Reliance’s partnership with Saudi Aramco not a retreat from energy business: Report
Reliance Industries’ partnership with Saudi Aramco for its USD 75 billion oil-to-chemicals business signals expansion rather than retreat as growth opportunities are expected to boost the petrochemical and refining vertical, market analyst firm Bernstein said. Billionaire Mukesh Ambani had in August last year announced initial agreements to sell a 20 per cent stake in the oil-to-chemical business to the Saudi national oil company. Also, a 49 per cent interest in fuel retailing business was sold to UK’s BP plc for Rs 7,000 crore. “Reliance has pivoted away from energy to the new economy. But energy still accounts for 64 per cent of EBITDA. While RIL has divested stakes to BP and Aramco, we expect RIL to grow their petrochemical and refining business given the secular growth opportunities,” it said in a report. Stating that India has significant secular expansion (that is, unaffected by short-term trends) ahead in refined products and petrochemicals, it said with the lowest demand per capita of 1.3 barrels per person, demand for refined products will grow by 5 million barrels per day over the next two decades, more than any other major market. Ethylene demand could grow ten-fold from 5kg per person per annum to 50-60kg pp/pa as consumer demand rises. “Reliance partnership with Aramco and BP signals expansion ahead rather than retreat,” Bernstein said. “Aramco’s investment is to secure market access and growth. While refining is a cash cow for the business, we believe that there are significant opportunities for petrochemical expansion ahead given demand growth and synergies with refining.” Fuels marketing will be significantly expanded given the partnership with BP and plans for 5,500 stations, it said. Ambani had in August last year announced that the deal with Aramco will close by March 2020 but it is now expected to close within the current calendar year. Refining and petrochemicals are a cash cow for Reliance. “But to think of this as an ex-growth part of the business would be a mistake. In India, there is strong secular demand growth ahead. India is estimated to be the fastest growing refined fuels market over the next 20 years (faster than China) and will also one of the fastest growing markets for petrochemicals given the per capita demand which will grow with the GDP,” it said. As part of the August deal, Saudi Aramco will supply 500,000 barrels per day of crude on a long-term basis to RIL’s Jamnagar refinery complex (40 per cent of the refining capacity). “While bears will argue that Reliance is stepping away from energy to digital, we see this deal as an opportunity to expand the downstream business in India with a solid partnership. For Aramco, the deal provides direct access to what is widely expected to be the fastest growing refined oil product market over the next 20 years,” it said. “For Reliance, it provides cash to fund expansion of their digital business and further expansion of downstream capacity with an experienced partner.” Bernstein also said in the short term it remains cautious on chemical margins, but more positive on refining. On RIL’s oil and gas exploration and production business, it said output will start to recover from this year with new developments. “Reliance and partners are developing 3 trillion cubic feet of reserves in the KG-D6 block which can add gross production of 1 billion cubic feet per day and raise segment EBITDA back to Rs 120 billion,” it said. The turnaround is based on three new projects which Reliance and partner BP has launched in the KG basin. Notably the R-Series, Satellites and MU development which together contain 3 trillion cubic feet (TCF) of reserves which will underpin a recovery in production. But the refining segment remains one of the most important contributors to earnings for Reliance. The single largest asset within Reliance’s refining and petrochemical business is the Jamnagar complex, which is one of the world’s largest refining hubs. The Jamnagar complex was built in 2000 with a capacity of 0.67 million barrels per day. After upgrades in 2008, Jamnagar’s crude processing capacity has more than doubled to 1.24 million bpd. Not only is Jamnagar the largest refinery hub in the world, it is also one of the most complex refineries globally, allowing RIL to process discounted heavier crude oil into oil products. “In comparison to global oil majors, Reliance has relatively less refining capacity at 1.24 million bpd versus peers at 2.62 million bpd. However, Reliance has one of the best positions to grow its capacity over time given India’s structural growth in oil demand over the next 20 years,” it said. “Moreover, Reliance has one of the most profitable refining business relative to peers owing to the higher complexity of Jamnagar. Whether Reliance will choose to expand its existing footprint is not clear, but the relationship with Aramco (assuming the deal goes through) means that there could be options for further expansion.” In fuels marketing, Reliance has also formed a new JV with BP last year to create a world-class fuel retailing network in India. Over the next 20 years, India is likely to be the fastest growing fuels market. The new JV company will assume ownership of RIL’s existing fuel retail network and aviation fuel business. Under the new partnership, RIL will hold 51 per cent of the new JV company and BP will hold the remaining 49 per cent. The JV has plans to rapidly grow the fuel retail distribution network in India over the next 5 years. RIL currently has 1,400 sites across India including contribution of USD 1.9 billion per annum in revenue from owned petro retail outlets. The JV plans to expand this to 5,500 sites over the next 5 years, which represents 800 additional sites per year. “For BP, the JV gives them access to the fastest growing refined fuels market. It also allows BP to tap into convenience non-fuel retail in India which is growing rapidly. For Reliance, the transaction provides funding and enables them to tap into
Oil India may hold 74 per cent in BPCL’s NRL, Assam 26 per cent
State-owned oil and gas explorer Oil India (OIL) and the Assam government may acquire Bharat Petroleum Corporation’s entire 61 per cent stake in the Numaligarh Refinery (NRL), retaining the public sector character of the Assam-based entity. According to official sources, while OIL may pick up close to 48 per cent stake, Assam has indicated to pick up the rest to raise its stake to 26 per cent from 12.4 per cent. Assam Commerce and Industry Minister Chandra Mohan Patowary recently stated the state government’s willingness to pay up to Rs 2,000 crore to pick 13.6 per cent of BPCL stake in the refinery. Going by this, BPCL’s stake in OIL may be worth over Rs 8,000 crore, including control premium. With the Centre owning over 50 per cent in BPCL, the stake sale in the NRL will help it pocket around Rs 4,000 crore as disinvestment receipt. BPCL holds 61.65 per cent stake in the NRL, OIL 26 per cent and the Assam government 12.35 per cent. Privatisation of BPCL has become a political issue in the Northeast with voices being raised not to disturb the refinery’s PSU character. NRL was set up as per the 1985 Assam accord. The All Assam Students Union (AASU), one of the signatories to accord, has also protested. “OIL best fits the bill to take over NRL because of the synergy arising from their operations largely being located in the Northeast and its existing investment in NRL. Being the largest shareholder, the government may get OIL board to approve the takeover,” said an official source privy to the development. Though estimates for the NRL acquisition would be finalised post-demerger of the refinery from BPCL as per the cabinet decision, it’s expected that OIL may have to invest around Rs 6,000 crore to pick up the BPCL stake. Another Rs 2,000 crore may be put by the Assam government. The NRL’s high valuation is largely on account of its mega expansion plan. NRL has approved Rs 22,000 crore plan to expand capacity to 9 million tonnes per annum (mtpa) from 3 mtpa. Sources said though consolidation among oil sector PSUs has been put on hold and an integrated OIL-NRL operations could later be considered for merger with Indian Oil Corporation (IOC) to create a large integrated oil and gas company on the lines of Oil and Natural Gas Corporation (ONGC) that acquired HPCL last year. NRL recorded the highest revenue at Rs 18,511 crore in 2018-19, registering a 16.25 per cent growth. Its earnings per share stood at Rs 27.79 while net worth reached Rs 5,551 crore. For OIL, the acquisition will give it an opportunity to enter the lucrative fuel refining with possible entry into retailing at a later stage. With both firms having operations in the Northeast, lot of synergies is expected to flow out of the proposed deal. OIL has over 1 lakh sq km for exploration and production activities, most of it in the Northeast, which accounts for its entire crude oil production and majority of gas output. Rajasthan is the other producing area of OIL, contributing 10 per cent of its gas production. OIL’s exploration activities are also spread over onshore areas of the Ganga Valley and Mahanadi. OIL also has participating interest in NELP exploration blocks in Mahanadi Offshore, Mumbai Deepwater, Krishna Godavari Deepwater as well as various overseas projects in Libya, Gabon, the USA, Nigeria and Sudan.