On Aug. 12, Saudi Aramco (ARMCO) reported that its realized price of crude oil for the first half of 2019 averaged $66 per barrel, down 4% from the same period in 2018. However, it still earned $46 billion in net income.
According to its national budget, its “breakeven” price to be budget neutral is in the $80s. This is due to the fact that its profits from petroleum must be used to pay for its defense and social programs since its economy is so dependent on the price of oil.
Crown Prince Mohammed bin Salman (“MbS”) aims to change that by diversifying the economy. One way Aramco is pursuing diversification is through investments “downstream” in refining and petrochemicals.
During periods of rapidly-changing prices, refining and marketing provide a hedge for E&P. For example, during te 4Q18, oil prices collapsed, which hurt “upstream” companies, but “downstream” companies, such as Marathon Petroleum (MPC), experienced a surge in earnings. The opposite was true in 1Q19, when oil prices recovered.
Reliance Industries Ltd.
Coinciding with the earnings report, Aramco announced its intention to buy a $15 billion, 20% stake in the Indian oil-to-chemicals business. Processing 1.24 million barrels a day, the Jamnagar refining complex is the largest in the world. The deal also would involve Reliance purchasing 700,000 b/d from Aramco on a long-term basis.
In its earnings report, Armco explained:
Leveraging our strength in Upstream, we continued to deliver on our Downstream growth strategy, including acquisitions in both Saudi Arabia and key international markets. These acquisitions are expected to enhance dedicated crude placement, increase refining and chemicals capacity, capture value from integration and diversify our operations.
We also signed an agreement to acquire a 70% equity stake in SABIC which is among the world’s top petrochemicals companies by revenues. This is a major step in accelerating growth in Downstream through refining and petrochemicals integration, maximizing the profitability from every molecule we produce.
In refining, the Company continued to capture opportunities and execute initiatives to meet the strategic goal of increasing refining capacity. The Company entered into an SPA with Shell Saudi Arabia Refining Limited (Shell) to take full ownership of Saudi Aramco Shell Refinery Company (SASREF) located in Jubail Industrial City, by acquiring the remaining 50% share of SASREF from Shell, adding 152.5 mbpd to the Company’s net refining capacity. Additionally, the Company reached an agreement to acquire a 17% stake in Hyundai Oilbank, a subsidiary of Hyundai Heavy Industries Holdings.”
Motiva was a joint venture between Saudi Aramco and Shell from 2002 until April 2017. In the split up of the venture, Aramco acquired full ownership of the 630,000 b/d Port Arthur, Texas, refinery.
Motiva wants to expand the refinery with an $18 billion petrochemical plant. Motiva wants to add an ethane cracker that could produce more than 1.5 million tons of ethylene a year, using natural gas from U.S. shale fields to make the building blocks for plastics.
Widespread Chemical Corrosion
But first it must make repairs to the refinery. A five-year, $10 billion expansion was completed in 2012. During the restart, a leak was found in a line to the larger VPS-5 CDU and “thousands of gallons of caustic sodium hydroxide were unknowingly vaporized, causing widespread chemical corrosion and forcing VPS-5 to be shut for seven months of repairs.”
Motiva shut the small crude oil distillation unit at its Port Arthur refinery Thursday night. The report is that water was found in the lines to its 80,000 bpd VPS-2 CDU and its 195,000 bpd VPS-4. The smaller CDU was shut and production slowed on the larger unit.
Its 320,000 b/d VPS-5 CDU will be shut for sixty days commencing September 5th for repairs. It was also reported:
In addition to the 325,000-bpd VPS-5 CDU, Motiva plans to shut the naphtha processing complex, which includes the 115,000-bpd naphtha hydrotreating unit 2 (NHTU2), 85,000-bpd catalytic reformer 5 (CRU 5) and 50,000-bpd isomerization unit for the work, scheduled to finish by Nov. 5, the sources said.
While the other units are shut, Motiva has also scheduled a 10-day shutdown of the 105,000-bpd hydrocracking unit 2 (HCU 2), according to the sources.”
Investing in downstream assets provides some hedge for short-term downturns in oil prices. It also provides some diversification for growth.
For investors in E&P companies, some useful diversification may be achieved by adding refiners to the portfolio, just as Aramco is doing.
Due to the size of Motiva’s refinery, repairs will reduce U.S. crude demand by at least 20 million barrels starting last Thursday with the two smaller CDUs and including the larger CDU. Motiva declined to comment, but it would appear that the damage in the 2012 incident is coming home to roost. The damage was reported to be a cause of the break-up of the joint venture with Shell.
The repairs raise questions about the overall condition of the refinery units and whether there are additional problems that have not yet been found or disclosed. It would also explain why Aramco may be reducing its exports to the U.S. in coming weeks - that is, it’s not to “drain” U.S. crude inventories, it just does not have the demand for the crude with units being shut down.
Are you pleased with your energy sector returns?
To guide investors who are interested in profiting from outstanding opportunities in the energy sector, I provide a service on Seeking Alpha’s Marketplace oriented toward individual investors, Boslego Risk Services. A long/short Model portfolio is continuously updated, along with on-going analysis of the oil market.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.