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Upstream and downstream integration for KSA

by Indrajit Sen on Aug 8, 2016

Aramco and SABIC hope to develop a crude oil-to-chemicals complex in KSA.
Aramco and SABIC hope to develop a crude oil-to-chemicals complex in KSA.

“By working together, Saudi Aramco and SABIC are supporting the kingdom’s economic transformation and creating ‘Chemistry that Matters’ for future generations,” he remarked.

The integration move has been described by one analyst as “long overdue”, given that both companies are competing in the same markets. The expert said that co-operation between the two would eliminate the duplication of projects. Aramco’s participation could benefit SABIC by giving it better access to funding as well as assistance in marketing products, Mazen al-Sudairi, head of research at Al-Istithmar Capital, told Reuters.

However, both Aramco and SABIC have previously refuted media reports that claimed that the two energy giants had plans to merge their petrochemical businesses. “The companies wish to clarify that they have no plans to pursue this option”, they said in a joint statement in May, adding that they would “continue to explore mutually beneficial opportunities to work together as partners”.

Speaking of larger economic ramifications, the announcement of Aramco and SABIC’s joint study comes just a couple of months since Saudi Arabia’s Deputy Crown Prince Mohammed Bin Salman called for more industry collaboration and the creation of new jobs in the kingdom as part of Riyadh’s Vision 2030.

The country’s leadership has long been working towards building a post-oil future by developing new downstream industries, integrating its existing refining assets with newly built petrochemical plants and thus generating more job and investment opportunities for the local population.

“Saudi recognised some time ago that oil was losing market share to natural gas and renewables,” said Paul Hodges, special advisor to ICIS and chairman of International eChem. “Last December’s climate change conference in Paris reinforced this message, making it essential that the country moved quickly to reduce its current dependence on oil revenues, and diversify its economy.”

Hodges cited Saudi’s major expansion of downstream product volumes over the past few years and some of its world-class petrochemical investments, such as Sadara and SATORP, as “evidence for its new policy” to move away from a crude oil economy. Higher product volumes are in addition to its actual oil exports and confirm that the days of OPEC oil quotas are in the past, Hodges noted.

“The oil-dependent Kingdom of Saudi Arabia (KSA) has a long-term blueprint to transform itself into a more diversified economy, with non-oil government revenues projected to increase six-fold to 1 trillion Saudi Riyals ($27bn) by 2030,” Nikhil Salvi, manager of the investment research practice at Aranca, said.

“It’s an ambitious dream to transform an economy that relies on crude oil exports for more than 70% of government revenues. Deputy Crown Prince Mohammed bin Salman’s 15-year economic plan is the boldest attempt yet in the kingdom’s history to spur additional revenue streams amid a steep fall in commodity prices. The shift from oil-dependent economy to ‘live without oil by 2020’, as foreseen by Deputy Crown Prince Mohammed, is a huge step in this direction,” Salvi added.

Alongside government entities like the Saudi Arabian General Investment Authority or SAGIA, the sole purpose of which is to encourage investment in the kingdom’s non-oil sector, Aramco has increasingly been looking for ways to diversify its portfolio away from crude oil export into refining, petrochemical and chemical production. All of this has been in line with the government’s strategic vision to diversify revenue away from crude oil export and support the development of downstream industry in the kingdom.

Shashank Shekhar, PetChem editor at S&P Global Platts, says, “What distinguishes Saudi Arabia’s Vision 2030 from similar attempts by governments in the region over the past decade is the urgency of ground results rather than the luxury of dogmatic planning.”


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