MUMBAI : Historically low crude oil prices could mean the multi-billion dollar deal between Reliance Industries and Saudi Aramco could take longer to seal. Chairman Mukesh Ambani had last August announced Reliance Industries’ plan to sell 20% stake in its refining and petrochemicals business for $15 billion to Saudi Aramco, as part of his plan to deleverage RIL’s balance sheet .
Since August 2019, crude has dropped 64.52%. From $58.23 per barrel on 15 August, 2019, it is now hovering around $20.66. “Given the crude price, the realizations will shrink and thus the valuation will also come under pressure. From RIL’s point of view, they were exploring this deal to deleverage their balance sheet. If the valuation is impacted because of current market conditions then they will have to either dilute a higher percentage of stake or defer the trade to more normal times. For Aramco, the deal still makes a lot of sense,” said Sudhir Dash, founder and CEO at advisory firm UnaPrime said,
As part of the deal with RIL, Saudi Aramco will also supply 500,000 barrels per day of crude oil to RIL’s twin refineries in Jamnagar. This represents about 40% of Reliance’s crude intake, significantly higher than the stake taken, although Saudi Aramco historically supplied 20% of Reliance’s crude oil requirements.The deal might be delayed, but it is unlikely to be called off, despite the weak macro conditions, feel industry analysts
“The current challenges will not diminish Saudi Aramco’s interest in accessing the Indian market. There is no sense of urgency in this deal. I think after the coronavirus dust settles and crude oil prices stabilize, the discussions may pick up steam,” said a consultant aware of the discussions.
Reliance’s refining and petrochemicals assets include 1.2 million barrels of oil per day of highly-sophisticated refining assets in North-West India. Both refining sites are in Jamnagar and heavily integrated with petrochemicals. Reliance also has a leading position in polyester and intermediates, as well as steam crackers and polyolefins capacity at another four locations in India.
“Saudi Aramco wants to look at how they can tie up with the large oil consumption market of India and from that point of view Reliance remains a very important potential partnership for them. So there is unlikely to be much change in intent, but there could be some change in pricing. They won’t walk away from the deal,” said a senior partner with a big four audit firm.
He added that Aramco is unlikely to go for state-run Bharat Petroleum Corporation Ltd instead of RIL, as privatization is always a tricky issue with uncertain timelines. “And in these depressed markets, it will be difficult for the government to go through with such a divestment,” he added.
The government is selling its 52.98% stake in BPCL and has called for bids from private companies with a net worth of more than $10 billion. Mint reported in October that several global energy companies including Aramco, Shell, Rosneft, ExxonMobil and others had evoked initial interest in BPCL.
Government has extended the deadline for submission of expression of interest (EoI) for privatization of Bharat Petroleum Corp. Ltd (BPCL) by more than a month to 13 June amid lockdowns in many countries including India due to the covid-19 outbreak and slump in global crude oil prices. However, some feel that given the current conditions in the crude market, RIL might be better off monetizing some of its other assets.
“As a group, RIL has been negotiating with strategic investors on multiple fronts such as retail and Jio. Given their plans to deleverage, they will definitely try to do a trade. But in this market, they might get a better trade in the retail business or Jio than the oil business, so they might chase those trades more vigorously,” said Dash of UnaPrime.