Reliance Industries Ltd and Saudi Arabia’s national oil company, Saudi Aramco, have decided to “re-evaluate” a proposed investment by the latter in RIL’s oil to chemicals (O2C) business. We examine the background and context for this decision.
What was the proposed investment?
In August 2019, RIL and Aramco signed a non-binding letter of intent for the latter to acquire a 20 per cent stake in Reliance’s O2C business in a deal worth $15 billion. The deal was expected to benefit RIL’s O2C business in terms of higher feedstock security for its tilt towards higher crude to petrochemical conversion. Reliance had applied to hive off its O2C business in line with the National Company Law Tribunal.
In October, Reliance also appointed Saudi Aramco Chairman Yasir Al-Rumayyan to its board as an independent director.
What are the factors that have led to the deal being called off?
The Covid-19 pandemic had played a significant role in delaying the planned investment by Aramco as the pandemic caused crude oil prices to crash in line with demand for petroleum products. Experts noted that this likely impacted Aramco’s ability to acquire the 20 per cent stake in the RIL’s O2C business.
Further, RIL’s announcement to become a net zero carbon emitter by 2030 and plans to optimise its Jamnagar refinery to produce on jet fuels and petrochemicals may have impacted Aramco’s interest in investing in the O2C.
“RIL and Aramco have mutually determined that it would be beneficial for both parties to re-evaluate the proposed investment in O2C business in light of the changed context,” RIL said in a statement. The company said the Jamnagar complex which is a key part of its O2C business would be the centre of Reliance’s renewable energy and new materials business, supporting its net zero carbon emissions commitment.
“These plans are counterintuitive to Aramco’s interest and world view. Oil production countries have been making the case that fossil fuel assets need to be given more time and investment so that the energy transition can be gradual,” said an equity analyst who did not wish to be named.
Jamnagar is set to become the site for RIL’s “Green Energy Giga Complex” which is set to include an integrated solar photovoltaic module factory, an advanced energy storage factory, an electrolyser factory and a fuel cell factory.
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The analyst noted that Aramco may have also had concerns that a large part of it’s investment could be used to repay loans to RIL, which the Mukesh Ambani led firm may then use to fund its green energy related projects.
Post the reorganisation of the O2C business, the new entity would have had a $25 billion loan from RIL on its balance sheet according to an investor presentation by RIL.