Supply an issue as Aramco exits Petron

Industry officials have moved to alleviate oil supply concerns arising from Saudi Aramco’s sale of its stake in Petron Corp. but analysts remain apprehensive, stressing the new owner’s pedigree lack. In a surprise announcement, Petron and erstwhile parent Philippine National Oil Co. (PNOC) on Friday said that Aramco had agreed to sell its 40% stake in Petron to UK-based Ashmore Group for $550 million. Stock markets appeared to react negatively to the announcement — shares in Ashmore, an aggressive fund manager that handles some $36.5 billion in assets, lost 1% on the London exchange, while Petron dropped 1.6% in Manila. Analysts said the supply issue was a factor in the fall. "It (Petron) will be replacing a strategic investor with a financial investor," one analyst said. But Aramco representatives said the world’s largest state-owned oil firm was committed to a long-term crude oil supply agreement with Petron. "The nature of the relationship between Petron and AOC is changing, but not ending," a spokesman of Aramco affiliate Aramco Overseas Co. said in an e-mail to BusinessWorld. Petron has a 20-year contract to purchase 90% of its monthly crude oil requirements from Aramco. A Petron spokesman said that informally, the firm had an "evergreen" supply contract. Aramco also clarified that it had no prior plan to sell its Petron stake. "No (Aramco did not solicit the offer), Ashmore approached us," the company said. "AOC is divesting from Petron at this time because its parent company, Saudi Aramco, is increasingly focused on a $50-billion capital expansion program and a series of world-scale upstream and downstream projects in the Kingdom of Saudi Arabia. "Saudi Aramco is also pursuing a defined strategic direction for its overseas refining and marketing portfolio, which calls for involvement in large markets and participation in high-capacity refineries and refining networks which offer economies of scale, and/or significant potential for substantial increases in future demand for refined products," the e-mail stated. Reading between the lines, an industry observer said this meant the Philippine market was not big enough for Saudi Aramco. In 2006, the Philippine crude oil supply deal was worth some $2.9 billion, compared to total sales of $168 billion. "And Aramco clearly is moving into China, where the demand is rising," the analyst said. Aramco has also cited this long-term downstream investment strategy when it sold its Greek refinery investments in 2005. In the same year, Saudi Aramco president Abdullah Saleh Jummah instructed Petron to undertake a feasibility study on a second refinery to be based in Northern Mindanao that could supply the oil requirements of East Asia and the US Pacific coast. That plan fizzled out, and Petron concentrated on improving efficiencies at its 180,000-barrel per day (bpd) refinery in Bataan. Despite the success of a recent $300-million upgrade, Petron is simply out of sync with Aramco’s vision, the analyst claimed. Ashmore, said First Grade Holdings Inc. managing director Astro C. del Castillo, cannot promise neither crude supply nor a similar long-term vision. "Obviously, we are more comfortable with Aramco," he said. PNOC president Antonio M. Cailao, meanwhile, describes the new owner as an "astute investor". On its website, Ashmore says it wants to get into "growing markets." "[T]here are many potential asset classes in emerging countries — many different risk return profiles which we shall be able to offer our clients and Ashmore fund investors in the future. "As capital markets grow rapidly in emerging markets we wish to be a part of that growth, both enabling access to these markets by developed world pools of capital, but also and increasingly by emerging market pools of capital." But for Mr. del Castillo, "The question is ... ‘Will they be in for the long haul - BusinessWorld