption is strengthening again, possibly tightening fuel balances in Q4
  • Meanwhile, much of the US Gulf of Mexico crude production remains hampered by the effects of Hurricane Ida, providing a counter-balance on the supply side

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