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Saudi Aramco, Shell to Break Up 18-Year U.S. Refining Marriage

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Screen Shot 2016-03-16 at 22.36.32By Joe Carroll and Wael Mahdi: March 16, 2016

Royal Dutch Shell Plc and Saudi Arabian Oil Co. are ending an 18-year refining partnership as the Anglo-Dutch crude titan prepares to sell billions of dollars of assets and as Saudi Arabia’s national oil company eyes a possible initial public offering.

Shell will assume control of two Louisiana refineries operated by the Motiva Enterprises LLC joint venture, as well as nine fuel terminals and rights to Shell-branded markets in Florida, Louisiana and the U.S. Northeast, the companies said Wednesday in a statement. Aramco will retain the Motiva name and take ownership of the largest U.S. refinery, in Port Arthur, Texas, along with 26 terminals and exclusive license to sell fuel under the Shell brand across Texas and much of the U.S. Midwest and Southeast.

The split comes as Shell eyes $30 billion in asset sales and Aramco explores plans for an IPO. Chief Executive Officer Ben Van Beurden has pledged to protect dividend payouts that consumed about $10 billion last year, even as The Hague-based company curbs its drilling budget to cope with the swoon in crude markets. An IPO may give Aramco a value of as much as five times that of Apple Inc., according to Bloomberg Intelligence.

Motiva, formed in 1998, has the capacity to process more than 1 million barrels of crude per day, and is the largest Saudi Aramco investment in the U.S. It’s been plagued by cost overruns and construction delays that eroded profits, said Fadel Gheit, an Oppenheimer & Co. analyst. The Port Arthur refinery suffered leaks and fires that delayed a $10 billion expansion to double the size of the plant.

“These assets ranked probably in the bottom quartile of Shell’s portfolio and they are going to be moved,” Gheit said in a telephone interview on Wednesday. “They’ve got to fund the dividend.”

Aramco Options

Options being considered by Aramco for the IPO include selling shares in the parent company, placing Aramco’s domestic and overseas downstream joint ventures into a holding company and selling shares in that, or grouping together the companies joint ventures and smaller refineries, according to a person with knowledge of the matter.

“The division of Motiva will also make it easier for Saudi Aramco to sell part of a wholly-owned downstream asset in any future public offering instead of going through the long legality and pricing process with an international joint venture partner,” said Mohamed Ramady, London-based independent analyst and former professor of economics at King Fahd University for Petroleum and Minerals in Dhahran, Saudi Arabia.

Shell and Aramco signed a letter of intent, the statement showed. A final agreement has yet to be reached, and no terms were released.

Van Beurden “has a very busy two years ahead of him and Simon is going to be cracking his calculator,” Gheit said, referring to Shell CFO Simon Henry.

A former partner in Motiva, Chevron Corp., exited the partnership in 2002 as part of a settlement with regulators that allowed it to acquire Texaco Inc. Chevron’s divestment left Shell and the Saudis as 50-50 partners in the venture.

Different Goals

Shell and Saudi Aramco were already pursuing divergent goals within Motiva, John Auers, executive vice president at Turner Mason & Co., said in a telephone interview. The Texas plant that Aramco will own processes large quantities of Saudi oil; the Louisiana plants to be controlled by Shell refine mostly offshore Gulf of Mexico oil and nothing from Saudi fields, he said.

“This partnership made sense when it was formed but things have changed and the market conditions have changed, so it makes sense for this partnership to be dissolved,” Auers said. “It makes fundamental sense.”

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