Saudi Aramco looks to South Korea for downstream investment

As the world’s fifth-largest oil consumer, South Korea is dependent on Middle Eastern crude to meet 70-80% of its petroleum needs.
Sunday 21/04/2019
Stronger operations. A part of Aramco’s Ras Tanura oil refinery in Saudi Arabia. (Reuters)
Stronger operations. A part of Aramco’s Ras Tanura oil refinery in Saudi Arabia. (Reuters)

Saudi Aramco is making a second major downstream investment in South Korea, with an eye to its impending initial public offering and securing more dedicated crude supplies to one of the top Asian consumer nations of Saudi oil.

Saudi Aramco’s move to purchase a 17% stake in a South Korean refiner comes on the heels of the Saudi state oil and gas giant’s announcement in March of its $69 billion purchase of 70% of the shares in Saudi state-controlled Saudi Basic Industries Company, a calculated step by Saudi Aramco to bolster its corporate profile ahead of a limited public sale.

The announcement April 15 that Saudi Aramco would purchase a 17% stake in Hyundai Oilbank for an estimated $1.25 billion is a further sign that Saudi Aramco is looking to pitch itself as a highly integrated energy firm to potential shareholders by continuing to grow its refining business, a key component of its downstream operations.

Hyundai Oilbank is a private oil-refining arm of publicly traded Hyundai Heavy Industries Holdings. Hyundai Oilbank is Seoul’s smallest refiner by capacity. It operates a refining complex with a crude processing capacity of 650,000 barrels per day (bpd) in Daesan, on South Korea’s western coast.

Saudi Aramco and Hyundai Heavy Industries Holdings were already connected through a joint venture established in 2017 with Abu Dhabi’s Lamprell and Saudi national shipping company Bahri that is dedicated to building a giant maritime shipyard at Ras al-Khair Industrial City in the kingdom.

A regulatory filing by Hyundai Heavy Industries Holdings stated that the South Korean parent company signed a sales agreement with Saudi Aramco that would allow the Saudi firm to buy an additional 2.9% holding in Hyundai Oilbank.

Hyundai Heavy Industries Holding had been mulling whether to go ahead with an initial public offering (IPO) for Hyundai Oilbank for some time but put off a decision about a public listing until after the Saudi Aramco purchase is complete.

Saudi Aramco made its first strategic investment in South Korea nearly 30 years ago when it bought a 34.99% stake in South Korean refining firm S-Oil in August 1991. Four years ago, the Saudi state energy conglomerate built on its majority stake in S-Oil by acquiring a 28.4% stake held by South Korean’s Hanjin Group, giving Saudi Aramco a 63.4% ownership of the country’s third-biggest refiner. That deal with Hanjin was valued at $1.95 billion.

In the release announcing the Hyundai Oilbank purchase, Saudi Aramco Senior Vice-President of Downstream Abdulaziz al-Judaimi said: “This acquisition demonstrates our investment in the highly complex refining sector in Asia and continuous commitment to the region’s energy security and development.”

Judaimi added: “The investment supports Saudi Aramco’s broader downstream growth strategy, as well as providing long-term crude oil placement supply options and product offtakes as part of our trading business.”

As the world’s fifth-largest oil consumer, South Korea is dependent on Middle Eastern crude to meet 70-80% of its petroleum needs. Saudi Aramco is South Korea’s top oil supplier, with Seoul importing nearly 90,000 bpd of Saudi crude in 2018. The Saudi volumes accounted for approximately 30% of South Korea’s oil imports.

Saudi Aramco began shifting its crude supply focus in the mid-2000s to Asian markets, where it could typically fetch higher prices than for its US- or Europe-bound volumes and where oil demand growth has generally been outpacing the rest of the world.

Not surprisingly, the Saudi state oil firm was intent on ensuring it had dedicated crude deliveries to its Asian customers to protect and grow its market share, particularly as it faced increasing competition from other suppliers.

This has meant acquiring stakes in refineries throughout Asia — including South Korea, Japan, China, Pakistan and Malaysia — or helping bankroll the expansion of regional refineries. There was also the recent news that Saudi Aramco was in talks to buy as much as a 25% stake in Indian firm Reliance Industries’ refining and petrochemical business.

More than one-third of Saudi Aramco’s crude is processed in its wholly owned and joint venture refineries. The company indicated that it wants to boost its refining capacity from 5 million bpd at present to as much as 8 million-10 million bpd by 2030, as part of its strategy to secure dedicated outlets for Saudi crude.

Strengthening its downstream operations through purchases of stakes in refiners such as Hyundai Oilbank and Reliance is calculated to boost Saudi Aramco’s valuation as it prepares for the IPO, which Saudi Oil Minister Khalid al-Falih said in January would occur in 2021 after several years of fits and starts. The expectation is that Saudi Aramco will continue to add to its Asian refining assets as the IPO looms.