Middle Eastern oil companies will continue their push into chemicals

Two Middle Eastern national oil companies—Abu Dhabi National Oil Company (ADNOC) and Saudi Aramco—are likely to sign more big-ticket chemical deals in 2024. With motor and aviation fuel markets poised to decline, the companies see the chemical industry as a growth sector worth pursuing.

ADNOC has signaled its intention to purchase two of the world’s largest chemical companies. It is in discussions to buy the German polyurethane and specialty chemical maker Covestro, and it recently bid to acquire a controlling stake in the Brazilian petrochemical maker Braskem.

ADNOC is also shoring up its portfolio closer to home. In December, it signed a $3.6 billion agreement to buy out OCI in their Fertiglobe nitrogen fertilizer joint venture, which operates in Algeria, Egypt, and the United Arab Emirates (UAE). In addition, the company is negotiating a merger between Borealis, a European petrochemical maker in which ADNOC has a 25% stake, and Borouge, a UAE-based petrochemical joint venture between Borealis and ADNOC.

Meanwhile, in deals that include large purchase agreements for Aramco’s petroleum, the Saudi firm is taking equity positions in up-and-coming Chinese companies that both refine oil and make chemicals. Last July, Aramco bought a 10% stake in Rongsheng Petrochemical, one of China’s largest petrochemical producers, for $3.4 billion. As part of that deal, Aramco will supply oil to Zhejiang Petroleum and Chemical (ZPC), a Rongsheng subsidiary that operates a massive refining and petrochemical complex.

Aramco is also negotiating the purchase of a 10% stake in Shandong Yulong Petrochemical, which is building a big refinery and petrochemical complex in China. Aramco is in talks to buy a similar interest in Jiangsu Shenghong Petrochemical Industry Group, another refining and chemical company. Both those deals could involve crude oil supply agreements.

The refineries these Chinese chemical firms operate are so-called crude-to-chemical facilities that produce a greater proportion of chemicals—mainly aromatics like benzene, toluene, and p-xylene—than conventional refineries do. For example, chemicals compose about 40% of ZPC’s output. If Aramco became the sole oil supplier to the three facilities, the Saudi firm would be sending them nearly 10% of its output.

Alan Gelder, vice president of refining, chemicals, and oil markets for the consulting firm Wood Mackenzie, says Aramco and ADNOC’s dealmaking has everything to do with the long-term prospects for the oil that Saudi Arabia and the UAE produce. The transition away from fossil fuels, caused in part by the adoption of electric vehicles and the emergence of sustainable aviation fuel, is cutting into petroleum demand. Oil companies need to drum up new business.

Gelder says Aramco is seeking vertical integration from the oil well, while ADNOC’s strategy is largely geographic diversification and expansion into specialty materials.

“What you’ve got now is a growing realization that oil for combustion as a transport fuel will decline at some point,” Gelder says. On the other hand, he adds, population growth, urbanization, and an expanding middle class around the world all point to rising demand for petrochemicals.

“If you’re a major oil producer who wants to be confident that there will be a continued demand for the hydrocarbons you produce, you want to make sure you can serve the growing demand for petrochemicals,” Gelder says.