Aramco forges ahead with south Asia petchem strategy

State-owned Saudi Aramco is forging ahead with its petrochemical strategy in south Asia through a deal to buy a minority stake in Indian private-sector firm Reliance Industries (RIL).

Yesterday's deal to acquire 20pc of RIL's refining and petrochemical assets adds to a preliminary agreement that Aramco signed earlier this year for a major downstream investment in Pakistan. Aramco is also in the process of closing a deal to buy a 70pc stake in Saudi petrochemical firm Sabic that would make it one of the world's largest petrochemical producers.

The proposed deal with RIL, which is still subject to regulatory approvals, covers all of the Indian firm's refineries and petrochemical assets, including its 51pc stake in a new retail joint venture with BP.

RIL is the world's second-largest producer of paraxylene (PX) and a major producer of polymers, polyester, fibre and aromatics. It commissioned new 2.2m t/yr PX and 500,000 t/y benzene plants at its Jamnagar complex in 2017.

Aramco will supply 500,000 b/d of crude to RIL's refineries, tying up a key customer in one of the world's fastest-growing oil markets.

Downstream growth surge

The deal will also give Aramco access to one of Asia's top petrochemical growth engines, driven by expected Indian GDP growth of more than 7pc in 2019 and 2020, according to the IMF.

India's petrochemical demand is estimated at 43m t in the 2018-19 financial year that ended March. Year-on-year growth is forecast at around 8.5pc for naphtha, 6.7pc for butadiene, 12pc for styrene and 5.1pc for polymers, according to the Chemicals and Petrochemicals Manufacturers' Association (CPMA). Indian PVC demand is also likely to pick up in 2019, supported by the peak season for pipe laying, the CPMA said.

The re-election of prime minister Narendra Modi's BJP government in May will also underpin the petrochemical sector's robust growth trajectory for the next few years. The Modi administration has already promised a slew of construction and infrastructure projects across India that will boost domestic petrochemical growth.

Yesterday's deal with RIL comes two years after Aramco lost out to Russia's state-owned oil firm Rosneft in the bidding to acquire fellow private-sector Indian refiner Essar Oil.

Aramco is pursuing other projects in India. The Saudi company and Abu Dhabi's state-owned Adnoc have each taken 25pc stakes in a proposed 1.2mn b/d refinery and 18mn t/yr petrochemical project in Maharashtra state. The joint venture with Indian state-controlled firms has been delayed after local protests forced the government to relocate the proposed project to Raigadh from Ratnagiri.

Regional expansions

Elsewhere in the region, Saudi Arabia and Pakistan signed a preliminary agreement in February for the construction of a joint venture 300,000 b/d refinery and integrated petrochemical complex at Pakistan's deepwater port of Gwadar at an estimated cost of around $10bn. Work is still in the feasibility study phase.

Recent tensions between India and Pakistan may be a short-term concern. Pakistan on 7 August announced a decision to suspend trade with India after the Modi government changed the status of the disputed Kashmir region.

Aramco, as a neutral investor, is likely to be able to overcome the disputes between the traditional south Asian rivals.

South Asia's proximity makes it a natural market for Mideast Gulf petrochemical companies as they look to diversify their export destinations. As China grows more self-sufficient in petrochemicals, producers in the Middle East are aggressively looking for new long-term customers to sell their downstream products.

Saudi producers are also set to increase their presence in other south Asian markets such as Bangladesh and Sri Lanka. Consumption in these two markets is much lower than in their larger neighbours, but a growing middle class means they are showing promising growth for petrochemicals.