Downstream Evolution: National Oil Companies and US Players Going Big

The recent oil crisis accelerated the focus on the downstream value chain. National Oil Companies (NOCs) are rapidly adapting their strategy by investing in refining and petrochemical complexes both at home and abroad. The goal is threefold: to meet the rising domestic demand, to hedge against oil price volatility by accessing the products margin and finally, to secure future crude customer base through overseas investment in a market with increasing supply from unconventional sources. This is ever more crucial in a transitioning energy mix, as petrochemicals would still remain a growing sector.

Historically, the downstream capacities were built by International Oil Companies (IOCs) in the developed countries. However, with emergence of developing countries in Asia and the economic growth in the Middle East, NOCs have taken the front seat to build the new capacities at home, signaling a “production and processing proximity” approach. Additionally, Middle Eastern NOCs invest in downstream capacities abroad, especially in India and China as the downstream markets, to secure future crude sales to these strategic countries who are currently the biggest Middle Eastern crude importers.

Saudi Aramco

Saudi Arabia is leading in downstream assets growth. State-owned company, ARAMCO, is currently undergoing substantial expansions in refining and petrochemical sectors with an ultimate goal of 8 to 10 million barrel per day (mbpd) of downstream capacity. To do so, they have acquired a 70% stake in Saudi petrochemical player Saudi Basic Industries Corp. (SABIC).

Overseas, Saudis are particularly consolidating operations in Asian markets. Providing 20% of Chinese crude imports, ARAMCO plans to further expand its in-country downstream presence. One example among many is the decision in 2019 to develop a $10 billion fully integrated refining and petrochemical complex with Chinese players. Also, ARAMCO agreed in 2018 to develop a $44 billion mega-refinery in India, capable of processing 1.2 mbpd of crude, ranking it among the largest global downstream projects. Additionally, the Saudi Crown Prince secured a $10 billion refinery project in Pakistan during his visit to the country. ARAMCO also marked its presence in Malaysia by creating two JVs for the Refinery and Petrochemical Integrated Development (RAPID) project with national company Petronas in 2018.

The company is also expanding its longstanding presence in the US to benefit from the activity growth thanks to the shale revolution. ARAMCO plans to bring additional $10 billion investment in its Port Arthur refinery in Texas. The complex is the largest oil refinery in the US, now fully owned by ARAMCO.

ADNOC

Similarly, UAE is targeting a significant expansion in its global downstream footprint. The national company, ADNOC, announced a $45 billion investment alongside its partners over the next 5 years, including highly targeted overseas spending. One remarkable example is the transformation of its main Ruwais facility into the world’s largest integrated downstream complex – doubling refining capacity and tripling petrochemicals production by 2025.

ADNOC is also a partner in the above mentioned ARAMCO’s $44 billion investment in India. Moreover, ADNOC has strategically targeted the underground storages in southern India, which makes them the only foreign company with a deal to store oil in India’s strategic reserves. In China, ADNOC signed a strategic cooperation agreement with CNPC in 2018, securing supply and developing downstream opportunities as a part of the plan.

US Majors

The US oil players have also engaged in increase of their downstream exposure, particularly along the Gulf Coast, where refiners are taking advantage of cheap output from Texas. ExxonMobil and Chevron are now investing to expand and upgrade facilities in order to handle lighter grades flowing from Permian and other shale plays.

ExxonMobil has plans to double earnings from downstream business by upgrading refineries in Baytown and Beaumont in Texas and Baton Rouge, Louisiana, as well as in Rotterdam, Antwerp, Singapore, and Fawley in the UK. Chevron aims to process more of the Permian’s light crude after it agreed to acquire Pasadena refinery from Petrobras. Separately, surging US supply of low-cost shale gas and NGLs is also transforming domestic petrochemical industry, motivating players to add new petrochemical capacities.

Overseas, similar to Middle Eastern NOCs, US Majors are spending in the fast-growing economies. For example, ExxonMobil plans to make a $10 billion investment in China, including construction of a petrochemical plant and an investment in a LNG terminal. Along with Kuwait Petroleum, ExxonMobil plans to acquire a stake in BORL refinery, a JV of Bharat Petroleum Corporation and Oman Oil Company in India.

Conclusion

Downstream investment is emerging as a core business strategy among the Middle East NOCs who want to capture more of the processed value of their natural resources. Similar strategy becomes a priority for their US rivals who aim at a stable long-term business growth and leverage their unconventional momentum even in downstream.

Growing demand for refined crude and petrochemical products in Asia leads without a doubt to substantial changes in capacities and partnership structures. The US and Middle Eastern refiners expand their facilities in emerging countries, mostly by taking shares in local facilities and partnering with national companies.

Schneider Electric is well positioned to ensure that customers gain sustainable downstream profitability in a volatile market. Our solutions can provide Operational Excellence and discipline in downstream capital allocation.