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.

Oil prices surge after attacks hit Saudi output

Updated 26 min 39 sec ago

Oil prices surge after attacks hit Saudi output

  • The Houthi attacks hit two Aramco sites and effectively shut down six percent of the global oil supply
  • President Donald Trump said Sunday the US was ‘locked and loaded’ to respond to the attacks

HONG KONG: Oil prices saw a record surge Monday after attacks on two Saudi facilities slashed output in the world’s top producer by half, fueling fresh geopolitical fears as Donald Trump blamed Iran and raised the possibility of a military strike on the country.
Brent futures surged $12 in the first few minutes of business — the most in dollar terms since they were launched in 1988 and representing a jump of nearly 20 percent — while WTI jumped more than $8, or 15 percent.
Both contracts pared the gains but were both still more than 10 percent up.
The attack by Tehran-backed Houthi militia in neighboring Yemen, where a Saudi-led coalition is bogged down in a five-year war, hit two sites owned by state-run giant Aramco and effectively shut down six percent of the global oil supply.
Trump said Sunday the US was “locked and loaded” to respond to the attack, while Secretary of State Mike Pompeo said: “The United States will work with our partners and allies to ensure that energy markets remain well supplied and Iran is held accountable for its aggression.”
Tehran denies the accusations but the news revived fears of a conflict in the tinderbox Middle East after a series of attacks on oil tankers earlier this year that were also blamed on Iran.
“Tensions in the Middle East are rising quickly, meaning this story will continue to reverberate this week even after the knee-jerk panic in oil markets this morning,” said Jeffrey Halley, senior market analyst at OANDA.
Trump authorized the release of US supplies from its Strategic Petroleum Reserve, while Aramco said more than half of the five million barrels of production lost will be restored by tomorrow.
But the strikes raise concerns about the security of supplies from the world’s biggest producer.
Oil prices had dropped last week after news that Trump had fired his anti-Iran hawkish national security adviser John Bolton, which was seen as paving the way for an easing of tensions in the region.
“One thing we can say with confidence is that if part of the reason for last week’s fall in oil and improvement in geopolitical risk sentiment was the news of John Bolton’s sacking ... and thoughts this was a precursor to some form of rapprochement between Trump and Iran, then it is no longer valid,” said Ray Attrill at National Australia Bank.