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Sabic: begining of a new chapter

Sabic: begining of a new chapter



A strategic fit

As Saudi Aramco brings its $69.1 billion buyout Sabic into its fold, it remains to be seen how Sabic-Saudi Aramco post-acquisition structure will shape up, writes Pummy Kaul

August 2020

Saudi Aramco’s $69.1 billion takeover of the Saudi Basic Industries Corporation (Sabic) in June was a giant step towards realising its powerful ambition: to be the world’s leading integrated energy and chemicals company.

Closing on the merger of the petrochemicals-focused Sabic, Saudi Aramco, officially, became the fourth-largest chemicals firm in the world, as well as the largest oil firm of all.

Responding, the Saudi oil giant, announced that its downstream business will be reorganised to support and enhance integration across the value chain of hydrocarbons and better position the company to drive financial performance, value creation and global growth.

 

Sabic: high costs of labour and feedstock

Sabic: high costs of labour and feedstock

Spotting synergies

As Saudi Aramco begins to reorganise its business, all eyes will be on how the Sabic-Saudi Aramco post-acquisition structure will shape up. On its part, Saudi Aramco has promised that it will be the beginning of a new chapter. Industry analysts, also, see many additional advantages that Sabic may bring to Aramco’s push in chemicals.

“The strategic integration of our upstream production and downstream chemicals feedstock production with Sabic’s chemicals platform is expected to create opportunities for selective integration synergies that support growth and add value for shareholders,” said Amin Nasser, President & CEO, Saudi Aramco.

“Despite the Covid-19 pandemic forcing many companies to rethink or revise their long term strategies, our long-term focus, financial strength and resilience have enabled us to complete this historic deal.  It marks the beginning of a new chapter in the history of both companies and is an important marker in delivering our long term downstream strategy,” he added.

“The completion of this transaction marks an important step in Aramco’s continuous drive to develop a global integrated downstream business designed to add value across the hydrocarbon chain. As Sabic joins the Aramco family of companies, we expect to create synergies and add value through integration in procurement, supply chain, manufacturing, marketing and sales,” noted Abdulaziz Al-Gudaimi, Senior Vice President of Downstream, Saudi Aramco.

 

Technology transfer

For starters, technology transfer across the two companies can provide a wider range of possibilities and options for potential project configurations. In fact, the combined Saudi Aramco-Sabic entity can form a strong basis for longer-term technology developments in the entire energy value chain.

“Sabic will bring advanced chemical technology to Aramco and help the Saudi oil giant reduce its dependence on foreign companies like Dow Chemical and Mitsubishi for technology as well as for management of its large joint ventures. This acquisition aligns with Aramco’s goal to develop its downstream activities and diversify its sources of income away from the production of crude oil,” said Dr Jean-François Seznec, a senior fellow at the Atlantic Council Global Energy Center.

In addition to homegrown technical knowledge and infrastructure in the advanced chemical industry, the acquisition of Sabic can enable wider collaboration and avoid competition, particularly around petrochemicals, he added.

 

Sabic’s strength: advanced chemical products

Sabic’s strength: advanced chemical products

Speciality chemicals

‘Sabic’s real value to Aramco is in advanced specialty chemicals and advanced plastics. These chemicals and plants are valuable and would allow the newly merged production lines to compete better than Sabic alone with giants like BASF, Bayer, DowDuPont, or large Asian chemical firms,” Dr Seznec noted in a report on the Saudi Aramco-Sabic merger for the Atlantic Council.

Besides the advanced chemical products, Sabic’s large research department, which has issued 12,291 patents, will bring additional advantage to Aramco, he pointed out. “Aramco is also very strong in research and development, but mainly in the oil upstream. As such, it would appear that a merger will greatly help Aramco expand its research to all the aspects of modern IOCs, including chemicals,” he commented.

Further, as part of the merger, Sabic will be able to bring to the deal its de facto control of Saudi Kayan, a Saudi chemical company. Saudi Kayan produces some of the most advanced and high-value chemicals in the Sabic group.

 

Marketing strength

Also, a major value for Aramco will be Sabic’s excellent marketing division—among the best in the industry. Aramco would gain much leverage by selling its own products with the help of Sabic’s team, the report noted.

“Advanced chemicals require specialised sales efforts. The chemical industry refers to such efforts as “technical sales.” These require a large number of salespeople with extensive knowledge of the industry, intimate understanding of the clients’ technical requirements, and deep experience in chemical manufacturing. All this takes many years to build. By getting access to Sabic’s sales organisation, Aramco will be able to hit the ground running in its existing and future chemical productions and reduce its dependence on its joint venture partners,” Dr Seznec observed in the report.

 

Core competencies

On the other hand, some of Sabic’s assets sit outside of Aramco’s core competencies, such as the metals and fertiliser sectors. Aramco may need to divest from them or close these industrial assets in order to maintain Sabic’s value within its own operations,” Dr Seznec noted.  

Notwithstanding Sabic’s activities in fertilisers and metals, it is still mainly a chemical company. In 2018, chemicals and specialty chemicals represented about 88 per cent of its sales and 93 per cent of total profits, while fertilizers represented less than 3 per cent of its sales and 5 per cent of profits, and metals were 6 per cent of its sales, but lost money, the report said.

However large Sabic may be, it pales in comparison to Aramco, which in 2018 had $355.94 billion in sales and $111.071 billion in net income after taxes and royalties paid to the state. Aramco is very profitable in that its cost of production is reported to be less than $6/ barrel on sales at above $43/b presently, while Sabic’s profits, considered in the industry to be quite competitive, are at 15 per cent of sales. Sabic, like most chemical companies, has high costs of labour and feedstock.

 

Uncertainties

Dr Seznec, however, is apprehensive of the Sabic-Aramco merger on one account. According to him Sabic’s advanced chemical lines will likely serve Aramco well, but Sabic also has divisions and product lines that would be major distractions to the management.

“A proper rationalisation of Sabic’s product lines into Aramco will create substantial redundancies within both companies and cost the kingdom a number of well-paid jobs at a time when the state’s main concern is to create such jobs for young, educated Saudis. This important issue will, undoubtedly, be studied extensively by Aramco and the MOE, as well as at the highest levels of the Saudi government. Nevertheless, it will create tension within the well-educated, well-paid middle class in the country, which has until now greatly benefitted from the oil and downstream economy,” he warned.

Traditionally, when chemical companies merge or buy each other’s divisions, some of the products are the same and thus production facilities can be rationalised and oftentimes closed to make place for the most efficient ones within the merged firms. A number of the products made by Aramco’s affiliates—Sadara Chemical Company and Petro Rabigh—like HDPE, LDPE, LLDPE, and some amines, are already manufactured by Sabic. Hence, a consolidation of companies may bring a consolidation of production lines, which would likely result in a rationalisation of facilities and personnel, Dr Seznec cautioned.  




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