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RIL-Aramco: All about a game-changing deal

Tuesday, August 13, 2019

/ by Satyagrahi

Reliance Industries (RIL) chairman Mukesh Ambani has announced a deal with Saudi Aramco, which will be one of the largest foreign direct investments (FDI) in India. Aramco, world's largest oil producer, will acquire a 20% stake in RIL refining and petrochemicals business at an enterprise value of $75 billion. The deal is projected to be a game changer for RIL, Saudi Aramco and India's energy security. Reliance also said it would launch its
cloud and fibre broadband services.

What is the big announcement from RIL?

India’s Reliance Industries (RIL) is set to sell a 20% stake in its oil to chemicals business to Saudi Aramco, helping the Indian conglomerate to cut debt and giving Aramco better access to a fast growing market.

While terms of the deal are yet to be finalised, Reliance will get roughly $15 billion, including some debt adjustments for the 20% stake, and the two companies aim to close the deal by March 2020. The deal will see Reliance buy up to 500,000 barrels a day of crude oil from Aramco, more than doubling the volumes that Reliance currently purchases from Aramco.

The deal ties in with Aramco’s push to expand its refining and marketing footprint globally by signing new deals and boosting the capacity of its plants to secure new markets for its crude oil. Aramco is boosting its refining and petrochemicals business, particularly in Asia, and sees growth in chemicals as central to its downstream expansion strategy to reduce risk as oil demand slows.
“This signifies perfect synergy between the world’s largest oil producer and the world’s largest integrated refinery and petrochemicals complex,” said Reliance Chairman Mukesh Ambani, while announcing the deal at the AGM in Mumbai on Aug. 12. Ambani, who is Asia’s richest man, said the deal would be the biggest foreign investment in the history of Reliance and also one of the largest foreign investments ever in India.

Last month, Saudi Arabia’s Energy Minister Khalid al-Falih told that he was ‘optimistic’ that a deal between the two companies would work out. The joint venture with Aramco will cover all of Reliance’s refining and petrochemical assets, along with its 51% stake in its petroleum retail joint venture.

Last week, global oil major BP said it was forging a fuel retailing joint venture with Reliance to cash in on rising demand in Asia’s third-biggest economy. Reliance is set to own a 51% stake in the venture.

Why is this a ‘big deal’ for RIL?

Reliance as a whole has an enterprise value of about $134 billion, which is about half the GDP of India’s rival Pakistan. With great valuations, however, comes great debt burden. While it’s difficult to read the mind of Asia’s richest man, it looks like RIL is achieving twin objectives through its deal with Saudi Arabian Oil Co. (Saudi Aramco).

For Reliance, the equity infusion by Aramco will help cut debt. Liabilities surged to $65 billion in the year ended March 31, according to Credit Suisse Group AG, from just $19 billion in 2015. While Reliance’s $8 billion bet on telecoms has pushed up leverage, crude payables beyond 60 days have also tripled to $6 billion.

The world’s largest oil producer will be acquiring the 20% stake in RIL's refining and petrochemicals business at an impressive enterprise value of $75 billion. In end-June, RIL had a net liability of $36.9 billion, with the refining and petrochemicals business housing about $5.6 billion of it, analysts at Jefferies said in a note to clients last month. Based on these numbers, Saudi Aramco may shell out about $15 billion for the stake purchase, which will in turn reduce RIL’s net liability figure by about 40%.

RIL also said that it intends to become a debt-free company by 2021. While one may complain about its exclusion of capex (capital expenditure – plants and machinery) creditors from the definition of debt, the general trajectory of its balance sheet will please investors. Reliance’s global depository receipts (GDRs) were trading 6.5% higher in London after the announcement.

The deleveraging aside, the stake sale to Aramco has other messages as well. It’s tactful on the part of the company to give up some of its ownership in what is seen as its core business. Importantly, the move will free up resources for the group’s consumer businesses, which enjoy far higher valuation multiples.
RIL's stake sale to Saudi Aramco can help it retire nearly all of its non-telecom debt. What’s more, in the process, RIL has extracted a decent valuation for the refining and petrochemicals assets. The median valuation across the Street for the refining and petrochemicals business was around $70 billion.

The fact that the company is cutting down on debt will certainly be hailed by investors. What’s more, as a result, resources will become more freely available to RIL’s faster growing consumer business, which will be seen as an added bonus.


A global depositary receipt (GDR) is a bank certificate issued in more than one country for shares in a foreign company. Private companies use GDRs to raise capital denominated in either U.S. dollars or euros.

Deleveraging is when a company or individual attempts to decrease its total financial leverage. In other words, it is the reduction of debt. The most direct way for an entity to deleverage is to immediately pay off any existing debts and obligations on its balance sheet.

When can this deal benefit India?

RIL’s Jamnagar refining complex in Gujarat has a capacity to process 1.4 million barrels per day (BPD) and the company plans to expand its capacity to two million BPD by 2030, Ambani announced.

“The future of India — and also the future of Reliance — has never looked brighter to me than now. As India is getting transformed into a new India, Reliance will also transform itself into new Reliance,” Ambani said. He also emphasised the fact that RIL is the only diversified Indian firm that has “three major growth engines in one single corporate entity — oil-to-chemicals division, Jio, and retail.”

New Delhi is quite aware of India’s dependence on imported crude oil, though for now high petroleum taxes and a sluggish economy have managed to put a cap on the country’s thirst for oil. Despite domestic production that’s collapsed to minor-economy levels, imports in the first six months of this year fell by about 1.26 million metric tons, or 1.1%, from a year earlier. Reliance’s Jamnagar refining complex does offer India a buffer of sorts, since it produces mostly for export and thus provides a natural hedge to the current account.

With the tensions escalating in the Persian Gulf, India, the world’s third-largest oil importer, has upped its diplomatic efforts to ensure energy security and is closely monitoring the Strait of Hormuz situation. Saudi Arabia is a crucial source of energy for India and the Narendra Modi-led NDA government is trying to impress the Gulf Kingdom in maintaining global oil balance and supplies.

Speaking at the ‘Urja Sangam’ conference in March 2015, Prime Minister Modi had said that India needs to bring down its oil import dependence from 77 percent in 2013-14 to 67 percent by 2022. But with consumption growing at a brisk pace and domestic output remaining stagnant, India’s oil import dependence has risen from 82.9 percent in 2017-18 to 83.7 percent in 2018-19.

Saudi Arabia is playing active energy diplomacy in the India energy market and has been more than willing to export more oil to India. The RIL deal, which is unlikely to have materialized without a nudge or two from the Indian government, seals its commitment. It is even more remarkable that the announcement came at a time when Pakistan has been pressurizing Saudi Arabia to take steps against India in lieu of the latter’s move to end the ‘special status’ of the state of Jammu and Kashmir.


As part of India’s evolving energy security architecture, the NDA government is also working on the second phase of strategic petroleum reserves. Such reserves will help India manage short-term supply disruptions. Member nations of the International Energy Agency (IEA) maintain emergency oil reserves equivalent to at least 90 days of net imports. India has an existing storage capacity of 5.3 million tons. The government in June approved construction of an additional 6.5 million tonnes of strategic crude oil reserves. These facilities together will help support 22 days of India’s crude oil requirements.

Where does this lead Aramco to?

Saudi Aramco is happy to pay such a rich price because, for one, it can afford to do so.
That $15 billion represents just 10 weeks’ worth of the $38 billion in first-half free cash flow Aramco posted in results on Aug. 12, a result that comes when oil prices have been weak. The world’s top oil producer plans to launch an initial public offering (IPO) by 2020-2021, having postponed its flotation from last year. Aramco, which declined to comment on the Indian deal, reported a net profit of $46.9 billion in the first half of 2019, down from $53 billion for the same period last year. Despite the profit decline, Aramco remained the world’s most profitable company. Its profit is bigger than Apple, Exxon and Shell combined.

Indeed, overpaying for major deals isn’t a great look if you’re still lining yourself up for an IPO, but when your operations are generating cash the way Aramco’s are you can afford to get a little casual with your negotiations. Let’s also give credit to Mukesh Ambani, who seems to have pitched his company well in front of the oil-rich Arabs.

More important, though, is the co-dependent relationship that Saudi Arabia, the world’s biggest oil exporter has with India, the country that’s likely to soon overtake the U.S. as the world’s biggest net importer of crude. India’s dependence on buying oil from abroad is a problem both for its pollution-choked cities and a trade account in which crude accounts for about a quarter of imports.

It’s also a hedging bet for Aramco. India is happy when oil price is low, Saudi when it’s high. The high oil prices that Riyadh needs to balance its budget are ones that would cut India’s high GDP growth by about 3.6 percentage points, while pushing up inflation and eating into the government’s budget, too.

Aramco’s investment also makes sense because its other plan to find a captive customer for crude in India – a mega refinery constructed jointly with India’s state refiners and Abu Dhabi National Oil Co. – was beginning to look like a white elephant. With environmental requirements and plant relocation having pushed up the required capital expenditure by 36% to $60 billion, Indian Oil Corp., Bharat Petroleum Corp. and Hindustan Petroleum Corp. won’t earn their cost of capital on the project.

A splashy investment in the Jamnagar refinery means that even if India and the world start a slow retreat from crude, Riyadh will be protected. At present, the refinery complex sources about one-quarter of its 1.4 million barrels a day of crude throughput from Saudi Arabia and the United Arab Emirates together, equivalent to about 350,000 barrels each day. As part of the deal, Aramco alone will be selling 500,000 barrels per day of crude to the plant.
That 150,000 barrel difference alone will be worth $3.6 billion a year at Aramco’s current prices of $66 a barrel. That $15 billion investment won’t take long to pay for itself. This is a classic win-win deal.

Who will the Jamnagar refinery now be catering to?

Billionaire Mukesh Ambani's Reliance Industries Ltd plans to produce only jet fuel and petrochemicals at its mega Jamnagar refinery complex as it implements an oil-to-chemical strategy that will eliminate most fuels it produces in favour of high value products.

The company is preparing its Jamnagar complex, the world's largest refinery at a single location, to be future ready as fuel demand undergoes change with advent of electric vehicles. "Jamnagar shall be the refinery icon of the world with best-in-class performance," the company said in its latest annual report outlining its vision. The firm's mission is to "ensure the Jamnagar refinery is future-ready with a strategic transformation to optimal oil-to-chemicals."

Its refineries currently convert crude oil, sourced from around the globe, into petrol, diesel, LPG, aviation turbine fuel (ATF), LPG, naphta and other value added fuels. Some of these products are used to produce petrochemicals used for making plastics and other products. Now, it is implementing a strategy that will convert the crude oil only into petrochemicals and ATF used in aeroplanes.
"Reliance has developed a future-ready Oil-to-Chemical strategic vision to progressively, transform the Jamnagar refinery from a leading producer of fuels to chemicals," it said in the annual report.

The fundamentals of the Jamnagar oil-to-chemical strategy are to employ advanced molecule management to upgrade the refinery intermediate streams by value. "The oil-to-chemical program is a roadmap implemented over a long time horizon, based on market outlook and price triggers for refinery fuel products. The ultimate goal is to achieve greater than 70 per cent conversion of crude refined in Jamnagar, to competitive chemical building blocks of olefins and aromatics.” "The Jamnagar refinery product slate, at the culmination of oil-to-chemical transition, shall be only jet fuels and petrochemicals," it said.

India already has an oil refining capacity that is in excess of fuel demand. While the fuel demand is tapering, Public Sector Units (PSUs) have planned massive refinery expansion plans, which some analysts have questioned in view of the massive push by the government towards electric vehicles and moving away from polluting hydrocarbon-based liquid fuels.

Reliance said the objectives of this plan was to preserve as well as upgrade existing refinery margins, while maximizing asset utilisation for a sustainable competitive cost of chemicals. It has developed a disruptive technology innovation, a Multizone Catalytic Cracking (MCC) process, which converts a wide range of feedstock to high value propylene and ethylene in a single riser. "All refined products priced below crude shall be eliminated for chemicals at initial stage. Final fuel de-risking shall target elimination of gasoline, alkylate and diesel, synchronised to the global evolution of E-mobility and transport fuel demand decline," it said.
Ambani is in no mood to be hung over with what’s working now. He’s already preparing to cater to the customers of tomorrow.

How are RIL’s diversification plan’s proceeding?

The planned stake sale to Aramco comes as Reliance looks to bolster its consumer businesses and diversify from its core oil and petrochemicals operations.

The cloud services partnership with Microsoft Corp underscores Ambani’s ambitions to go toe-to-toe with Amazon, which offers cloud services in India and is also one of the country’s biggest online retailers. “We have received strong interest from strategic and financial investors in our consumer businesses, Jio and Reliance Retail,” Ambani said in a statement for the company’s annual general meeting (AGM).

The consumer-facing businesses collectively contribute nearly a third of the company’s consolidated operational profit, Ambani said. Five years ago they contributed just 2% and Ambani expects them to account for 50% soon. Ambani was joined by Microsoft Chief Executive Satya Nadella via video conferencing for the AGM being held on a public and stock exchange holiday in India.
“We will induct leading global partners in these businesses in the next few quarters, and move towards listing of both these companies within the next five years,” he said. Microsoft and Jio will launch cloud data centres in India, the two executives said. Jio will provide free cloud services for startups for as little as 1,500 rupees ($21) a month, which Ambani said was less than one-tenth of global rates. “The strategy continues to be to grab a lion’s share of the market ... by integrating several channels of entertainment and communication,” said Hemant Joshi, a technology, media and telecom consultant at Deloitte.

The second biggest announcement in the RIL AGM, after the Aramco deal, was the group’s plans to launch its fiber-to-the-home (FTTH) service.

This is likely to worry telecom rivals who are struggling to keep up with Jio, Ambani’s telco upstart, which has disrupted the market with its cheap data plans and has become India’s top mobile operator by subscribers in just three years.

Jio Fiber services will start on 5 September. The base package is priced at Rs. 700 and offers 100Mbps speed. The service was announced last year, on 12 August, but the telco didn't reveal details like data plans and real-time data speeds. Jio did offer the FTTH service to early adopters with the GigaFiber Preview Offer, but the service has a capped top speed of 100Mbps instead of 1Gbps speeds promised during its unveiling last year.

The top-of-the-line package is priced around Rs. 10,000 per month. This package offers 1Gbps speeds. All Jio Fiber plans allow access to broadband, fixed line, Jio HomeTV and Jio's IoT services. Voice calling to any Indian operator would be free, Ambani announced at RIL's 42nd AGM. "ISD calling tariffs would be 1/5th to 1/10th of industry rates. We are offering unlimited US/Canada pack at Rs. 500 per month," said Ambani.
Ambani also introduced Jio Forever Plans that will give users an HD or 4k LED television set-top box for free. "We are calling this the Jio Fiber Welcome Offer. I invite all of you to make the most of our Welcome Offer, and sign up for Jio Fiber as soon as it is available in your neighbourhood."

Ambani said Jio is signing up 10 million new customers every month. He also talked about the readiness of the Jio Infocomm hardware and the overwhelming reception of Jio Fiber by early adopters. "The core and aggregation layers of our converge network are already 5G ready. Our wireless hardware is already 4G+ and can be upgraded to 5G," he said.
Jio, which has over 340 million subscribers, said its GigaFiber broadband services will include access to television channels, fixed-line telephone calling and video conferencing with prices starting at 700 rupees per month

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