The industrial logic behind Saudi Aramco's 'chemical attraction'

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DUBAI - News that Saudi Aramco, the world’s biggest oil company and the mainstay of the Kingdom’s economy, was in talks to buy a controlling stake in Saudi Basic Industries Corporation (SABIC), the diversified chemicals giant, caused some surprise.

Not only was the move, which could cost Aramco about $70 billion if it acquires the whole stake held by the Public Investment Fund, an apparent step outside the traditional energy business; it looks like a further distraction from the initial public offering (IPO) of shares in Aramco, the flagship project of the economic transformation of the Kingdom set in train by the Vision 2030 strategy.

One prestigious commentator talked of Aramco’s “strange chemical attraction” for a deal some said had been dreamt up by the armies of investment bankers hired by Aramco for the history-setting IPO but now underemployed as the deadline for the flotation has slipped.

Aramco chief executive Amin Nasser confirmed that a deal with SABIC could push the IPO, already delayed until next year, back further.

But experts on Saudi business have told Arab News that there is a sound industrial logic to a potential move for SABIC, and that the effect on the IPO plans would not necessarily be negative. Long term, a deal with SABIC could make Aramco a more attractive proposition for global investors.

The move, which has been mulled over for some time by advisers at American investment banks JP Morgan and Morgan Stanley, which have reportedly been retained to see it through to transaction, should be viewed against the backdrop of Aramco’s long-term strategic goal: It wants to become more than just a pumper of crude oil for burning in car engines, but instead a high-value-added developer of advanced petrochemical products.

“Demand in the petrochemicals sector is twice as much as the transport sector, so for us it is very important as a strategy to look at other sectors and maximize the value of our resources such as converting crude directly into chemicals,” Nasser said recently.

Industry experts agreed that the move fitted well into that long-term strategy. Ellen Wald, author of recently published “Saudi, Inc.” and president of US-based Transversal Consulting, told Arab News: “There is a business logic to explain the potential Aramco-SABIC deal.”

“From the SABIC perspective the deal could mean it would benefit from Aramco managerial expertise and maybe even Aramco talent and financing. Also, SABIC could benefit from Aramco’s experience and connections in international expansion. There is also a possibility that a strategic investment from Aramco could mean the return of preferential and cheaper feedstock for Sabic.

“From the Aramco perspective, the benefits are that it would help solve any questions about when or if Aramco’s own chemicals business is competing with SABIC. Also, acquiring a strategic interest in SABIC would immediately increase Aramco’s downstream business, bringing it closer to the profile of a typical independent oil company (IOC),” she said.

That was echoed by Jean Francois Seznec, a political scientist specializing in Middle East business based in Washington DC.

“Aramco would buy a very extensive research portfolio and excellent chemical management, eventually allowing Saudi Aramco to ‘Saudize’ its chemical division. There could be rationalization of certain basic chemical production lines, which duplicate with Aramco’s and also within SABIC. Aramco would acquire an excellent marketing organization worldwide for its new and future products,” he said.

On the downside, Seznec said that “rationalization (in the form of an Aramco-SABIC merger) means job duplication, perhaps among expats, but also among Saudis.”

Jim Krane, author and fellow for Energy Studies at Rice University’s Baker Institute in Houston Texas, pointed to synergies from the deal. “Currently, Aramco provides SABIC’s feedstock at a cut-rate price and allows SABIC to export products made from that feedstock at the full international price. It reaps the profit, but with Aramco now in the petrochemical business itself, it no longer makes sense. Saudi Aramco is essentially subsidizing a competitor.

“The number-crunchers at Aramco probably figured it makes more sense to combine with SABIC and work together, so that both companies would see the benefits of Saudi Arabia’s cheap supply of natural gas.”

But what of the financial implications of the deal, both for the Saudi economy and for the Aramco IPO?

Wald said: “It means that the IPO is at the very least delayed.”

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