Energy & Mining

East is East

Saudi Aramco takes royal cut in Malaysia project

The USD7 billion investment will guarantee a 50% share for Saudi Aramco on select ventures of Petronas’ Refinery and Petrochemical Integrated Development (RAPID).

Saudi Arabia’s King Salman meets with Malaysia’s Prime Minister Najib Razak to sign deal on February 27, 2017

At USD7 billion, this will also be Aramco’s most expensive downstream endeavor outside its homeland. According to the two major oil producers, Saudi Aramco will take a 50% share on select ventures of Petronas’ Refinery and Petrochemical Integrated Development (RAPID) project.

RAPID integrates one of Malaysia’s biggest ongoing projects, Petronas’ Pengerang Integrated Petroleum Complex (PIPC), located at the southern tip of the country’s Johor region, a stone’s throw away from Singapore.
While PIPC was ear-marked at $27 billion, RAPID’s share was estimated to cost around $14 billion, making the two companies equal partners in the refining venture.

RAPID will have a crude oil refining capacity of 300,000 bopd and an output of 7.7 million tonnes of petrochemical products per annum. Petronas has stated that the project is 60% complete and should reach initial refining output as soon as 2019.

The area’s location between the Strait of Malacca and the South China Sea will benefit, as in the case of neighboring Singapore, from global shipping traffic routes. Almost all of the oil, gas, and fuels that power the major industrialized Asian markets pass through the strait, making it perfectly positioned to supply these economies.

The deal also includes a purchase agreement for crude oil feedstock from Saudi Arabia. Aramco will provide up to 70% of RAPID’s input. In a joint statement, the two companies said the discussions on the partnership had been ongoing for over three years.

The agreement comes at a good time for Petronas, having slashed its investment budget considerably and cut contributions to the government as a result of the oil price crisis that has been ongoing since mid-2014. The Malaysian firm will reduce its investment plans by USD11.27 billion over the next four years.

The timing is also no coincidence for Saudi Arabia. The Kingdom has taken a considerable hit since the oil crisis. While it has met its budgetary expenses through extensive foreign reserves, these are dwindling quickly, and soon king Salman bin Abdulaziz Al Saud might find it difficult to maintain calm among the country’s increasingly uneasy elites.

His one-month trip through Asia, accompanied by a 1,500-strong entourage, is not one of courtesy, but one of need. In its attempt to diversify its economy away from oil, which still amounts to almost 90% of its exports, Saudi Arabia has already invested billions in Japanese technology funds and is likely to invest further in infrastructure, logistics, and other sectors in the months to come.

Above all, the Kingdom’s closer ties with its Asian Muslim counterparts, and with the likes of China and Japan, is part of a broader strategy to attract investment to new ventures in Saudi Arabia. Chief among these could be the biggest stock market floatation in history.

Saudi Aramco, considered to be the most valuable company in the world, has gained a considerable expansion of its refining capacity with this deal, just ahead of an announced IPO for 5% of its equity in 2018.

In January the company held an independent audit of its much-speculated-upon crude oil reserves. The audit seems to have confirmed the company’s reserve figures at 265 billion barrels of crude oil, or 15% of the world’s entire proven crude oil reserves.

Despite attempts at economic diversification, Saudi Arabia will still need clients for its oil. China’s growth might not be meeting expectations in recent years, but the country recently surpassed the US as the world’s biggest oil importer. It still sources most of its oil from the Kingdom of Saudi Arabia.

However, with the lifting of sanctions on Iran and its stated intention to aggressively ramp up oil production in the years to come, along with Russian moves to become more influential in the Asian oil trade, Saudi Arabia’s place as primary provider of fuel for Asia’s economic expansion might not be so certain after all. King Salman’s itinerary over the next month will surely involve more attempts to secure long-term agreements for its oil, as it has done with the RAPID deal.

As Donald Trump continues to defy predictability and undermine established political protocol, Saudi Arabia, the US’ strongest ally in the Middle East, is feeling the same uncertainty as the rest of the world. By covering its bases and strengthening alliances with Islamic countries in Asia, it can also promote its pilgrimage tourism industry to hundreds of millions of Muslims. For the future of Saudi Arabia, but also for the reshaping of geopolitics in the Middle East and Southeast Asia, King Salman’s trip East is one to watch closely.

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