(EnergyAsia, March 3 2017, Friday) — Saudi Arabia has handed Malaysia a major diplomatic and economic prize by agreeing to pump in a total of US$7 billion in a US$27 billion oil refinery-petrochemical complex that had been struggling to attract investors.

Saudi Aramco will become the largest foreign investor in the Refinery and Petrochemical Integrated Development (RAPID) project being developed by Malaysia’s state-owned energy firm Petronas in Pengerang in the southern state of Johor. The project has been dogged by delays, cost overruns, grassroots opposition and doubts over its viability since its unveiling by Prime Minister Najib Abdul Razak in May 2011.

The Saudi decision to take a 50% stake in a 300,000 b/d refinery and the main petrochemical plant came as a surprise to the industry as some analysts had only recently predicted that Aramco was going to withdraw from the project.

Najib broke the news on February 27 after hosting a luncheon for Saudi King Salman who was visiting Malaysia as part of a tour of six Asian countries to strengthen political, economic, security and cultural ties.

The following day, Saudi Aramco President and CEO Amin H. Nasser and Petronas President and Group CEO Wan Zulkiflee Wan Ariffin signed the share purchase agreement on behalf of their companies in the presence of King Salman and Najib. The king and his large entourage are on a month-long tour that will include high-level meetings in Indonesia, Brunei, Japan, China, and the Maldives.

Saudi Aramco CEO Nasser said the agreement will strengthen his company’s position as the leading supplier of petroleum feedstock to Southeast Asia, and help enhance energy security in the Asia-Pacific region.

The Saudi firm will meet most of the refinery’s crude feedstock while Petronas will supply natural gas, power and utility services to the complex.

According to Petronas, the refinery will produce a range of refined petroleum products including gasoline and diesel of Euro 5 fuel specifications as well as feedstock for its integrated 3.5-million tonnes/year petrochemical complex. The refinery is scheduled to start up in 2019

Located north of Singapore, Asia’s leading oil refining and trading hub, Petronas said the integrated complex is almost 60% complete.

Apart from RAPID, which comprises the refinery, cracker and the downstream petrochemical complex, Petronas is also developing an adjoining complex to supply utility services and a liquefied natural gas (LNG) re-gasification plant on a 6,242-acre site. The Pengerang Integrated Complex (PIC) will also be served by a deepwater terminal as well as oil and chemical storage tanks as part of Malaysia’s plan to develop Pengerang into an energy trading hub to challenge Singapore.

The Saudi investment will provide a timely shot in the arm for the Malaysian economy which has been hit by capital flight in recent years owing to worsening political instability. The prime minister has been accused of stealing hundreds of millions of dollars from a state fund at the same time that Islamic State (ISIS) terrorists are preparing to attack the country. The local currency, the ringgit, has lost 50% of its value since 2012 to trade at just under RM4.5 against the US dollar today.

The World Bank expects the Malaysian economy to grow by 4.3% this year, slightly up from last year’s 4.2%, but some way off from 6% in 2014.

Saudi Arabia has good reason for its late dramatic entry into the RAPID project. Aramco’s plan to raise US$100 billion by selling off a 5% stake based on its own US$2-trillion valuation has been setback by news reports citing analysts valuing the company for much less.  According to a Bloomberg report, Aramco may be worth as little as US$400 billion. The hurried addition of a sizeable stake in a new oil-petrochemical complex in Asia will go some way to beefing up the company’s asset base ahead of the share offer.

Aramco is also taking a long-term view as it looks to expand its share in Asia’s 33-million b/d oil market. One of its biggest competitors, Russia’s Rosneft, has acquired a major stake in India’s Essar refinery and downstream assets but others like Iran, Iraq and Africa’s producers have yet to make any significant investment in Asia’s downstream oil sector. The Malaysian refinery and petrochemical complex will provide a secure outlet for Saudi crude in the face of rising supplies from other parts of the world, including shale-based oil from the US.

The project will add to Saudi Aramco’s growing downstream stake in Asia through refinery ventures in South Korea, Japan, and China.