The Arabian Gulf’s national oil companies (NOCs) will see an opportunity to increase global asset portfolios as super-majors look to shave off poorly performing downstream assets.
This year’s round of earnings results from some of the world’s largest oil companies have rejuvenated talks about how the NOCs can capitalise on what may be another wave of downstream divestments. Year-on-year earnings results for some of the world’s largest oil companies continued to suffer heavy blows as the global economy struggled to recover in 2013. Shell saw earnings fall 38%; ExxonMobil, 27%; and Chevron 18%, all over the twelve month period.
Earnings were brought down by refining operations in Europe, where the economy remains stagnant, and Asia, amid growing supply from China and the Middle East. “2013 did not get us fully out of the economic slump of past few the last couple years, it has been a bit of a mixed bag of results coming from the IOCs, particularly within their refining and petrochemicals sectors” said Saji Sam, principal at A.T. Kearney Middle East’s energy practice.
This may be good news for the GCC’s NOCs and sovereign funds. As the IOCs look to replenish existing reserves while navigating the end of easy-oil by investing in more expensive oil plays, they will look to raise cash through asset sales.
“The quest to finance expensive upstream projects will continue to put pressure on the downstream portfolios of IOCs, with likely further divestments of assets that are sub-scale, low complexity and not integrated within their global systems,” said Mirko Rubeis, principal at the Boston Consulting Group, in an emailed statement.
Earlier this year, Shell announced that it would increase the pace of asset sales to $15 billion for 2014-15 between its upstream and downstream divisions, whereas asset sales between 2010 and 2012, only amounted to $21 billion in proceeds. Last month, Shell sold off its downstream assets in Australia to Vitol and the Abu Dhabi Investment Council for approximately $2.2 billion, according to the Australian Financial Review. “We are making hard choices in our world-wide portfolio to improve Shell’s capital efficiency,” Ben van Beurden, Shell’s recently appointed CEO said.
As Europe’s demand remains stagnant, the continent’s older refining capacity will become increasingly challenged. “Since 2008, already 15 refineries closed in Europe, representing about 1.7 million bpd,” said Rubeis.
“The European thirst for diesel is enormous but if you look at the refineries, not many of them are middle distillate focused,” added Sam. “Five or six years back, the US refined product supply-demand was in favour of European refiners – the gasoline length that of Europian refiners could be used to produce could be shipped to the US, while diesel could be back-hauled to Europe to meet its shortage which had a huge demand for the gasoline.” Nowadays, American demand for gasoline is declining while bio-fuels continue to eat into gasoline markets.
This downward trend will only accelerate as demand for gasoline imports into the United States continues to erode as well, and new distillates exports will increasingly target the market – in particular from Russia, given the expected upgrades following the changes in the export tax regime, from the Middle East, given the large capacity additions, and from US, benefiting from low crude and gas prices.
But Europe’s woes are, in many ways the Middle East’s joys. Refinery Mega-projects in Saudi Arabia such as in Jubail, Yanbu and Jazan, with a combined capacity of 1.2 million bpd, will continue to cut into European markets.
Increased competition in Europe from the Middle East and also Asian refiners, will continue to push IOC earnings, possibly bringing them closer to sell-offs. But that raises the question of why national oil companies would look to invest in aging and challenged assets which could even compete with their domestic refineries. Rubeis points out that with the GCC expected to add another 2.7 million bpd of refining capacity by 2020, the challenge will be to place products, not crude. From this point of view, international refining assets are not that attractive anymore.
“On the other side, entire segments of IOCs could still be relevant because of capabilities, and, opportunistically because of the very low multiples at which certain assets are offered,” said Rubeis.
“Companies that are virtually not capital constrained and have a long term investment horizon may find certain downstream assets divested by IOCs attractive, after all, over a 5-year cycle, the downstream segments of ExxonMobil, Shell and Chevron still returned a ROACE respectively of 23%, 13% and 7%,” he added. “Among these, Middle Eastern as well as Chinese NOCs are in theory possible buyer candidates.”
