Saudi Aramco’s Potential U.S. Listing and Implications for Nigeria’s Crude Oil Refining Sector

Africa’s richest man, Aliko Dangote, is a highly ambitious business magnate that is building the world’s biggest single-train facility in Nigeria—the $9 billion Dangote Oil Refinery Company. Funded with $3 billion equity and $6 billion loan capital, the 650,000 barrels-per-day (bpd) oil refinery is enough to whet the appetite of local and foreign stakeholders who cannot wait for the plant to commence operations in 2020.

But far away in Saudi Arabia, investment analysts dressed in crisp shirts and fine ties on tailored trousers and shiny shoes from New York Stock Exchange, London Stock Exchange Group Plc and Hong Kong Exchanges & Clearing Ltd are pitching Saudi Aramco in what would be the oil giant’s first Initial Public Offering (IPO) after listing in Riyadh Stock Exchange begins on November 17, 2019. Arguably the most profitable company in the world, the Saudi-owned oil giant is planning a 5% ($100billion) IPO of its valuation after the Kingdom’s Crown Prince Mohammed bin Salman valued the company at $2 trillion, a valuation deemed too high by equity analysts. 

The listing is reported as an attempt to raise capital to diversify the economy away from oil, which is logical considering that there has been a retrenchment in oil and gas spending in the Middle East since the past three years and a higher spending on power, particularly in gas generation and Solar PV, according to a report by the International Energy Agency. Similar spending pattern has been witnessed in sub-Saharan Africa, too – less oil and gas spending is offsetting small increase in renewables. 

In Nigeria, that in itself would not bother Dangote since the country is currently suffering paralysis in its own refineries, even as its four underperforming refineries combined together are operating at less than 50% of capacity, inefficient to meet the daily energy needs of over 200 million Nigerians. But when an oil giant like Saudi Aramco that raked in profits of $111 billion—more than the combined profits of Apple, Exxon Mobil Corporation & Amazon—in 2018 financial year picks the New York Stock Exchange as its Exchange for the IPO, what possible effect could this have on Nigeria’s black-gold business?

It would be instructive to first look at the relationship between Saudi Arabia and the US. The 75-year alliance between the Saudi Arabia, the country that owns Saudi Aramco, and the US has been built on a simple arrangement that sees the US demanding Saudi oil and Saudi Arabia demanding American firepower. Saudi Arabia is the US’ second largest supplier of oil, but analysts have predicted that the emergence of the US as a major oil supplying nation indicates that it could be the biggest gainer in any disruption in global oil production. For instance, Saudi Arabia currently meets 20% of oil needs to India, and the quantity of oil imported by India from the US is a paltry 1% of the total country’s import. But deals sealed by the US with gas transportation company GAIL, oil marketing firm Bharat Petroleum Corporation Ltd (BPCL), and Indian Oil Corporation shows that the trend is shifting towards US shale, underscoring the relevance of the US in this Asian market.

Unarguably, the New York Stock Exchange would open up the oil giant to many investments, but so would it to regulatory scrutiny and other litigation issues too. Saudi Aramco has the “No Oil Producing and Exporting Cartels Act 2019”, simply called NOPEC, to worry about. The bill puts OPEC member countries operating in the US at the risk of being prosecuted by the US government if they limit supply or fix oil prices. Saudi Aramco stands the risk of forfeiting its assets in the US, where it owns the largest oil refinery in North America, if found guilty. Assenting to listing in NYSE means that Saudi Aramco risks being exposed to volatility, and even steep falls, in the price of crude oil. In the midst of the concerns, however, the US Presidency is forward on his proposition to Saudi Aramco to list its shares in the US. If it assents, Saudi Aramco’s hedge against this crude price volatility risk may be to draw the White House to sign a deal where the US would make upfront payment of crude oil up to a date agreed by both parties.

Although speculative, but if this happens, in an industry where the economic outlook is muddy, it is likely to trigger similar moves by other oil-producing nations with high crude inventory to guarantee their sales and benefit their buyers with guaranteed supplies likewise—and this is not new in recent times; already, Indian Oil Corporation, India’s country’s top refiner, has signed its first annual deal to buy US oil in February, paying about $1.5 billion for 60,000 barrels a day up to March 2020. It is unlikely that Africa’s largest oil-producer, Nigeria, can guarantee such deals due to its unstable economic and political landscape. It is not with sentiments, therefore, that one would expect lots of volume purchase to go away from West Africa to the US where crude production is increasing, as Head of East of Suez oil for consultancy FGE in Singapore, Sri Paravaikkarasu opined.

Interestingly, Indian and Indonesian demands for Nigerian oil are currently what keeps the Nigerian oil market up, at the moment. Although the Nigerian crude oil is currently enjoying a honeymoon with Californian refiners, as light Nigerian oil is easily processed into higher octane gasoline increasingly used in the US and is offering support for the purchase from European refineries, it is foreseen that such romance may be over in 2020 when the market for marine gas-oil or very low-sulphur fuel oil reaches equilibrium. As Nigeria’s largest buyer, India, deepens its oil trade relations with the US, with that trend expected to continue in light of the above analysis, and as shale oil production and export continues to trend northward since US Congress’ lift on export ban on the oil, Nigeria’s oil inventory is argued to rise beyond normal levels. 

The Dangote Refinery is designed to process multiple grades of domestic and foreign crude, and is also poised to produce its own oil, the quantity put at about 20,000 barrels per day from oil blocks OML 71 and 72. But would the latter even be needed if the refinery’s capacity to meet the demands of local and global oil traders is inadequate? For the foreseen low oil prices and the accompaniment high crude oil inventory may cause oil-producing nations to trim the run rates of their refineries and seek oil products elsewhere. This is already happening with Saudi Aramco: traders from their trading arm are making enquiries about importing refined products, even as one million barrels of the company’s refining operations have been curtailed, releasing medium and heavy crude oil grades for export.

Perhaps the move by the Federal Government of Nigeria to officials of Saudi Aramco for investment in Nigeria’s moribund refineries and liquefied natural gas-producing company would yield fruits, and the promise of the Nigerian government to commence rehabilitation of the nation’s refineries by January 2020 will come to pass. If the recent discovery of oil in Northern Nigeria gives more urgency to this need, it is left for Dangote to decide whether all these points to a threat to, or an opportunity for his mega crude oil project.