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Saudi Aramco's downstream US expansion options limited as valuations may rise

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Saudi Aramco's downstream US expansion options limited as valuations may rise

As Saudi Arabian Oil Co. eyes global downstream expansion to fuel its growth, its options to do so in the U.S. through its Motiva Enterprises LLC subsidiary may be limited at a time when asset valuations may increase, experts say.

As it plans to nearly double its crude oil refining capacity and petrochemical production, the state-run company is preparing for an IPO that analysts expect to be the largest in history, with Saudi officials targeting a $2 trillion valuation for the state-owned company. Kingdom officials have earmarked the proceeds to fund the diversification of the Saudi economy.

Saudi Aramco's planned downstream expansions come as the oil majors have been moving away from the integrated business model, where companies both produce oil and refine it. In the U.S., the rise of independent refiners, culminating most recently with Marathon Petroleum Corp.'s planned acquisition of Andeavor, started with refining assets that integrated oil companies had spun off or sold to smaller independent refiners.

"In the case of Saudi Aramco, their ability to grow the upstream [business] is very limited … any growth is going to have to come [from] the downstream by building or acquiring refining assets," John Auers, an executive vice president with refining consulting firm Turner, Mason & Co., said during a June 14 interview. "They're not going to be involved in upstream anywhere else in the world. They're limited to what they can do in Saudi Arabia."

As part of an $18 billion growth effort, Motiva has said it plans to expand its refining capacity to between 1 million barrels per day and 1.5 MMbbl/d through additional refining assets. It currently has 600,000 bbl/d of refining capacity at its Port Arthur, Texas facility located on the Gulf Coast.

"Putting in new capacity costs more than acquiring existing capacity," Auers said, but he added there is not much refining capacity currently on the market. "The integrated majors in the U.S. have shed so-called non-core assets. I don't know that there's a lot of that to go. The majors, as they exist now, are fairly happy with the refining assets that they do have."

Aside from the cost of greenfield development, Auers said any new facility would be built to serve the U.S. export market: "Domestic demand isn't growing. You have to look [at] the economics of building greenfield and then exporting. … I think Motiva's got a tough time of trying to find that."

Strategically, Auers said he expects Motiva would look for an asset that could be a demand source for medium-sour Saudi crude oil.

Some experts have speculated PBF Energy Inc is a possible target that would fit Motiva's strategy. The New Jersey-based company has assets located on the U.S. Gulf Coast, East Coast and West Coast.

But analysts say tailwinds, including marine fuel regulations known as IMO 2020, could push asset valuations higher for facilities capable of processing the type of crude Saudi Arabia produces.

"We benchmarked the [LyondellBasell Industries NV] Houston refinery against cost estimates from new refineries in Asia and concluded that Houston could cost around $10 billion new," Tudor, Pickering, Holt & Co. analyst Matthew Blair said in a June 14 email. "But when [the company] tried to sell it a while back, it couldn't get $2 billion for it."

"We think that IMO 2020 will double refiner earnings versus 2017 levels," Blair said. "Let's say that extends to valuations as well. Maybe that means refineries will trade at 40% of replacement cost instead of 20%. It's still a better deal to buy instead of build."