Sorry, Saudi Aramco, Reliance Industries just is not that into you

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Could probably the most energy industry’s longest-running on-again, off-again romances be catching fire again? Saudi Arabian Crown Prince Moham­med bin Salman seems to think so.


“There are discussions happening at the moment approximately a 1 per cent acquisition by probably the most leading energy companies on this planet” in state-owned Saudi Arabian Oil Co, he said in a native television interview on Tuesday.


Prince Mohammed didn’t disclose which company might make the investment, but you don’t need to be a Jane Austen protagonist to work out the most likely partner. Reliance Industries Ltd, owner of the world’s biggest oil refinery, has been dancing the quadrille with Saudi Aramco for almost two years. At current prices, 1 per cent of Aramco would be worth approximately $19 billion — not far off the $15 billion price tag put on 20 per cent of Reliance’s energy division, at the time the Saudi company first took an interest in buying a stake in 2019.


A tie-up with Reliance is precisely what Aramco has in brain, the Finan­cial Times reported on Wednesday, citing people familiar with the matter. The two companies would to begin with exchange shares, with cash payments from the Saudis over subsequent years making up the balance of the transaction, the paper reported.


This is a truth universally acknowledged that an Asian company in possession of an oil refinery will have to be in want of a West Asian strategic investor. In this case, though, it’s tough to see the attraction for Reliance’s chairman, Mukesh Ambani.


First, believe why the Saudi company is taking a look to sell a stake in the first place. Back in 2019 when the deal was once first mooted, Reliance was once in a hard financial spot. Net debt had more than tripled to Rs 2.05 trillion ($30 billion) in March that year, from Rs 670 billion five years earlier, as the company plowed cash into its fast-growing telecom and internet arm Reliance Jio.


Aramco, meantime, was once awash with oil cash and expecting to be even more flush after its initial public offering, which eventually raised approximately $29 billion in December of that year. By offering to put down a 10-figure amount in return for a fifth of Reliance’s energy trade, Saudi Inc was once following a time-honoured tradition of the use of its bottomless funds to receive a strategic midstream or downstream asset in one of its consuming countries. That would put the deal in line with long-standing tie-ups over oil storage in Japan, and a venture proposed earlier in 2019 to build a $10-billion refining complex in northeast China.


How things have changed. Faced with paying an over-generous $75 billion annual dividend, in addition to the $69 billion purchase price of state-owned chemicals trade Saudi Basic Industries Co — at a time when all its peers are cutting their oil-price forecasts — Aramco is no longer swimming, Scrooge McDuck style, through piles of money. Though funds are hardly tight, they may be able to no longer be treated as limitless.


That Chinese refinery project was once put on ice final August, while investments in the USA and elsewhere are being wound back, the Wall Road Publication reported the following month citing people familiar with the matter. Another $44-billion refinery close Mumbai, in which Aramco and Abu Dhabi National Oil Co would have taken a joint 50 per cent stake, has also ground to a halt. Aramco’s most prominent deal this year — the $12.4 billion sale of its pipelines network to EIG Global Energy Partners — saw cash coming into the Saudi trade, quite than going out of it.


Reliance’s balance sheet has moved in the wrong way. Investments from Alphabet and Facebook in its Jio trade, combined with a rights issue, brought in Rs 2.2 trillion final year. That left the company effectively with a net cash position by December. A breakneck pace of growth at Jio will likely cause it to overhaul petroleum and che­m­icals as the biggest contributor to earnings, without or with a stake sale. Presently, Ambani isn’t especially in need of cash. He certainly doesn’t need shares in one of his biggest suppliers, least of all when they’re locked up on a foreign inventory exchange in a currency whose long-standing dollar peg is taking a look less protected than it once did.


Taking a look at his comments at the time of Reliance’s final annual general assembly in July, it’s lucid that the allure of a conventional petroleum trade is all of a sudden fading: “The catastrophic have an effect on of climate change calls for the legacy energy industry to reinvent itself on a war footing,” he said, before committing the company to net-zero carbon emissions by 2035 and promising investments in hydrogen, wind, solar, fuel cells and batteries. Already at the time of Reliance’s 2019 talks with Aramco, it was once taking a look to shift from a traditional focus on Road fuels into jet kerosene and petrochemicals.


It’s important not to overstate how much Reliance is likely to change. The world’s biggest oil refinery will continue to earn billions from processing crude and producing chemicals for a very long time to come, and Ambani wouldn’t be the first fossil-fuel boss to overstate the pace of his green makeover for the sake of a few shareholder adulation.


Still, a trade that’s flush with cash and sees its future in technology and zero-carbon chemicals doesn’t in reality need what Saudi Aramco is offering. Whether Prince Mohammed wants to seal this betrothal, he’s going to have to offer a far more beneficiant dowry.

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