As Saudi Aramco recently announced a series of plans to invest in the South Korean market, concerns are growing among domestic refining and chemical companies that the oil giant may gobble up the domestic market. Aramco is on a collision course with South Korean refining and chemical firms as it is seeking to control the petrochemical ecosystem connecting from crude oil extraction to refining and chemicals based on its huge amount of oil supply.
Aramco recently announced to invest 7 trillion won (US$6.02 billion) in S-Oil Corp. and signed an agreement worth trillions of won with Hyundai Oilbank Co. The firm owns a 63.4 percent stake in S-Oil and a 17 percent stake in Hyundai Oilbank.
S-Oil is planning to produce 1.50 million tons of petrochemical materials a year and high value-added chemical products, such as polypropylene, by completing its steam cracker and olefin downstream (SC&D) project by 2024. The company has started operation of its residue upgrading complex (RUC) and olefin downstream complex (ODC), which were built with an investment of approximately 5 trillion won (US$4.30 billion), from the end of last year, shifting its business focus from refining to chemicals.
Industry analysts said only Aramco can make such a large-scale investment in S-Oil, ignoring the growing concerns about the “downcycle” as the spread of ethylene, one of the core petrochemical materials, fell to as low as US$300 (350,000 won). The Saudi Arabian oil giant posted a net profit of US$111.10 billion (129.21 trillion won) last year alone. Aramco’s investment in S-Oil is such a large scale that its competitors, including SK Innovation Co., which is making a large-scale investment in electric vehicle (EV) batteries, and GS Caltex Corp., which is 50 percent owned by U.S.-based Chevron Corp., cannot follow.
Some say that S-Oil can threaten South Korea’s big three chemical firms -- LG Chem Ltd., Lotte Chemical Corp. and Hanwha Total Petrochemicals Co. These chemical companies do not have any special refining facilities, except a splitter, a facility for condensate. However, S-Oil can unify the extraction of naphtha and production of chemical products through its large-scale refining facilities.
Early this year, Aramco purchased a stake in Hyundai Oilbank for 1.37 trillion won (US$1.18 billion). Hyundai Oilbank is planning to introduce 150,000 barrels of non-Arabian crude oil per year from Aramco for 20 years starting from next year. It is a figure that is nearly twice more than before.
Aramco is more likely to accelerate investments in South Korea because Fahad Al-Sahali, regional director of Aramco Korea which was set up in 2012, is an expert in establishing joint ventures. South Korean companies are considered an attractive destination for business investment to Aramco as they have higher technical skills than Chinese and Southeast Asian firms and expertise in large-scale refining and chemical complex construction and operation.
The problem is that Aramco’s expansion in Korea will conflict with the interest of domestic refining and chemical companies in the end. The two sides are also expected to collide in overseas markets as Aramco intends to expand presence in countries which are export markets for South Korean refining and chemical firms.
Early this year, Aramco announced its plans to join hands with China North Industries Corp. (Norinco) and build a refining and chemical complex in China with an investment of US$10 billion (11.63 trillion won). In addition, it is now considering purchasing a 25 percent stake in the refining and chemical unit of India’s Reliance Industries Ltd. for US$10 billion (11.63 trillion won).
An industry insider said, “Since Aramco’s crude oil production cost per barrel is only US$2.80 (3,256 won), it will gain an enormous added value compared to other refining and chemical companies if it secures a tight grip on the ecosystem in the crude oil, refining and chemical sectors. Aramco’s investments seem like a treat but it will eventually be a ‘poisoned apple’ that will give Korean companies a hard time.”