Aug. 14–The $8 billion gasification and power joint venture Air Products will lead in Saudi Arabia caps a series of calculated investments the Trexlertown industrial gas company has made over the past four years, CEO Seifi Ghasemi said Monday morning.
Speaking on an investors call, Ghasemi said the latest project in the Jazan Economic City strengthens Air Products’ relationship with the world’s largest energy company, Saudi Aramco, and positions Air Products as the global leader in gasification — a more environmentally friendly way of converting raw material into fuel and chemicals.
The deal also dovetails with the company’s strategy for investing at least $15 billion over the next five years, which Ghasemi outlined during an earnings call in late July.
Depending on the terms of a final agreement, Air Products will own 55 to 65 percent of the joint venture with Saudi Aramco and ACWA Power, a developer and operator of power and water plants. The project will be financed with 60 percent debt and 40 percent equity. Of the roughly $3.2 billion in equity, Air Products will pony up $2 billion.
Ghasemi promised the company would make at least 10 percent return on the investment (its prerequisite for any project) and would generate at least 75 cents in earnings per share beginning in fiscal year 2020.
“We only promise what we know we can deliver, but we usually deliver more than what we promise,” he told investors.
The state-owned Aramco produces more than 10 million barrels of crude oil per day, about an eighth of global production. Its net income exceeded $33 billion in the first half of 2017 alone, according to Bloomberg.
Saudi Crown Prince Mohammed bin Salman in recent years has pushed to make the country’s economy less dependent on oil. Central to his economic diversification effort is the sale of a 5 percent stake in Aramco in 2019. He plans to reinvest the proceeds in refined products such as petrochemicals and gasoline and the kingdom’s burgeoning tech sector.
In April 2015, Aramco picked Air Products and ACWA to build the world’s largest industrial gas complex in Jazan. Ghasemi said Monday that Air Products developed credibility with Aramco by sticking to its timeline for completing the air separation unit facility, which will produce 75,000 metric tons of oxygen and nitrogen for Aramco to use in the oil refining process. When the Jazan refinery comes online in 2019, it will refine 400,000 barrels of crude oil per day into liquid petroleum gas, asphalt and other petrochemicals.
By taking control of the complex’s gasifier, Air Products can recycle the sulfuric bottom-of-the-barrel liquid — “vacuum residue” — by converting it into synthetic gas. Air Products will use this “syngas” to produce refinery-serving hydrogen, in gas turbines to generate power, and in its air separation unit to supply additional oxygen and nitrogen for the refining process.
Previously, oil companies sold the vacuum residue to shipping companies, but the International Maritime Organization in 2016 adopted regulations reducing the sulfur content in marine fuels effective 2020. These requirements, Ghasemi said, will affect almost every oil refinery around the globe and compel many of them to consider syngas alternatives.
Air Products began talking to Aramco in early 2016 about acquiring and operating the gasification assets at Jazan. Aramco had tapped Royal Dutch Shell’s liquid gasification technology in designing the gasifier, so Air Products bolstered its case in January 2018 when it acquired the patents to Shell’s coal and liquid gasification technologies.
Air Products also strove to further build its gasification bonafides by entering into a $1.3 billion syngas joint venture with Lu’An Clean Energy Co. in China.
“When you put all that together, we were able to convince Saudi Aramco to give us the honor of participating in this thing,” Ghasemi said. “It was a calculated, step-by-step process.”
Jake Dollarhide, who follows Air Products as CEO of Longbow Asset Management, said the company seems to be following through on its commitment to grow its core industrial gas business.
“For awhile Air Products was focused on becoming a much leaner company and redefining itself,” he said. “Today, its nice to see the company putting its money where its mouth is.”
Saudi Aramco will pay Air Products and ACWA a monthly fixed fee to operate the gasifier and power block over the next 25 years, which reduces the company’s exposure to fluctuations in energy prices. Saudi Aramco, in turn, can focus on its core refining and oil exploration businesses.
Air Products calls this strategy of purchasing industrial gas facilities from customers where it already owns and operates an air separation unit, and then selling gases back to the customer based on fixed-fee contracts, “asset buybacks.” This latest Jazan joint venture covers most of the minimum Ghasemi said the company would invest in asset buybacks over the next five years.
“Anytime you can sign a 25-year contract with a very reputable customer, the market’s going to be excited,” Dollarhide said.
Ghasemi also said in July that the company plans to invest at least $7 billion over the next five years in larger-scale energy, environmental and emerging market projects, including gasification efforts. He said Monday the Jazan joint venture will be “an excellent reference” for future gasification projects.
“By doing this project, the Lu’An project and owning the Shell technology, we’re now by far the premier gasification company in the world,” he said.
Air Products’ stock opened Monday at $162.20, up 2.7 percent from its previous close, and closed at $162.44.
One of two Fortune 500 companies in the Lehigh Valley, Air Products employs about 2,250 people in the region and has about 15,000 employees globally. It made $1.1 billion last year on $8.2 billion in sales.
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