Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Saudi Economy Collapsing? 5 Oil Deals Prove The Reverse

By Ellen R. Wald, Ph.D.Market OverviewOct 22, 2015 07:39AM ET
Saudi Economy Collapsing? 5 Oil Deals Prove The Reverse
By Ellen R. Wald, Ph.D.   |  Oct 22, 2015 07:39AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items

The media loves to report that Saudi Arabia is on the edge of a financial cliff. Last week, the Guardian reported on a “secret” memo in which King Salman ordered “unprecedented austerity” on government budgets, such as forbidding the purchase of new vehicles and furniture. This week, Bloomberg wrote that Saudi Arabia is renegotiating some contracts with companies working on infrastructure projects and has delayed some payments to contractors.

But are these really signs of an impending Saudi collapse? Consider the larger picture and how the Kingdom’s state-owned oil company, Saudi Aramco, is positioning itself to reap significant profits in the refining and petrochemicals sector.

  1. Saudi Arabia has one of the lowest public debt-to-GDP ratios in the world – less than 2% in 2014.
  2. Saudi Aramco and Total (N:TOT) are discussing serious plans to expand their 400,000-barrel a day refinery, Satorp, in Saudi Arabia.
  3. Saudi Aramco is deep into negotiations with the China National Petroleum Corporation (CNPC) to purchase a $1-1.5 billion stake in one of its refineries.
  4. Saudi Aramco just closed a $10 billion deal (which it financed with loans from major banks) to purchase a stake in the German synthetic rubber manufacturing company Laxness.
  5. Last year, Saudi Aramco increased its stake in South Korean oil refiner S-Oil (KS:010950) to 63%.

These deals should send a signal that Aramco is well positioned to take advantage of weaknesses in the energy sector to get good deals on refineries in places where it wants to increase its crude oil exports. This will prove lucrative for the company (and thus for the Kingdom) as it grows its footprint in a sector of the energy industry that traditionally does well when oil prices are low. Owning refineries also guarantees an outlet for Aramco’s crude oil, particularly as competition from other crude oil producers heats up.

The Kingdom is also putting billions of dollars into the infrastructure it needs to expand its domestic refining and petrochemical industry. In order to expand Satorp, Aramco and Total must have guaranteed access to natural gas to power their refineries. Saudi Arabia has long known that it possesses massive natural gas resources (5th largest in the world) but until now, has never committed to spending the resources needed to exploit them.

Meanwhile, King Salman is doing his part to help build his country’s long-term success in the energy industry by reigning in excessive spending in non-essential areas. Not only is this good business it also demonstrates to the banks, which Saudi Arabia hopes will continue to finance its purchases, that the Kingdom spends its money wisely. King Salman’s fist tightening also benefits his own power by driving home the message to Saudi bureaucrats that King Salman—whose reign is less than a year old—is in charge and watching them.

My prediction is that when the oil glut finally subsides (and with Iran inching towards increasing its own oil exports this will not happen anytime soon) we will find that Saudi Aramco will have increased its foreign holdings at least five-fold, and between its domestic refining industry and its foreign acquisitions, will control a significant portion of the global refining and petrochemicals market.

If that is the case, then where will Saudi Aramco look next? India is a serious contender.

India imports nearly 800,000 barrels of oil a day from Saudi Arabia and its consumption is continuing to grow. Two years ago, Aramco engaged in negotiations with India’s state owned Oil and Natural Gas Corporation for a 30% stake in its OPaL petrochemical plant, but the deal never materialized. Some officials said the deal fell through because Aramco really wanted to buy the entire company, not just invest in a single plant. More recently, after India’s Oil Minister recently complained about the so-called “Asian premium” on crude oil that India has had to pay, Aramco negotiated a price discount with India.

Ali al-Naimi, Saudi Arabia’s oil minister, indicated renewed interest in downstream investment in India when he recently remarked that Saudi Arabia is very interested in investing in India’s refining and petrochemicals industries and hopes that recent talks “will come to a good conclusion.” However, whether India’s Prime Minister Narendra Modi is able to relax regulations that currently prohibit foreign companies from owning over 50% of a business in India may play a role in future investment from Saudi Arabia.

Saudi Economy Collapsing? 5 Oil Deals Prove The Reverse

Related Articles

Saudi Economy Collapsing? 5 Oil Deals Prove The Reverse

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
Sign up with Email