Saudi Aramco losses to derail investment in Reliance

10th Aug 2020:The 73 per cent decline in quarterly profit of Saudi Aramco may force the oil giant to refrain from its promised investment in India for quiet sometime. The Saudi Kingdom-controlled company had announced two major investment plans in the country — the strategic investment in the greenfield petroleum refinery in Maharashtra and the $15 billion worth stake acquisition in the refining and petrochemicals business of Reliance Industries (RIL). Aramco, which raised $25.6 billion from the world’s biggest initial public offering in December last year, has also been expected to participate in the disinvestment bid for BPCL.

However, the Chief Executive Officer (CEO) of Aramco Amin Nasser has said the company is ‘still working on the deal to invest in RIL’, Bloomberg reported. But the analysts see it quiet unlikely in the near future. At the Annual General Meeting of RIL on July 15, RIL’s Chairman Mukesh Ambani had said the deal with Aramco did not progressed as per the earlier timeline due to unforeseen circumstances and the COVID-19 pandemic. “Nevertheless, we at Reliance value our over two-decade-long relationship with Saudi Aramco and are committed to a long-term partnership,” Ambani had said.

Aramco’s net profit has plunged a massive 73 per cent to $6.6 billion in the April-June quarter due to sharply lower oil prices as the coronavirus crisis undercuts global demand. “Strong headwinds from reduced demand and lower oil prices are reflected in our second quarter results,” CEO Amin Nasser said in a statement.

Aramco has been in negotiations with RIL to pick up 20 per cent stake in the latter’s oil to chemicals (O2C) business for $15 billion. The O2C business of RIL includes the twin refineries in Jamnagar, Gujarat and the adjacent petro chemicals complex. Aramco also plans to pick up 10 per cent stake in the petroleum retail joint venture of RIL-BP Plc. The two deals together will cost Aramco Rs 1.1 lakh crore.

The deal will open up a new market for Saudi Aramco. As part of the deal, RIL will sign to buy 500,000 barrels of crude oil every day (28 per cent of the company’s Jamnagar refinery requirement) on a long-term basis from Aramco. Besides, the O2C business will be a value-creating proposition for both the giants as the chemical products fetches more earnings than fuels like petrol and diesel.

Aramco and Abu Dhabi National Oil Company (ADNOC) have been planning to jointly hold a 50 per cent stake in the $44 billion refinery in Maharashtra. Indian Oil Corp, BPCL and HPCL through Ratnagiri Refinery & Petrochemicals Ltd (RRPCL) have agreed to hold the rest of the stake. However, the analysts reported that the cost of the refinery has already escalated to $70 billion.

The refinery was initially proposed to be built at Nanar, a village in Ratnagiri district. According to the recent reports, the Maharashtra government is looking for alternate sites at the coast of Mumbai after the protests from farmers. The 1.2 million barrels a day refinery and associated petrochemical project has been projected as one of the biggest projects in the country that will bring large foreign direct investment (FDI).

The Indian government, which is staring at falling GDP and huge fiscal deficit, see the BPCL disinvestment as the major step to revive the economic activities. According to sources, Aramco has been approached by the government to participate in the sale programme. However, the bad news in the oil market has forced the government to extend the deadline for bids for the third time to September 30. Going by the present market value of BPCL, the buyer will have to spend at least Rs 50,000 crore to buy the government’s 53 per cent stake.

The Saudi Ambassador to India, Saud bin Mohammed Al Sati said in September 2019 that Saudi Arabia is looking at making investments in India potentially worth $100 billion in the areas of energy, refining, petrochemicals, infrastructure, agriculture, minerals and mining. Saudi Arabia, the world’s biggest crude oil exporter, has been hit hard by the low prices and sharp production cuts. The crude prices dropped to a two-decade low of below $20 a barrel in April and May as the coronavirus outbreak dampened demand, before recovering to around $44 a barrel after OPEC+ producers agreed to record output cuts. Saudi has cut its oil production to 7.5 million barrels per day (bpd) in June, compared to last year’s average of 10 million bpd.

The US technology giant Apple has last week replaced Aramco as the world’s most valuable company after its market capitalisation spiked to $1.9 trillion against $1.76 trillion for the oil and gas major.