For Saudi Aramco, Breaking Up Is (Not So) Hard To Do

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Saudi Aramco and Royal Dutch Shell (NYSE:RDSa) recently announced plans to end their co-ownership of the Motiva refinery in Texas. The two energy companies have operated the refining and marketing enterprise as a 50/50 joint venture since 2002. This move is significant because Motiva includes three refineries in the gulf region of the United States with combined capacities of 1.1 million barrels a day. The complex is the largest in the United States and one of the 10 largest worldwide.

In the divorce, Shell will be getting the two smaller refineries, with a combined capacity of just under 500,000 barrels a day, 9 distribution terminals, and the Shell gasoline brand in Florida, Louisiana, and the Northeast U.S. Saudi Aramco will keep the Port Arthur Refinery under the Motiva name, 26 distribution terminals, and an exclusive license to use the Shell gasoline brand in Texas, Mississippi, the Southeast, and Mid-Atlantic. Significantly, the Port Arthur refinery recently completed $10 billion worth of renovations that made it the largest and most updated refinery in the U.S.

Neither company has much to say about the breakup, although management has long been an issue. “Too many cooks in the kitchen,” an oil trader familiar with the company commented.

On Shell’s part, the move seems to be motivated by a desire to save cash by simplifying operations. After a disastrous foray into offshore drilling in the Arctic that the company cancelled after losing billions of dollars, Shell merged with the BG Group (LON:BG) in London. Since then, Shell has been actively slimming down its operations. This month, in addition to the Motiva split, the company also dropped a major gas project in the UAE. Shell seems focused on shoring up its core areas: deep water drilling and LNG.

In many ways, Motiva was a test case for Saudi Aramco as the company has expanded its downstream operations over the past fifteen years. Since partnering with Shell on Motiva, Saudi Aramco has gone on to undertake joint venture refining enterprises with Sinopec (NYSE:SHI), Total (NYSE:TOT), ExxonMobil (NYSE:XOM), and Hanjin Energy (KS:097230), in addition to co-ventures with Shell in Saudi Arabia, South Korea, Japan, and China.

If management was indeed an issue, expect the Saudis to clean house. Saudi Aramco is a notoriously well run and managed operation that can be extraordinarily efficient when it wants. The Saudis may bring in their own people to manage the operation directly or may rely on local talent. Either way, Motiva is likely to emerge as a slimmed down operation. The real question is what are Aramco’s future plans for this major asset?

Just as Motiva paved the way for Aramco’s expansion into petroleum refining, does this move herald future movement away from the joint venture model? Aramco may be looking to move from partial to full ownership in countries where this is possible (some countries, like China, prefer that a Chinese company partially own any company that operates in China, although there are signs that the Chinese government may be easing up on this policy).

If sole ownership of Motiva goes well, then buying out their partners while retaining distribution rights in various countries could be Aramco’s long-term downstream strategy. This essentially mirrors the strategy the Saudis took with Aramco’s upstream assets in Saudi Arabia. The venture began as a wholly American operation in which the Saudis slowly increased their ownership percentage until buying out all remaining American interests in the 1980s. A similar strategy for downstream operations would not be surprising.

Aramco could also be looking for a new partner to expand its refining operations in the United States. A retooled Motiva enterprise could be the right investment for oil companies that have been cutting back on upstream investment or even for an ambitious private equity company. Motiva is the largest, most up-to-date refinery in the United States, where no new refineries have been built in 30 years. Run well, Motiva should be well positioned for future profitability.

On the other hand, Aramco might be looking to divest itself of the entire enterprise. American regulations have grown increasingly stringent over the years and Aramco may be more interested in putting its capital into countries with less restrictive environmental and corporate regulations. Expanding in regions like China, Korea, India, and even Saudi Arabia would pose less onerous burdens and potentially yield higher profits.

Last, but certainly not least, the move could be a precursor to the eagerly awaited Aramco IPO that was broached at the beginning of 2016. Aramco is unlikely to take its core company public (either on the Saudi or American exchanges) but has pointed to some of its downstream operations as likely candidates. Since the majority of its refining operations are joint ventures, taking them public would require complicated negotiations with the foreign companies involved. Now, with sole ownership of Motiva, Aramco has full control over the decision to take the refining enterprise public and over the decision of which market will list the company.

Imagine this – the largest refinery in America, owned and operated by a Saudi company that used to be an American company, publicly traded on the Saudi stock market.

Reader Survey

As the post above explains, Saudi Aramco and Royal Dutch Shell recently decided to end their 50/50 ownership of the Motiva refinery complex in Texas. Saudi Aramco will retain ownership of the largest refinery. What do you think Saudi Aramco will do/should do with Motiva? Please respond in the comments section.

1. Retain sole ownership
2. Look for a new partner
3. Sell the refinery
4. IPO the refinery
5. Other (explain in comments)