Aramco reviewing multi-billion Texas LNG terminal investment plan

(Bloomberg) --Saudi Aramco is shelving multi-billion-dollar petrochemical and gas projects as the state oil giant’s determination to preserve its dividend forces it to cut back on major investments.

The world’s biggest oil company is abandoning plans to build a $20 billion crude-to-chemicals plant at Yanbu on the kingdom’s Red Sea coast, according to two people familiar with the matter, who asked not to be identified because they aren’t authorized to speak to the media. It’s also reviewing a decision last year to buy 25% of Sempra Energy’s liquefied natural gas terminal in Texas -- which would cost several billion dollars -- and has already taken some staff off the project, according to a separate person.

Aramco declined to comment. Sempra said it continued to work with Aramco and others “to move our project at Port Arthur LNG forward.”

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The about-turns come as the Saudi firm tries to honor its pledge to pay a $75 billion dividend annually for the next several years. Rivals such as BP Plc and Royal Dutch Shell Plc slashed shareholder payouts as the coronavirus pandemic crushed energy demand. Oil prices have more than doubled since April to around $45 a barrel but are still down more than 30% this year.

“There is excess supply in the oil market, and full recovery may not happen until 2022,” said Mazen Al Sudairi, head of research at Al Rajhi Capital in Riyadh. “It makes sense to cut capital expenditure.”

Aramco’s Chief Executive Officer Amin Nasser is navigating one of the oil industry’s most turbulent periods less than a year after listing the company in the Saudi capital of Riyadh. The initial public offering brought added scrutiny to the once secretive firm, though the Saudi government still owns 98% of it.

Nasser has already slashed 2020 investment to as little as $25 billion from the original target of around $40 billion, and will probably reduce it even more next year.

All of Aramco’s major greenfield projects -- which involve building plants from scratch -- are under review, and the company is likely to invest in existing assets instead, said one of the people.

Delaying the chemical and gas projects is a blow to Aramco’s plans to diversify from pumping and selling oil. As part of that strategy, the company aimed to roughly double refining capacity to boost its unprofitable downstream unit. It also bought Saudi state chemical producer Sabic for $69 billion this year to break into new manufacturing industries.

Aramco planned to build the Yanbu plant with Sabic to create a new outlet for its crude as the global shift to greener energy worsens the long-term demand outlook for petroleum products. One option for Yanbu is to build petrochemical facilities and integrate them with existing refineries, said one of the people. Aramco will finish a feasibility study by the end of the year, they said.

“It was part of their future plan to protect oil demand and their downstream business,” said Robin Mills, founder of Dubai-based consulting firm Qamar Energy.

Aramco is still working on a $15 billion plan to buy into Indian firm Reliance Industries Ltd.’s refining and chemicals arms, Nasser told reporters last month.

Backing out of the Texas LNG export facility would hurt Aramco’s ambition to build a global gas business. Aramco and Sempra had already delayed the final investment decision on the project, which was meant to start producing LNG later this decade, until next year.

While global gas prices have also fallen with the spread of the virus, some analysts forecast a supply shortage around 2025, just as the Port Arthur terminal was meant to come onstream. Gas is an important feedstock for chemicals and a cleaner alternative to coal as a fuel for power plants.

“Building up a serious LNG business from the ground up is tough, though arguably now would be the time to start,” said Mills.

Aramco has suspended other projects too, including a $10 billion refining and petrochemicals complex in China, Bloomberg reported last month. Aramco said in response it was still committed to downstream investments in China.

The company reacted to the fall in oil prices this year by reorganizing its top management, restructuring business units, suspending some drilling and laying off hundreds of mostly foreign workers.

Dow Jones earlier reported that the Yanbu and Sempra investments were under review.