Saudi Arabia’s state-owned oil company could be set to lock up the U.S. refinery market in Texas, based on a tentative deal it struck with its waning partner Shell over the weekend.
Shell and Saudi Aramco are splitting up a 50-50 partnership they formed in the late 1980s called Motiva. The deal would give the Saudi firm control of the largest refinery on the Gulf Coast at Port Arthur, which analysts say could give the Mideast oil giant the perfect setup to ensure the U.S. keeps importing Saudi crude.
Many refineries on the Gulf Coast have been refining light crude oil from U.S. shale formations, which has made the U.S. far less dependent on foreign imports. The Port Arthur refinery completed a massive upgrade in 2012 that more than doubled its refining capacity from 275,000 barrels a day to 600,000 b/d. Shell says it can handle a wide variety of crude oil types, from lighter shale oil grades to heavier stocks, such as those coming from Saudi Arabia.
“Saudi Arabia would have an anchor tenant for much of their crude oil production,” Tom Kloza, head of energy analysis at the Oil Price Information Service, told CNN Money earlier this week. “Port Arthur is the jewel the Saudis would like.”
Saudi Arabia, with U.S. producers, has been suffering under low oil prices over the last year. But it and other members of the Organization of the Petroleum Exporting Countries have refused to cut oil production to curb the glut and force oil prices back up. Instead, analysts and observers say the Saudis are trying to preserve market share, given the unexpected competition they have experienced from U.S. shale oil. The Saudi-Motiva split could play into that bid to preserve a market for their oil outside of Asia.
CNN reports that the Motiva break-up could be an early step toward Aramco’s plans to go public and sell shares of its company as a way to weather the low-price environment. The desert kingdom announced in January that it was considering selling shares of the state-owned oil company.
Kloza said Motiva could be one of the country’s first assets “spun off” from Aramco, which he says controls 261 billion barrels of proven reserves in Saudi Arabia, which is roughly 15 percent of the world’s total, according to CNN.
Shell and Aramco said in a non-binding letter of intent last week that they mean to split up Motiva. Under the tentative deal, Shell would maintain control of two Motiva refineries in Louisiana, while securing control over nine distribution terminals along the Gulf Coast. Aramco would get the big Port Arthur refinery and the lion’s share of distribution terminals, 26 in total, and the brand license to sell Motiva gasoline and diesel in the Lone Star State.
The license alone would give the Saudis access to Shell’s large chunk of U.S. service stations.
Kloza called the company split a “very expensive divorce.”
“Shell has the largest branded fuels retailing network in the USA,” according to Shell’s website for the Port Arthur refinery. “The Port Arthur expansion is delivering increased supplies of petrol (gasoline), diesel and aviation fuel nationally as well as for export to other countries. The refinery’s strategic location on the Gulf of Mexico coast allows crude oil to be brought in by sea, and it has excellent links to the national fuel distribution network.”
At the same time, the Saudis have announced plans to hold a rare meeting next month to decide on whether to freeze crude oil production. A decision to freeze production would raise prices as supply and demand balance out over a period of several months. The decision would likely improve economics for U.S. shale producers, which have been laying off thousands of workers since the price began dropping below $40 per barrel last year.
Saudi crude oil imports to the United States have ebbed and flowed over the past decade. But since the invasion of Iraq in 2003, the number of barrels from the kingdom have been waning, with the bulk of U.S. oil imports now coming from Canada.
Imports from the U.S.’s neighbor to the north rose to just over 4 million barrels a day in December 2015, according to the Energy Information Administration. That’s compared to the 1.1 million barrels of oil per day imported from Saudi Arabia, which represents the bulk of the oil coming from the Persian Gulf states these days, according to the Energy Department’s independent energy analysis agency.
