Aramco reassesses US$20b chemicals plant amid cost cuts

[DUBAI] Saudi Aramco and Saudi Basic Industries (Sabic) will re-evaluate a planned US$20 billion crude-to-chemicals plant as they seek to cut spending and as the oil company tries to preserve its dividend.

The two firms intend to incorporate existing facilities into the Yanbu project on Saudi Arabia's Red Sea coast instead of building an entirely new one, Sabic said in a statement Sunday.

Aramco, which bought most of Sabic earlier this year, was looking to shelve the huge project or integrate it with existing refineries, Bloomberg reported last month, after oil and petrochemical prices crashed with the spread of the coronavirus.

"In the long-term, this is an indication of a weaker outlook for growth," said Hasnain Malik, the Dubai-based head of equity strategy at Tellimer, a research firm specialising in emerging markets.

Converting crude directly into high-value chemicals instead of transportation fuels is part of Aramco's plan to diversify from selling oil and earn more profit from each barrel it pumps. The world's biggest oil company aims to roughly double refining capacity to boost its unprofitable downstream unit. Its US$69 billion acquisition of 70 per cent of Sabic from Saudi Arabia's sovereign wealth fund is key to that goal.

Aramco and Sabic are still committed to "advancing crude to chemicals technologies through existing development programs with the goal to increase cost efficiency", Sabic said. Aramco declined to comment further.

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Lower oil prices led to a 73 per cent drop in Aramco's second-quarter profit and a sharp increase in debt, though it maintained a commitment to pay a dividend for 2020 of US$75 billion, which will likely be the world's biggest. Almost all of it will go to the Saudi government, which owns 98 per cent of Aramco.

"Signals that capex is being trimmed should be welcomed by debt and equity holders in the short-term because it frees up cash for debt servicing and dividends," Mr Malik said.

Sabic suspended new capital expenditure earlier this year as it lost money in the first and second quarters.

Aramco may struggle to keep up annual shareholder payouts of US$75 billion beyond 2021 unless crude prices increase, Moody's Investors Service said this month. The company, which listed in Riyadh last December, pledged dividends at that level for its first five years as a publicly traded firm.

This year's 35 per cent slump in oil prices to around US$43 a barrel has led Aramco to lay off hundreds of mostly foreign workers and announce plans to sell non-core assets.

Aramco's shares have risen 1.4 per cent this year to 35.75 riyals. They've outperformed those of other oil majors in large part because of Aramco's dividend commitment, according to Bloomberg Intelligence. The likes of BP and Royal Dutch Shell have slashed shareholder payouts for 2020.

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