It is part of a plan by the world’s largest national oil company to diversify away from pumping crude oil to generating more of its profits from high-value petrochemicals.
And it paves the way for the much-awaited IPO of Saudi Aramco, which is expected in 2021.
Under the deal announced on Wednesday, Saudi Aramco will acquire a 70 percent majority stake in Saudi Basic Industries Corporation (SABIC) from Saudi Arabia's Public Investment Fund (PIF).
“A combined Saudi Aramco-SABIC entity would allow truly global reach and market-leading positions across a strong vertically integrated portfolio of oil-to-chemicals,” Steve Zinger, senior vice-president for petrochemicals at Wood Mackenzie, told Arab News.
“(The) three pillars we see supporting the deal for both companies are vertical integration, geographical expansion and technology transfer.”
Aramco did not say how it planned to fund the purchase but has earlier suggested it could tap debt markets.
Gulf national oil producers including Aramco and Abu Dhabi National Oil Company (Adnoc) are increasingly targeting the petrochemical sector in an effort to tap into rising global demand and less cyclical income.
“This transaction is a major step in accelerating Saudi Aramco’s transformative downstream growth strategy of integrated refining and petrochemicals,” said Aramco CEO Amin Nasser.
“As part of the Saudi Aramco family of companies, together we will create a stronger, more robust business to enhance competitiveness and help meet rising demand for energy and chemicals products needed by our customers around the world.”
Petrochemicals are set to account for more than a third of the growth in world oil demand up to 2030, and nearly half the growth to 2050, according to a recent report from the International Energy Agency.
The Aramco offer for SABIC translates to SR123.39 per share. The remaining 30 percent of the company, which is publicly traded on the Tadawul stock exchange, are not part of the transaction and Saudi Aramco said it has no plans to acquire these remaining shares.
SABIC stock gained 0.65 percent on Wednesday at SR124.20, before the deal was announced.
Aramco wants to increase its global refining capacity from 4.9 million to 8-10 million barrels per day by 2030 — of which 2-3 million barrels per day will be converted into petrochemical products.
SABIC operates in 50 countries globally and employs 34,000 people. Last year it generated profits of about $5.7 billion on sales of $45 billion.
The SABIC deal is set to rekindle interest in the delayed IPO of Saudi Aramco, which Energy Minister Khalid Al-Falih said earlier this month was on track for 2021.
Public Investment Fund Managing Director Yasir Othman Al-Rumayyan said on Wednesday that the deal would unlock significant capital for the fund’s long-term investment strategy.
Dave Witte, senior vice president of energy and natural resources at IHS Markit, said the deal would have advantages to both parties.
“Aramco’s stated objective of forward-integration and pull-through of crude oil to chemicals requires key product and application development capabilities that SABIC brings to the merger,” he said.
“Meanwhile, Aramco likewise provides access to feedstocks that help support growth opportunities to SABIC.”