Saudi Arabia owns the crown jewel of American refineries
“Earlier this month, Aramco became the sole owner of the largest US oil refinery, Motiva Enterprises LLC, cementing its access to the lucrative US energy market, writes Stasa Salacanin.”
Aramco’s multibillion dollar divorce contract from Royal Dutch Shell (RDSA), which previously owned 50 percent of Port Arthur refinery, has made Motiva Enterprises a fully owned affiliate of Saudi Refining Inc. It has also earned Saudi Arabia the right to use the Shell flag in a number of south-eastern states and east Texas.
Motiva will have the exclusive rights to sell Shell gasoline and diesel in Georgia, North and South Carolina, Virginia, Maryland, East Texas and most of Florida, while Shell retains rights to Shell brand in the rest of Florida.
A forward thinking approach
For Phillip Cornell, a non-resident senior fellow at the Atlantic Council’s Global Energy Centre, Aramco’s strategy to move both into downstream and to expand foreign joint ventures has been a long-standing one and it sounds like forward thinking approach.
Both strategies are integral to the Advanced Transformation Program (ATP) initiated under the leadership of Khaled al Faleh. “While downstream is certainly not a major profit centre inside the company, as a strategic investment it has successfully moved the company not only up the value chain, but also into areas like product trading,” he told The New Arab.
Furthermore, it is believed that the Port Arthur case signals Aramco’s new strategy, namely expanding its petrochemical operations and turning itself into a modern integrated energy company following the example of Exxon Mobil, for instance.
“The long term vision is to diversify the Saudi economy by creating a global network of refining and petrochemical facilities “
But this is just a piece of larger picture, as the long term vision is to diversify the Saudi economy by creating a global network of refining and petrochemical facilities that would provide Saudi production a wide variety of higher-value products.
Dr Naser al-Tamimi, an independent UK-based Middle East researcher and political analyst, recalls that Aramco, in its latest annual review, ambitiously envisaged its new role: “Saudi Aramco remained steadfast to its vision of becoming a top-tier, globally integrated energy and chemicals company.”
Aramco plans to double its global refining capacity from 5.32 million barrels per day (mb/d) currently (2.9 mb/d in Saudi Arabia, 1.07 mb/d in the US and 1.13 mb/d in Asia) to 10–12 mb/d, and to increase its global petrochemicals capacity from 12 million tons per year to 34 million tons.
Thus, “the deal is a big step in that direction, and shows Aramco’s determination to cement its position in the core export markets and ensure its market share in US markets regardless of competition or increased US production,” Dr Tamimi told The New Arab. Read more: Is Saudi Arabia selling off Aramco for peanuts? Aramco has been investing in new refineries for some time now, cementing its position in countries that are considered to be their core market, including China, Indonesia and Malaysia. Tom Kloza, the global head of energy analysis at the Oil Price Information Service, is absolutely convinced that this strategy of diversification makes sense, and he suspects that we will see the company pursue an acquisitive strategy across many continents, including North America.
“My guess would be that they will own several more US refineries by the end of 2018 and I do not believe that they’ll do so through joint ventures, so I suspect Motiva will be one of the biggest players in mergers and acquisitions in the US” he told The New Arab.
Cornell noted that such decisions will be taken on the basis of the long-term viability of specific potential investments — not just to make the initial public offering (IPO) more attractive.
There was much talk last year when Aramco made a bid to purchase the Lyondell refinery in Houston, Texas, however, the deal fell through as Lyondell took the refinery off the market.
But nevertheless, Motiva could pursue other Gulf Coast refineries or indeed expand via deals in other portions of the country, including the West Coast, according to Kloza.
More Saudi crude coming to US
By expanding its downstream potentials, Saudi Arabia is also increasing demand for its crude production, creating a chain of reliable crude buyers regardless of global oil price.
Through expanding its refinery fleet, Aramco and Saudi Arabia are diversifying energy price risk, as adding refining risks to a crude production risks contributes to the reduction of total risk.
Kloza believes they’ll certainly send more crude to the US when it makes sense, and that will hurt some of the demand for crude from the US, Canada or other foreign sources. So, Dr Tamimi says, the Motiva split will not only increase Aramco’s equity by nearly 13 percent from 532,500 b/d to 600,000 b/d, it will also give the company complete control over which crude oil grades are processed at Port Arthur.
There is no doubt thought, that Saudi crude will be prioritised at this refinery complex — which makes sense in any such vertical integration strategy.
Aramco then, is seeking to secure its market share in the US; one of the top three markets in addition to Japan and China. Furthermore, Cornell said that Aramco can optimise the refinery (say for particular grades of crude) and its crude dispatching operations to achieve increased efficiency.
“This move is also part of Aramco’s strategy of diversifying its investment portfolio in major markets “
However, he added, that doesn’t necessarily mean the refinery will exclusively buy Saudi crude — they retain the option of buying North American crude to take advantage of arbitrage opportunities. While American suppliers may object, the arrangement is not substantively different than other vertically integrated upstream and downstream operations.
Last but not least, most oil industry experts agree that this move is also part of Aramco’s strategy of diversifying its investment portfolio in major markets in Asia and the United States, as the company is looking to secure highest financial returns from IPO next year.
Although Aramco’s activities in the US are principally commercial, they could also be understood as a sign of restored confidence between the two countries, which hit rock bottom during president Obama’s second term.
Relations between the US and Saudi Arabia are already improving under Trump, despite his presidential campaign threat of potentially stopping buying oil from Saudi Arabia, unless the kingdom provided ground troops to fight IS.
For Jim Krane, energy analyst at Rice University’s Baker Institute, Houston, Saudi Arabia wants to remain relevant in the United States for commercial and strategic reasons. The Saudis need to continue placing crude cargoes into the US market, and also ensure that US troops protect the Kingdom and its oil shipments.
“Owning refineries and configuring them for Saudi crudes helps with both these goals. If Aramco owns the refinery, it can ensure that Americans continue to depend on Saudi oil, and hopefully, that Americans still see value in maintaining close ties with the kingdom,” he said.
But some say that Saudi ownership of the largest US refinery poses a security risk for the US, since according to some sources, 30 percent of US refining assets are owned by foreign companies. So does the particular case of Port Arthur give the Saudis a powerful weapon when dealing with the US in the future?
“Some say that Saudi ownership of the largest US refinery poses a security risk for the US”
Firstly, this is not an entirely new practice as there is a track record of “petro states” owning US assets. Kloza noted that Venezuelan PDVSA and CITGO are very much in the news these days, with the fear that Rosneft — the Russian company with close ties to Vladimir Putin — might take title to Citgo, should Venezuela and PDVSA default on loans.
So, given the state of US politics, “that might lead to (somewhat xenophobic) outrage among lawmakers and the population, not wishing to have core life-blood refined products in the hands of adversaries. Of course, we have a much better relationship with Saudi Arabia, but this needs to be watched very closely,” Kloza added.
According to him, Motiva (or Saudi Aramco) could buy a number of individual US refineries without difficulty. However, if they attempted to take out a multi-refining company (like PBF, or Tesoro), they would probably run into hastily assembled hurdles from US lawmakers.
“It is important not to confuse the Saudi government’s investments with Aramco’s investments”
Therefore, Cornell doesn’t believe that there is no need for alarm and “any kind of nationalistic American concerns about security threats when it comes to foreign ownership, are usually more linked to cynical protectionist impulses than to legitimate national security threats.
“If the Saudis or any other country halted their American refining activities explicitly to damage the US economy, that would be a blunt and ineffective weapon — it would be a highly aggressive act by a longstanding ally, the volumes would be easily replaced, and any economic impacts would be spread thinly and beyond American borders.”
As for Dr Tamimi’s comments, it is important not to confuse the Saudi government’s investments with Aramco’s investments. It is true that the company is a state company but its management and investment decisions are independent.
“The bottom line, is that Aramco would not risk any access to US markets for Saudi Arabia’s political gains.” Therefore, the Port Arthur refinery is about diversification and market share, not about nefarious security intentions.
Stasa Salacanin is a freelance journalist who has written extensively on Middle Eastern affairs, trade and political relations, Syria and Yemen, terrorism and defence.
Opinions expressed in this article remain those of the author and do not necessarily represent those of The New Arab, its editorial board or staff.
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