Saudi Aramco made headlines last week when it signed a deal to purchase a 70% stake in Saudi chemicals giant SABIC from the Saudi Public Investment Fund (PIF) for $69.1bn. The highly anticipated deal carries key benefits to the involved parties that will help them change to suit market trends and to change the market to suit their needs.
As Saudi Crown Prince Mohammed bin Salman continues his efforts to diversify the Saudi economy away from oil, PIF's divestment of Sabic gives it more liquidity to invest the $69.1bn it will earn from the deal into other programmes.
"It will unlock significant capital for PIF's continued long-term investment strategy, underpinning sectoral and revenue diversification for Saudi Arabia," said PIF Managing Director Yasir al-Rumayyan in a statement announcing the deal. The nation had originally sought to raise $100bn by listing a small percentage of Saudi Aramco, but the Aramco IPO has been delayed, with the crown prince noting it should go through by 2021.
For Saudi Aramco, this acquisition is all about strategy on multiple fronts. Saudi Aramco CEO Amin Nasser, in a speech at London Petroleum Week, said that while electric vehicles and alternative energy might replace some of the demand for oil and gas, 80% of oil demand comes from sectors where no alternatives are readily available. That includes petrochemicals.
The company plans to feed 30% of its upstream output to create petroleum products, which form the basis for plastic production, among other things. While electric vehicles and r enewable energy are expected to see increasing uptake in the coming years, there remains no viable, readily available alternative to plastic.
But investing into the downstream sector also provides insulation against a low oil price environment. By balancing out its portfolio, Saudi Aramco can ensure another revenue stream when the price per barrel of crude is low, and it is making less money out of its upstream arm. It can also leverage Sabic's international presence to enter new markets, as it aims to expand globally.
Sabic's benefits are best summarised by its vice chairman and CEO, Yousef Al-Benyan, who said in a press release that "SABIC will benefit from the additional scale, technology, investment potential, and growth opportunities Saudi Aramco will bring as a global leader..."