Saudi Aramco deal will help India’s Reliance to reduce $42bn debt burden

Reliance CEO Mukesh Ambani said that the company had already been processing Saudi crude oil for 20 years. (AFP)
Updated 18 August 2019

Saudi Aramco deal will help India’s Reliance to reduce $42bn debt burden

  • Reliance will buy up to 500,000 barrels a day of crude oil from Aramco, more than double its current purchase

NEW DELHI: India’s Reliance Industries’ deal to sell a 20 percent stake in its oil to chemicals business to Saudi Aramco will reap major dividends for both companies, analysts said.

Under the terms of the non-binding deal announced earlier this week, the conglomerate will get roughly $15 billion for the 20 percent stake, money that it will use to pare its massive debt load.  Reliance has an overall debt of nearly $42 billion including $20 billion at its fibre division which the group is currently in talks to sell. 

In exchange, Reliance will buy up to 500,000 barrels a day of crude oil from Aramco, more than double its current purchase.

Reliance chairman and the country’s richest man, Mukesh Ambani, said that the company had been processing Saudi crude oil every single day for the past 20 years and this deal, among the largest foreign investments in India, signified “perfect synergy between the world’s largest oil producer and the world’s largest integrated refinery and petrochemicals complex.”

The deal will cover all of Reliance’s refining and petrochemicals assets, including 51 percent of its petroleum retail joint venture.

Reliance has been on the lookout for strategic partners for its businesses to help it in its goal of reducing its debt, said Ajay Bodke, chief executive officer, portfolio management services at Prabhudas Lilladhar, a brokerage. “Reliance has become a net debt company from a net cash company. Whatever money that flows in from this deal will be used by Reliance to deleverage,” he said. It’s “a marriage made in heaven because you have the largest oil explorer in the world tying up with India’s largest oil to chemicals company,” he added.

Gagan Dixit, vice president institutional equities research at Elara Capital, agreed that the deal will give Reliance “much needed capital.” Plus, “refining is a dying business and they can use this money for the high margin business of chemicals,” he said.

That apart, historically Reliance has bought oil from Iran and Venezuela, both of which are under US sanctions. This deal helps Reliance secure its supplies and ensures Aramco that additional business as well, said Dixit. Aramco has been beefing up its business in Asia, especially with some of the large importers of crude oil. With the US, the world’s largest consumer of energy, depending less on Saudi Arabia for oil, Aramco needs new markets to hedge its bets. India, one of the largest energy consumers in the world after the US and China, fits the bill.

 This deal provides Aramco with a steady customer in the midst of global uncertainty in the oil and gas sector, said Anirban Mukherjee, a partner at the Boston Consulting Group. “There’s merit in a producer like Aramco wanting to lock in a large market. India is a very consumption-led economy in the petrochemical sector and it will continue to be a large importer of oil, so this is a good match between producer and market. Rather than a simple supplier-buyer compact, if an oil exploration company has partnerships with some of the large refineries, there’s a permanence to the business.”

This is not Aramco’s first investment in India. In 2017 it opened an office in the Indian capital to expand the company’s international portfolio in this growth region. Last year it announced a joint venture with a consortium of Indian state-owned refiners to set up a $44 billion refinery and a petrochemical project on the country’s western coast.

The proposed refinery, which is yet to take off, is expected to have a total capacity of 18 million tons a year and will process up to 1.2 million barrels of crude oil a day as well as refined petroleum products including petrol and diesel. The proposed project has been billed as among the world’s largest refining and petrochemicals projects and one that has been designed to meet India’s fast-growing demand for fuels and petrochemicals.

The Aramco deal is the latest in a series of moves by Reliance to sell non-core assets or establish joint ventures to reduce debt. Speaking to shareholders, Ambani said the group will become a zero net debt company within 18 months.

Ahead of the Aramco deal, Reliance announced a joint venture with global oil major BP to set up a nationwide network of fuel retail outlets where Reliance will have a 51 percent stake, to cash in on rising demand in the country. It will also market aviation turbine fuel to cater to India’s growing aviation industry. 

“Our transactions with Saudi Aramco and BP will create win-win relationships, generating significant strategic value for our partners,” Ambani said.


GM energizes Chinese electric micro car market

The Wuling Hong Guang MINI EV, below. (Supplied)
Updated 17 min 4 sec ago

GM energizes Chinese electric micro car market

  • Trend toward a new segment of EVs in the country following changes to government subsidies

BEIJING: When 32-year-old photographer Jaco Xu needed a run-around car for work in the eastern city of Hangzhou, the price tag on the latest micro EV from GM’s China joint venture overcame his qualms about electric vehicles.

Xu paid 38,800 yuan ($5,735) for his tiny two-door Wuling Hong Guang MINI EV, while the basic model retails for just 28,800 yuan ($4,200), making it China’s cheapest EV.
“It feels pretty good. The price is so low and the appearance is simple and beautiful,” said Xu. “Why would I hesitate at that price?“
Launched in July, the Wuling MINI is heading a trend toward a new segment of EVs in China following changes to government subsidies — smaller vehicles with less range between charges, but a super-cheap price tag.
Despite basic features — no safety air bags, optional air-conditioning and a driving range of less than 200 km (125 miles) due to a smaller battery — buyers have been enthusiastic.
SGMW, GM’s venture with partners SAIC Motor Corp. and Guangxi Automobile Group, sold about 15,000 of the vehicles in August, making it China’s top-selling EV for the month, surpassing Tesla’s popular Model 3.
The venture plans to expand manufacturing capabilities of the new model, turning out cars at its plant in Liuzhou as well as its existing facilities in Qingdao, said Zhou Xing, SGMW’s branding and marketing director.
“We positioned this model as a ‘people’s commuting tool’,” he said, speaking ahead of the Beijing auto show that starts on Saturday. “Customers can drive their cars to work every day.”
The target market includes people like Xu who are looking for a city run-around as a second car, rural buyers who want a vehicle to move goods and young first-time buyers who are motivated by price.

HIGHLIGHTS

● GM JV micro car is China’s best-selling EV in August.

● Wuling MINI EV targets new EV buyers, sells from $4,200.

● Leads trend to smaller cars, batteries after subsidy cuts.

Total sales of new energy vehicles — including electric, plug-in hybrid and hydrogen fuel-cell vehicles — are expected to reach 1.1 million vehicles in China this year, about 5 percent of total auto sales. The micro car represents a shift in what typifies a mainstream electric vehicle, as policymakers push for increased EV production and sales have been bolstered by restrictions on petrol-fueled cars.
In response to government requirements to win generous EV subsidies, automakers over the past decade have developed higher energy-density battery systems to allow cars to drive for longer with a single charge.
Tesla’s Model 3, which has a range of more than 400 km, has been the market leader in China for most of 2020, retailing for about $43,000, about 10 times the cost of the Wuling MINI.
However, China cut subsidies heavily in 2019 and is now asking for higher EV power efficiency to save energy. Automakers, in turn, are planning more smaller EVs with a moderate driving range aimed at customers who can charge cars easily, industry executives said.
The economics are skinny. Wuling MINI will not get EV subsidies due to its short range. For SGMW, the cheap price tag means it makes very little money at best, according to insiders.
EVs, however, generate green credits for SGMW that can be used to offset negative credits of other companies like SGM, its sister venture which is expanding a lineup of bigger SUVs under Buick, Chevrolet and Cadillac marques.
“Selling micro EVs in China makes more sense this year,” said a product planning official at a GM rival. “Subsidies have become a less important factor of pricing as government has already cut a lot, while green credits are expected to become more expensive,” the official said.
Bidding to reverse a sales decline due to a slower economy and stiff competition, GM expects EVs to make up more than 40 percent of its new launches in China over the next five years.
The Detroit automaker is revamping plants in Shanghai, Wuhan and Liuzhou under its two Chinese JVs to enable production lines making gasoline cars to turn out EVs, public documents detailing its constructions plans show.
For now, the Wuling MINI is the cheapest EV, but it faces competition from the cheapest models from rivals BYD and BAIC BluePark.
Great Wall Motor and Toyota’s China partner GAC are also planning more electric models with a range below 400 km, company officials said this month.
And startup Kaiyun Motors is trying to radically lower the price of its new electric pickup truck Pixel to about 20,000 yuan for urban delivery services, although these EVs will be sold without batteries, allowing consumers to swap them.