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Saudi Arabia seeks downstream Asia-Pacific investment

20 Mar 2017, 3.31 pm GMT

Saudi Arabia seeks downstream Asia-Pacific investment

London, 20 March (Argus) — The recent tour of Malaysia, Indonesia and China by Saudi Arabia's King Salman bin Abdel-Aziz was a high-profile, grand expression of interest in downstream investments to reinforce Riyadh's market share in a region that absorbs around 65pc of the kingdom's crude exports.

Securing market share through refining and petrochemicals joint venture with main crude buyers is becoming a central plank of state-owned Saudi Aramco's strategy, because rising non-Opec supply means the ability of Saudi Arabia and other Opec producers to influence prices by cutting or increasing output is becoming limited.

The creation of joint ventures, in Asia-Pacific and in Saudi Arabia, allows an economic interdependence that helps to safeguard long-term partnerships.

Such deals, like a recent agreement with Malaysia's state-owned Petronas for a 50:50 partnership in the Refinery and Petrochemical Integrated Development (Rapid) project in the country's southern Johor state, are also likely to boost Aramco's value as it prepares for an IPO. Aramco will pay $7bn for the Rapid stake, and in return will get access to a strong growth market. It will supply as much as 70pc of the joint venture's crude feedstock requirements.

In Indonesia, Aramco committed to investing in a $6bn expansion and upgrade of the 348,000 b/d Cilacap refinery it jointly owns with with state-owned Pertamina.

But China is Aramco's main target, particularly because Beijing's keen interest in overseas investment matches the sort of inward investment Saudi Arabia wants as it industrialises its economy under its 2030 Vision roadmap.

"With the right opportunities, we would like to further strengthen our oil supply relationship and multiply our investments in China, particularly in the downstream," Aramco chief executive Amin Nasser said in Beijing last week.

Aramco owns a 25pc stake in Sinopec's 280,000 b/d Fujian refinery and marketing joint venture, but has not concluded any further refining deals in China, mainly because it is unable to secure distribution rights, hence Nasser's reference to "the right opportunities."

Nasser signed two preliminary agreements for Aramco in China — one with China North Industries (Norinco) enabling further co-operation and downstream investment opportunities including the development of a refinery and chemical facilities, and one with Aerosun involving the manufacturing of reinforced thermoplastic (RTP) pipe and further research and development (R&D).

Holding out the prospect for strategic Chinese investments in Saudi Arabia, Nasser said: "Chinese companies can benefit from the kingdom's strategic location… by establishing manufacturing, logistical and R&D bases, especially on the west coast of Saudi Arabia."

"From there, they can easily access large markets in the wider Middle East-north Africa region, all the way up to Europe and they can also easily access the kingdom's vast energy resources and supply of petrochemicals," he said.

It is likely, however, that Riyadh would link Chinese investments in Saudi Arabia to the facilitation of more Saudi downstream investments in China.

China's state-owned Sinopec owns a 37.5pc stake in the Yasref joint venture 400,000 b/d Yanbu refinery on Saudi Arabia's western coast. Nasser suggested in February that Aramco should seek Chinese investment in the industrial city that is being planned around the $7bn, 400,000 b/d Jizan refinery.

One potential field of co-operation is an initiative under exploration in Saudi Arabia to turn crude directly into petrochemicals. Nasser said in October that the company and state-controlled chemicals group Sabic were studying potential technology that would eliminate the crude refining process.

Sabic and Sinopec signed a strategic agreement last week to study opportunities for joint petrochemical projects in Saudi Arabia and China. Sabic's chief executive Yousef al-Benyan said one project under study is the establishment of a coal-to-chemicals complex in China with China's Shenhua Ningxia Coal Industry Group.

Nasser also suggested last week that China and Saudi Arabia could co-operate to reduce carbon emissions and enhance hydrogen extraction from hydrocarbons.

"We must deal with carbon emissions in line with the Paris agreement on climate change. This is where hydrogen and carbon capture utilization and storage could be game-changers for Saudi Arabia and China," said Nasser. "If carbon capture, utilization, and storage and hydrocarbons can be made to work together, then green hydrogen is within our reach," he said. This would allow Saudi Arabia to turn its oil and gas into clean energy, while China could use its massive coal resources to generate clean power, he said.

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