By Ryan M. Couture and John Auers
On March 16, Saudi Aramco and Shell announced their intent to divide the assets of Motiva Enterprises, the 50/50 joint venture which was formed in 1998 and has operated as a joint refining and marketing venture between the two companies since 2002. To some, this news came as a shock, while to others it was the next logical step for a partnership that had been drifting apart for years. So what exactly drove these two giants to part ways? What, if anything, will this “divorce” mean for the three refineries, U.S. crude imports, regional product supply, and the USGC refining environment in general? And finally will this development lead to some other “domino” developments (such as more acquisitions by Aramco of U.S. refining assets)? Perhaps, unlike in Neil Sedaka’s 1975 Karaoke favorite, Breaking Won’t Be So Hard To Do.
“Think of all that we’ve been through”
The Motiva venture consists of three refineries, two in Louisiana and one in Texas. The two Louisiana refineries (in Convent and Norco) each process about 240 MBPD and are located only 25 miles apart. The Port Arthur, TX refinery, the largest refinery in the U.S. after its 2012 expansion, has a capacity of just over 600 MBPD and is located 200+ miles further west. Despite their relative proximity, the three plants have not shared any synergies, each operating as independent entities (although a project is currently proceeding to closely integrate Convent and Norco).
The Motiva relationship today came out of a series of mergers and acquisitions that took place in the late 1980s and 1990s. Saudi Aramco initially partnered with Texaco in 1998, forming Star Enterprises. In 1997, Shell partnered with Texaco on two joint ventures of their own, merging their refining and marketing operations in the West/Midwest into Equilon and East/Southeast into Motiva. Ultimately, Texaco merged with Chevron in 2001, at which point Shell bought out the stake in Equilon and Saudi Aramco purchased the Texaco interests in Motiva. The resulting 50/50 joint venture between Saudi Aramco and Shell began operating in 2002 as Motiva and included the three refineries (Convent, Norco and Port Arthur) discussed in the opening paragraph.
When the joint venture was formed, it provided important strategic benefits for both parties. It gave Saudi Aramco access to a large and stable consumer of its crude in the U.S., while at the same time providing Shell (the operating partner in the venture) with a secure crude supply source for its Gulf Coast refineries in a period of decreasing domestic production. This worked well for both partners for years, as U.S. domestic production continued to decline and Saudi crude imports remained a key part of the crude slate of the Motiva refineries. With the advent of the light tight oil boom in the late 2000s, this dynamic changed. The increased volumes of U.S. crude led to domestic discounts and incentivized U.S. refiners to shift away from imported (including Saudi) crude. In Figure 2, we show how as U.S. production has increased, the level of total waterborne (non-Canadian) imports has trailed off in recent years.
The drop-off of U.S. crude imports had a notable effect on Saudi imports, which saw a fall from over 1.6 MMBPD in 2003 to just above 1.0 MMBPD in 2015, the lowest level since 2009 (when the Saudis temporarily cut production to boost prices). This decline was despite the aggressive pricing policies that Saudi Arabia has had to attempt to maintain U.S. market share, which likely kept the level from falling further. Figure 3 shows to what extent Saudi import levels have been impacted in tandem with total waterborne imports.
The level of Saudi imports to the three Motiva refineries began to decline even before the light tight oil growth and actually rose from 2009-2014 as shown in Figure 4 below. In fact, if you compare it to Figure 3, you see that the level of total Saudi import growth between 2009-2012 is due in large part to the increases in Saudi imports by just Motiva. While some of this is related to the major expansion at the Port Arthur refinery, it was not totally so since the expansion did not fully come online until 2013.
Figure 5 below shows the level of waterborne and Saudi imports into the individual Motiva plants. As shown, the Port Arthur plant has become almost the exclusive importer of Saudi crude within the Motiva system. For years, Norco has imported very minimal levels of foreign crude overall, and has not imported Saudi crude since early 2011. Convent, which imported as much as 100 MBPD of Saudi crude in 2012, has seen decreases in those imports over the last few years, with levels dropping below 50 MBPD in 2015. The Norco/Convent integration project, one of whose main purposes was to improve access to U.S. domestic crude, would make Saudi imports even more unattractive to those plants. These trends, with Port Arthur becoming a true “demand anchor” for Saudi imports in the U.S. and the Norco and Convent plant geared for domestic crude is certainly a key factor in the division of assets among the Motiva partners.
“Now I know, I know that it’s true”
The split of assets was reported to be a long time in the making, with Shell and Saudi Aramco insiders working to break up the venture for years. It was also reported that Aramco had interest in acquiring Shell’s entire stake, despite the fact that the Louisiana plants were being “weaned” from Saudi crude. In years past, major oil companies looked at refining as an inconvenience, and looked for ways to spin or sell off assets, ultimately forming the refining majors we have today. The rapid drop in crude prices seen over the last 18 months has changed that. In a previous blog (http://www.turnermason.com/index.php/tell-me-something-good-refiners-a-bright-spot-despite-recent-dimming/), we showed how the refining segments helped to carry the underperforming upstream segments in the previous year. Companies are realizing that in this ever-cyclic industry, being diversified can have its benefits, and Shell clearly wanted to retain their refining assets. The desire for Saudi Aramco to acquire total control is logical. Saudi Aramco has been expanding their refining operations and interest in JV facilities for the past several years, both at home and abroad. They remain interested in increasing their exposure to key consuming markets as a reliable outlet for their crude.
The division was not just of refineries, but also of fuel terminals and retail channels. In the split, Saudi Aramco keeps the rights to market Shell branded fuel in Texas, Southeast, Mid-Atlantic and most of the Mississippi Valley. Shell will assume control of nine fuel terminals and rights to market Shell branded fuel in Florida, Louisiana and the U.S. Northeast.
The breakup and ultimate division of assets allows each partner to pursue their own goals. Abdulrahman Al-Wuhaib, Saudi Aramco’s Senior Vice President of downstream said the joint venture with Shell “has served our downstream objectives very well for many years. However, it is now time for the partners to pursue their independent downstream goals.” Saudi Aramco with full control over the Port Arthur Refinery will allow them to process as much or little of their crude as they want, and maximize the value to them. For Shell, control over the other sites allows them to pursue increased integration between both sites, as well as between their other facilities. In addition, with the startup of the 50 MBPD Stones Field development in the Gulf of Mexico, it allows them to run increasing volumes of their own equity crudes or other Canadian or Mexican crude imports in addition to Saudi crudes as opportunities arise.
“Don’t say that this is the end”
While the breakup of Motiva will not have any immediate or substantial impact on the market, it marks a long-term divergence in the strategy for the individual refineries. Port Arthur, which will be wholly owned by Saudi Aramco, will likely shift to processing increasing volumes of Saudi crude, while the imports of Saudi crude to Convent refinery will likely trail off. The Norco refinery hasn’t imported appreciable volumes of Saudi crudes since early 2011, according to the EIA. It is expected that Convent and Norco will become increasingly integrated into domestic crude supplies in the future as Shell invests to optimize these facilities in the wake of surging domestic crude production. It is worth noting that the announcement was of the signing of a non-binding letter of intent, and not the final documents. While it seems unlikely there will be major changes to the plans, anything is possible.
Turner, Mason & Company continually monitors industry events to see how they may influence both domestic and international markets. We recently published our 2016 Crude and Refined Products Outlook which we issued last month. The Outlook discusses key industry trends that influence both crude production and refined products demand both domestically and internationally. For more information on this or our other products, or to talk to us about specific engagements, please feel free to reach out to us via email or call 214-754-0898.