IPO for Aramco-Sumitomo $10 Billion Petrochem Project as Saudis Floor Pedal on Refining Expansion Projects

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Researched by Industrial Info Resources (Sugar Land, Texas). A $10 billion ‘upgrade’ on an existing oil refinery could only happen in Saudi Arabia. The upgrade is, in fact, a mammoth new joint venture project between Saudi’s Aramco and Japan’s Sumitomo Chemical Company (TSE:4005 )that will produce 18.4 million tons of oil products, 1.3 million tons of ethylene and 900,000 tons of propylene per annum, when it goes into production in the second half of 2008.

Construction has begun on the Petrorabigh project at Aramco’s Rabigh refinery site on the Red Sea. “Petrorabigh is an investment of high economic and commercial value. It will generate additional revenues for Saudi Arabia and it will provide Japan with ready access to a stable and abundant supply of petrochemical feedstock,” said Abdulaziz Al Khayyal, Petrorabigh’s Chairman.

Under the terms of the joint venture Saudi Aramco (SA) will feed the project on a daily basis with 400,000 barrels per day (bpd) crude oil, 95 million cubic feet of ethane and 15,000 bpd of butane. Petrorabigh is on a scale way beyond the usual ‘world class’ project.

The national government in Riyadh announced plans in 2005 to invest $50 billion by increasing production of crude oil to 12.5 million bpd, from the current 11 million bpd, by 2010 and plan for a 15 million bpd target in the following years. It also announced massive investments in downstream industry and the social infrastructure to equip the country’s underemployed youth with jobs and the skills with which to handle them in the global economy. For related news item see November 8, 2005 – Saudis Plough Windfall Cash into Petro Production Expansion.

This is the Saudi company’s first direct entry into the petrochemical sector and it is planning to float an Initial Public Offering (IPO) of 25 – 30% of the project. This move has been made to develop a new investment model for Saudi projects as the country seeks to moderate global fuel prices by increased production. The IPO move is also being made against a background of rising costs of raw materials and project inputs that have inflated costs by 70% for Petrorabigh since the initial estimates of $4.5 billion. The public float is also aimed at soaking up some of the super liquidity being experienced on the Saudi stock exchange as the central government looks to diversify the country’s structurally fragile economy.

Projects across the Middle East and Persian Gulf region are currently experiencing steep increases in construction costs and in engineering skills, and technology personnel overheads as the global energy construction boom continues soaking up resources. For related news item see December 20, 2005 – http://www.industrialinfo.com/showNews.jsp?newsitemID=74363 Middle East Boosts Refining Capability at Home and Abroad on Back of Major Crude Production Increase Plans.

There has been some contention between the partners on the size and timing of the IPO. Sumitomo is reported to have expressed a firm preference for the listing to take place in 2008 after the project goes into production and starts generating value. The Japanese also felt that a larger cash sum could be raised from a delayed offering and perhaps a greater percentage floated while the Saudi’s went for the early IPO to offset rising costs. Moody’s Investor Service said that the project had secured $5.8 billion in financing and would have the capacity to cover project finance obligations and generate ‘acceptable’ returns because it had a low break-even point. In the end, Hiromasas Yonekura, Sumitomo’s president said that his company was committed to the IPO, which would help to promote the sound growth of Saudi Arabia’s stock market.

Ali Al Naimi, the Saudi Oil Minister (known in the global industry as Mr. Oil), said that details of the offer such as timing and number of shares would be announced after the partners have completed talks with the Saudi Capital Markets Authority. “Big projects are coming in the future and nearly all of the projects in the refining and petrochemical sector will be partially floated to support the stock market and diversify the economic base of Saudi Arabia,” he said. He also indicated that there could be other energy sector flotations on the stock exchange.

New greenfield and expansion projects will see the country’s reefing capacity grow to one million bpd by 2010, which represents an increase of 50% from current levels. Increased exports of refined fuels to Asia and the U.S. are targeted. The refining expansion is aimed to take advantage of the strong earning margins and contain increasing oil prices that could undermine future demand for crude output.

Saudi Aramco, in addition to building two export-orientated refineries, is planning to expand production at Yanbu and Ras Tunara refineries by 100,000 bpd each. The latter plant has a current capacity of 550,000 bpd. The company is also talking to France’s Total (NYSE:TOT ) on a new $4-$5 billion export plant to produce 400,000 bpd at Jubail and has indicated that ConocoPhillips (NYSE:COP ) (Houston, Texas) has successfully bid to build a similar sized plant in Yanbu. Talks on plant expansions are ongoing with partners and associates for other refining plants, both domestically and internationally.

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