Aramco is joining oil companies from Royal Dutch Shell to BP in increasingly focusing on liquefied natural gas
The biggest oil exporter is stepping up its efforts to become a major force in natural gas.
Saudi Aramco, the world’s most profitable company, is trying to break into the fledgling market for liquefied natural gas trading. To do so, the state-owned company is tapping its decades-old network of oil-trading contacts, selling its first two cargoes to longstanding crude customers in South Korea and India.
Aramco is joining oil companies from Royal Dutch Shell to BP in increasingly focusing on liquefied natural gas, the fastest-growing fossil fuel. That comes as production soars with the start of multibillion-dollar liquefaction plants across the world, creating a glut that may last until the middle of the next decade.
“They’re going to friends first” to look for gas deals, said Iman Nasseri, managing director for the Middle East at London-based researcher FGE. “It will be a buyers’ market for the next couple of years, so it’s a good time for traders to get into the market.”
Just as energy consumers are diversifying the type of fuels they burn, producers are seeking to provide natural gas and renewables on top of crude. The Saudis, who have been dispatching tankers across the globe since the 1940s, are looking for gas supplies at home and abroad and seeking to turn crude into chemicals for consumer goods.
Aramco sees that as creating an opportunity for its traders to find cargoes and sell them to companies that have historically bought its crude. Aramco didn’t comment.
That strategy, which has so far focused on selling in Asia, has had limited success. Aramco has sold two LNG cargoes - one each to Indian Oil Co and to S-Oil Corp of South Korea, according to people with knowledge of the matter. Aramco is also in talks to provide a term deal with numerous buyers, including Pakistan.
The LNG overtures come on the back of one of the kingdom’s most important supply lines. The Saudis have sold nearly 800,000 barrels of crude a day on average to India over the past two years and Aramco this year agreed to partner with the country’s biggest refiner. In South Korea, the company is the biggest investor in S-Oil and it enhanced energy ties with Pakistan after a state visit there by Saudi Crown Prince Mohammed bin Salman in February.
The Saudis have also started building a portfolio of LNG production assets and export infrastructure that will provide them with fuel to sell and potentially use domestically. Aramco agreed in May to a buy a 25 percent stake in Sempra Energy’s Texas LNG terminal, its first foray into producing hydrocarbons outside Saudi Arabia.
The kingdom is looking for additional gas projects in areas including the US, Russia’s Arctic and Australia to supply global markets and meet demand at home, Saudi Energy Minister Khalid Al-Falih said earlier this year. Buying internationally will augment Aramco’s domestic exploration plans as the company seeks to become a “major player” in gas, CEO Amin Nasser told reporters in Riyadh in April.
Aramco is following in the footsteps of international trading houses including Vitol Group, Trafigura Group, Glencore and Gunvor Group, which used their oil market knowledge to become some of the biggest LNG traders, according to Giles Farrer, research director for global gas and LNG supply at Wood Mackenzie.
“Aramco is just starting to get into the market to understand its dynamics and build a portfolio of supply in small steps,” he said. “There are advantages to having multiple sources of supply which provide opportunities for arbitrage and the possibility to sell into different markets. Aramco isn’t there yet.”
Russia’s state-backed Rosneft secured deals to sell cargoes to Egypt over the last three years even while it lacked LNG facilities by taking advantage of oil cooperation and ties between the two governments. The Russian company now has stakes in the giant Zohr gas field in Egypt’s Mediterranean Sea waters.
“Periods of abundant LNG give traders more options to procure supply, and greater opportunities for new entrants,” James Taverner, a London-based analyst at IHS Markit, said by email. “However, the market is becoming increasingly competitive, and trading margins are likely to be squeezed. Players with flexible portfolios, economies of scale, and/or existing relationships with buyers will be in a stronger position to compete.”
Traders will be talking about the growing LNG market next week in Singapore as they gather for meetings and receptions on the sidelines of the annual Asia Pacific Petroleum Conference. Aramco’s Nasser is set to talk about the company’s approach to markets when he addresses the World Energy Congress in Abu Dhabi next week.
At the moment, Aramco’s got its size and its Rolodex and, until the company develops its own supplies, has to compete to buy spot cargoes along with everyone else. The company’s balance sheet gives it more leeway to navigate its way around LNG trading and the ability to sustain losses if some deals don’t make money, said FGE’s Nasseri.
“If you have deep pockets and some time to learn the ropes of trading, both of which Aramco has, it makes a lot of sense for them,” he said.