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Singapore — Saudi Aramco's move to invest in two of Asia's biggest refining projects will help it handle future oversupply situations better and keep its concerns about peak oil demand at bay.

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Analysts said the company's back-to-back agreements to take 50% stakes in Malaysia's RAPID project and India's biggest planned refinery on the west coast will guarantee a huge outlet for its crude oil in coming years as oil faces increasing competition from alternative energy supplies.

"What gives this move new significance is that it is occurring in a changing environment marked by both the globalization of product markets and rising anxiety about peak oil demand -- a long-term concern with short-term implications," Antoine Halff, director for global oil markets at Columbia University's Center on Global Energy Policy, told S&P Global Platts.

Another analyst at a leading global consulting firm said: "Next time there is an oversupply situation, Aramco will not be worrying about finding buyers."

In late March, Malaysia's state-run Petronas finalized a deal with Saudi Aramco that gave them equal ownership of the Refinery and Petrochemical Integrated Development, or RAPID, refinery project, which includes a 300,000 b/d refinery. Under the agreement, Saudi Aramco will supply 50% of the refinery's crude feedstock with the option of increasing it to 70%.

And earlier this month, Saudi Aramco signed an agreement with India to jointly develop an integrated 1.2 million b/d refinery and petrochemical plant in the western Maharashtra state -- called the Ratnagiri Refinery and Petrochemicals Ltd -- at an estimated cost of $44 billion.

Under the terms of the deal, Aramco would take a 50% stake in the project. The three Indian state-run refiners -- Indian Oil Corp., Hindustan Petroleum Corp. Ltd. and Bharat Petroleum Corp. Ltd. -- will hold the remaining 50% stake in the venture.

"These developments make Asian refineries a prize in two ways. First, there is the perception of Asia as a die-hard market, as the last undisputed island of demand growth in an increasingly challenged and precarious oil market," Halff said.

"Virtually all oil demand forecasts, no matter how soon they see peak oil demand, continue to see Asia as a growth market. So in that sense, to lock in Asian market share is as much a defensive move as it is part of a classic expansionist strategy," he added.


The Indian and Malaysian deals would also take Aramco closer to its target to raise its global refining capacity to between 8 million b/d and 10 million b/d, from the current 5.4 million b/d.

Serena Huang, senior analyst at Wood Mackenzie said that the Indian deal would not only provide a shot in the arm for Indian Prime Minister Narendra Modi ahead of the 2019 federal elections, but also for Saudi Aramco ahead of its initial public offering.

"Overall, this joint refinery-petrochemical complex investment is a win for both India and Saudi Aramco," Huang said.

Platts Analytics expects India's oil demand to grow by 300,000 b/d in 2018, compared with only 120,000 b/d in 2017.

Wood Mackenzie said that India's oil demand would rise by an average 120,000 b/d annually over the next five years, fast outpacing the average 45,000 b/d per annum capacity expansion by state refiners over the same period. And because of the under-investment, state-run firms would see their combined gasoline and middle distillate deficit rising to 630,000 b/d by 2023. "If India is to be self-sufficient, the need for new capacity to meet the growing demand in the longer term is clear," Huang said.


The RAPID refinery is on track to start operations in the first quarter of 2019 and is currently 87% complete.

The $16-billion project includes a 300,000 b/d refinery and a petrochemical complex, and will also have an LNG regasification terminal, water supply facilities and a co-generation power plant.

"We continue to believe that Petronas will likely receive favorable feedstock pricing given Saudi Aramco is involved in both upstream and downstream RAPID projects," Nomura said in a research note.

Additionally, the RAPID refinery will add to the concentration of refining capacity in the vicinity of Singapore's refining hub, which already has 1.3 million b/d of CDU capacity and an additional 167,000 b/d of condensate splitter capacity, Platts Analytics showed.

"The India and Malaysia investments will allow the company to secure export outlets for its crude oil, and at the same time enhance its presence in the refined product markets of a growing region," said Lim Jit Yang, director of oil market analysis for Asia Pacific at S&P Global Platts Analytics.

Other than the Indian and Malaysian joint ventures, Saudi Aramco had tied up with Indonesia's state-run Pertamina to conduct a $4-$5 billion upgrade of the 348,000 b/d Cilacap refinery that was expected to be ready by 2023.

"As peak-demand angst in the west accelerates the eastward migration of refining capacity, and as the oil trade moves further downstream from crude to products, Asia's importance as a global refiner and petrochemical hub seems poised to increase," Halff said.

"Taking equity in Asian refineries is thus about more than locking in Asian domestic market share, it is also about reclaiming some of the oil rent captured by those Asian export-oriented refiners with a global reach," he added.

-- Sambit Mohanty,

-- Edited by Norazlina Jumaat,