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How the Breakup of Motiva Will Help Royal Dutch Shell plc (ADR) and Saudi Aramco

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By Staff Writer on Jul 5, 2016 at 9:04 am EST

Earlier in March, Saudi Aramco’s subsidiary, Saudi Refining, Inc (SRI) and Royal Dutch Shell plc (ADR) (NYSE:RDS.A), announced to dissolve their fuel partnership, Motiva Enterprise. Due to contradictory interests, both the entities signed a letter of intent (LOI), showing the division of assets held under joint venture (JV).

However, the disbanded venture has stuck another blow as Shell is seeking up to $2 billion as a part of breakup from its giant refining enterprise. The hefty compensation is due to Saudi Aramco’s retention of a larger stake in the venture for almost two decades.

At the time of announcement in March, the breakup was expected to be completed in October, but due to the latest stumbling block in a partnership driven by payment issues, the final date could be postponed – according to Thomson Reuters. Both the oil giants formed the partnership in 1998, and since then the venture is operational as a 50-50 downstream entity.

Both the oil giants — Shell and Aramco — agreed to form JV in 1998, and spend around $10 billion to double the capacity of its plant in Texas, which made it the largest American fuel factory with a total capacity of 600,000 barrels a day. Through Motiva, jet fuel was also exported to overseas market.

What Shell and Saudi Aramco Will Get

Each of the company will hold ownership in different assets held by the company. Saud Aramco will retain the ownership of 26 distribution centers. Moreover, the ownership of Port Arthur, the Texas refinery, will be transferred to Aramco along with an exclusive license to use Shell’s name for the purpose of selling gasoline and diesel.

On the flip side, according to the terms of agreement, Shell would retain two plants, which have a combined capacity of 465,000 barrels of oil equivalent per day (BOEPD). Furthermore, Shell would also retain its branded market in Louisiana, Florida and Northeastern region.

With the changing dynamics of the energy market, Shell plans to expand its global chemical business, but also plans to dispose of worth $30 billion assets in order to fund its $54 billion worth acquisition, which will include disposals of several refining assets.

On the other hand, the breakup will pave the way for Saudi Aramco’s broader strategy to conduct IPO, which would make it the world’s largest publicly-traded company. In January, the company hinted that it will not sell shares of its parent company; rather it will opt to conduct initial public offering (IPO) of its refining subsidiary. Since conducting IPO of a joint venture is a complex process, the breakup of Motiva will help the company to conduct the offering smoothly.

Shell’s Interest

To minimize the impact of Shell’s takeover of BG, the company is currently implementing a massive asset disposal plan. The Anglo-Dutch company plans to raise around $30 billion in the next three years — from 2016 to 2018 — through its asset divestment plans. Shell has been under immense pressure from its investors and analysts to reduce leverage from the balance sheet, which has increased to $70 billion thanks to one of the largest acquisitions in the history of the company.

We firmly believe that the demand of $2 billion by Shell will be consumed to lower its debt burden. Even the current demand has not done justice with such a big company, as the company is seeking options to keep itself afloat in the current environment, including reduction in capital and operating expenditure.

However, it is expected that the company could extend its asset disposal time frame if it fails to receive favorable bids for its assets. The prolonged depression in oil prices has prompted oil and gas producers to slash billions of dollars in capital expenditure and lay off thousands of employees.

What It Means for Saudi Aramco

Saudi Aramco intends to sell equity of its subsidiary that would make it the world’s largest company. Aramco currently comprises oil reserves, which are 10 times more than Exxon Mobil. According to Bloomberg’s conservative valuation of $10 per barrel, the company could be worth as much as $2.5 trillion.

The company intends to become the world’s largest oil refiner, surpassing Exxon Mobil after expanding its operations in Asia. The breakup of Motiva underscores Saudi Aramco’s strategy to expand its global refining operation in order to preserve its market share.

Reasons behind Breakup

The two decades old partnership has been on the rocks for quite some time. The relationship between the two entities started to sour after they decided for a $10 billion upgrade at Port Arthur refinery, which was operated by Shell. Initially, the upgrade amount was projected to be around $5 billion, but due to several setbacks and cost overruns, the amount got almost doubled.

Back in 2012, the biggest refinery in the US went out of service due to several fires, which turned into an economic headache causing millions of dollars in the form of lost sales and in the repair of equipment. The ballooning maintenance and repair cost became the bone of contention between Shell and Aramco.

The 600,000 barrels a day factory, Motiva Enterprise LLC, is not the only venture between Saudi Aramco and Shell. The two giants continue to collaborate in a 50:50 joint venture, known as Saudi Aramco Shell Refinery Co, located in Jubail, Saudi Arabia, while another refining partnership, Showa refining venture, is operational in Japan.

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