Aramco-Reliance marriage to boost India's global energy footprint

Resumption of stake sale talks a sign of India′s attraction as a destination for energy investors seeking access to one of the world′s fastest-growing markets.

The resumption of talks between Reliance Industries Ltd and Saudi Aramco over a 20 per cent stake sale by the Indian conglomerate in its oil-to-chemical business is yet another affirmation of the tremendous long-term growth opportunities offered by India to foreign investors. With a rapidly changing energy landscape, the deal - estimated to be worth about $15 billion as of August last year - had stalled over price negotiations and the coronavirus pandemic. Reliance Chairman Mukesh Ambani told shareholders in July that the deal had been delayed due to "unforeseen circumstances in the energy market and the COVID-19 situation.” Saudi Aramco has now categorically stated that it was committed to the deal and wants to do physical inspection of Reliance′s assets in India. “India offers tremendous growth opportunities over the long term and Aramco continues to evaluate new business opportunities with our potential partners," Saudi Aramco said in a statement to Reuters.

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A rapidly changing energy landscape

According to industry analysts, despite the weak oil prices there are still significant advantages for the Saudi behemoth to invest in the oil-to-chemical business of Reliance.

“We see enough reasons for Aramco to acquire a stake (in RIL's Oil-to-Chemicals business). With a stake, Aramco would not just have a stake in one of the world′s best refineries and largest integrated petrochemical complex but also access to one of the fastest-growing markets - a ready-made market for 500,000 barrels per day of its Arabian crude and offering a potentially bigger downstream role in future,” HSBC Global Research said in a note. According to HSBC, the Aramco deal would not only provide significant financial muscle to Reliance but also create a benchmark valuation for its OTC business estimated at $75 billion and help flow in precious liquidity into Indian investments.

“Once the money from the rest of its announced transactions flows into RIL, we believe that combined with its treasury shares, RIL will have $34 billion in assets that should allow it to expand in the competitive omni-channel retail space. We believe RIL′s diversified businesses, asset monetisation and capital raising in the current environment make it financially stable. In addition, the expansion of RIL′s omnichannel retail and digital businesses should allow it to grow rapidly,” it said.

Saudi Aramco has now categorically stated that it was committed to the deal and wants to do physical inspection of Reliance′s assets in India.

The deal also marks the growing interest of Gulf-based oil giants to invest in the Indian energy sector, buoyed by the prospects of growth, energy security and the ease of doing business. In addition to Reliance, Saudi Aramco has committed to taking a stake in the planned west coast refinery being jointly built by Indian Oil Corp., Hindustan Petroleum Corp. and Bharat Petroleum Corp, while Abu Dhabi National Oil Co (ADNOC) has also signed an agreement to take a stake in that project.

Gulf-based oil giants looking to invest in the India's energy sector

As the second-largest supplier of crude oil to India in the January-June period this year, Saudi Arabia shipped 18.97 million metric ton (MMT) of crude with a market share of 19 per cent, while Iraq retained the top spot with shipments of 24.93 MMT in the same period and accounted for a market share of 25 per cent, and the US supplied 5.96 MMT and had a market share of 6 per cent, according to data from GAC Shipping (India) Ltd.

According to Sumit Pokharna, vice president at Kotak Securities, a deal with Reliance would provide Aramco once of the best opportunities to tap a market for their crude, as they face competition from Iraq and the United States in India. "We think that Aramco′s deal with Reliance will go through, although we might see some sweetening of the deal because of the change in sentiment for oil,” he said.

The partnership between GCC energy giants and India has rapidly consolidated in view of Prime Minister Narendra Modi's robust outreach to the UAE, Saudi Arabia and other Gulf states, and the Saudi Aramco-Reliance venture is undoubtedly slated to be a prolific one.

In addition to Reliance, Saudi Aramco has committed to taking a stake in the planned west coast refinery being jointly built by Indian Oil Corp., Hindustan Petroleum Corp. and Bharat Petroleum Corp.

It makes complete economic sense to integrate an existing refinery fully with petrochemicals and Aramco would continue pursuing the opportunity with Reliance despite the challenges COVID-19 has created, said Sri Paravaikkarasu, director for Asia Oil at Facts Global Energy.

Other analysts pointed out how Reliance, which runs one of the most modern refining projects in the world, would be one of the best bets in Asia for Aramco.

“While [Aramco's] China investment would have seen cash returns after a very long time, a stake in Reliance means Aramco will see cash returns immediately,” a source close to the agreement negotiations told S&P Global Platts.

“India is an attractive place for investors such as Saudi Aramco to seek a foothold in its refining and petrochemical sectors, especially if it can get to supply crude as part of the deal," said Lim Jit Yang, advisor for oil markets at S&P Global Platts Analytics.

With India still on track to overtake the US as the world's biggest net importer of crude, Saudi Aramco's $15 billion capital infusion into Reliance will thus not take long to pay for itself in the dynamic investment environment of India.