Abu Dhabi, UAESunday 21 July 2019

Sabic and Careem deals mark different sides of the same coin

Saudi Arabia's energy industry re-emerging as a key investor and executor of new industrial projects amid diversification into new businesses and technologies

An oil tanker being loaded at Saudi Aramco's Ras Tanura facility in Saudi Arabia. The company received A1 credit rating from Moody’s Investors Service and A+ from Fitch Ratings. Reuters
An oil tanker being loaded at Saudi Aramco's Ras Tanura facility in Saudi Arabia. The company received A1 credit rating from Moody’s Investors Service and A+ from Fitch Ratings. Reuters

Two transactions last week mark very different modes for the Middle East’s economy.

Oil behemoth Saudi Aramco bought 70 per cent of petrochemicals compatriot Sabic for $69.1 billion from the Public Investment Fund and Uber acquired fellow ride-hailing company Careem for $3.1bn. Both types of deals will coexist, as the region’s “old economy” underpins the creation of the new.

The recent “back to basics” shift in the Arabian Gulf’s diversification plans sees the energy industry re-emerging as a key investor and executor of new industrial projects, focusing particularly on petchems and gas.

Simultaneously, diversification into new businesses and technologies is more vital than ever, with growing concerns over future demand for oil and its derivatives. And the flow of revenues from energy companies is called on to finance such investments.

The core petchems unit coincides with Aramco’s long-time ambition to generate more value from its oil by integrating refining and chemicals. Sabic’s initial expansion from its foundation in 1976 was underwritten by supplies of cheap gas captured from Aramco’s operations. The oil producer more recently saw the opportunity to retain that value itself, starting up the Petro Rabigh and Sadara joint ventures.

As new gas production has become more expensive and domestic prices have been raised, new projects for basic materials have become less attractive. The two companies have joint plans for a huge plant at Yanbu on the Red Sea, which would convert crude oil directly to chemicals. They have both been expanding internationally, and moving into more sophisticated speciality chemicals. Aramco’s giant new overseas refineries in Malaysia and western India also include a large petchems component.

To generate full synergies, Aramco needs operational control of Sabic. One approach could be to merge the company with its own existing petchems business, with the consent of existing minority shareholders. That could be a backdoor way to a public listing of an Aramco subsidiary.

Meanwhile, the PIF has a mixed role: it holds the government stake in pillars of the Saudi economy such as the Saudi Electricity Company, industrial utility Marafiq, the national water company, mining giant Ma’aden, oilfield services, the tanker company Bahri, ports, the railways, technology incubator Taqnia, industrial incubator Dussur, several banks, and the Tadawul itself. It owns 70 per cent of Saudi Telecom, which holds 8.8 per cent stake in Careem. There are overlapping ownerships with many of these companies also part-owned by Aramco, Sabic or both as well as private shareholders.

At the same time, the PIF owns technology-focused stakes overseas, notably a $3.5bn holding in Uber, 4.9 per cent in Tesla, $1bn in another electric vehicle company Lucid Motors, half of Middle East e-commerce start-up Noon, and a $45bn investment in the SoftBank Vision Fund.

These have potential for eventual high returns, with the associated risk, but are illiquid and do not pay dividends. Some of these companies are meant to invest in Saudi Arabia itself, including in renewable energy. Others, like Tesla and Lucid, could be seen as a limited hedge against a future of electric mobility, when Aramco will have to focus on other markets.

The PIF has to be clear about its mission. Which of its domestic holdings are strategic, but would generate more value with a different owner, such as Aramco? Which parts are essential to the diversification mission and require a powerful stakeholder and capital injections to drive them forward? Which entities could be sold to private investors, domestic or foreign, or listed publicly?

The sovereign fund needs a dynamic portfolio that recycles successful businesses to private hands. Aramco’s old economy strengths have to support, and not subsidise, the new. Government investment could help spark the next Careem.

Robin Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis

Updated: March 31, 2019 12:32 PM

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