Page 14 - DMEA Week 19 2020

DMEA COMMENTARY DMEA
to restrict output to under 8.5mn bpd in May and June. Aramco said on May 11 it would go fur- ther and reduce its supply to 7.5mn bpd in June. These efforts will weaken Aramco further in the absence of a price recovery.
Faced with a tougher second quarter, Aramco could cut its dividend, depriving the Saudi state of badly needed revenues.
Downstream
Aramco boasts some of the world’s biggest refining businesses, with a processing capac- ity of 6.4mn bpd, after investing in a massive expansion.
Downstream revenues were down 8.6% at SAR112.3bn, owing to COVID-19 travel restric- tions and generally weaker economic perfor- mance. Aramco also booked inventory losses as a result of lower oil and petroleum product prices. As a result, it swung to a pre-tax and inter- est loss of SAR19bn in the first quarter, versus a SAR5.12bn profit a year earlier.
“Despite a challenging market environment, the downstream business is keeping pace with its long-term strategy to capture value across the hydrocarbon value chain through further stra- tegic integration and diversification of its opera- tions,” the company said.
At the centre of these efforts is Aramco’s planned acquisition of Saudi state-owned pet- rochemicals firm SABIC, announced last year.
Aramco says the deal is still on track for com- pletion in the second quarter, although the com- pany is reportedly looking to restructure it again.
Aramco is in early discussions to stagger payments for the 70% stake it wants to buy in SABIC, Bloomberg reported on May 11. It is also looking to reduce the size of the initial tranche to the seller, Saudi Arabia’s sovereign wealth fund Public Investment Fund (PIF).
What is more, Aramco is seeking to lower the deal’s price tag, the news agency reported. This would mark the third time the transaction has been restructured. Under the current terms, Aramco is due to make a third of the payments in cash, down from half previously. Its deadline for paying the rest has been pushed back by four years until September 2025.
Aramco was originally set to acquire SABIC at SAR123.4 per share, but the petrochemical producer’s share price has since collapsed to SAR71.7. Aramco will also find itself saddled in the short term with a considerable financial bur- den. SABIC has reported two quarterly losses in a row as a result of low demand for its products, and the outlook for petrochemicals over the next two years is bearish.
Even so, this is unlikely to deter Aramco from closing the purchase, which will provide the company with a greater downstream hedge against low crude prices. In turn it will help PIF raise cash to fund its expansion plans.™
POLICY
Syria scales back fuel subsidies
SYRIA
The war-ravaged and sanctions-stricken country is scrambling to cut spending.
SYRIA’S oil ministry has scaled back fuel sub- sidies, barring owners of more than one vehicle and those with vehicles with larger-sized engines from the system of support.
The war-ravaged and sanctions-stricken country is scrambling to cut spending, as it grapples with the economic fallout of the coro- navirus (COVID-19) pandemic. The ministry announced the decision on subsidies on May 8 and it became effective the following day.
Subsidised fuel is distributed through a smart card system, whereby smaller cars are eligible for up to 100 litres of fuel a month at a cost of SYP250 ($0.49) per litre. Non-subsidised fuel is sold at SYP450 per litre.
The smart card system and the quota for sub- sidised fuel were introduced last year, as Syria was struggling with increasing fuel shortages. These shortages have been exacerbated by the shutdown of domestic oilfields and attacks on refineries and other oil infrastructure.
Western sanctions prohibit the supply of oil and petroleum goods to Syria, and the country
has relied on imports from Iran and Russia to cover its needs. Shipments are also smuggled across the border from some of Syria’s neigh- bours, including Lebanon.
A report on Lebanese television on May 9 estimated that up to $400mn of subsidised fuel was being trafficked across the border to Syria each year. Lebanon is also in the grip of an eco- nomic crisis, and smuggling activity is making it difficult for the state to provide basic commodi- ties to its population.
MP Hadi Abou Al-Hosn of Lebanon’s Dem- ocratic Gathering political alliance has said his group will go to the judiciary and question the government on the issue.
“While the Central Bank has put limits on the withdrawal of dollars from bank deposits to cover basic needs, such as wheat, fuel and med- icine, depriving people of their money, we see mobs draining the economy by smuggling flour and diesel across the illegal border crossings in both directions,” he said. “The situation is no longer bearable.” ™
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w w w . N E W S B A S E . c o m Week 19 14•May•2020