In August 2019, Reliance Industries (RIL) announced its plans to sell a 20 per cent stake in its oil-to-chemicals business to Saudi Aramco for an estimated $15 billion, dubbing the deal one of India’s biggest foreign direct investments to date.
By February of this year, both parties were looking to close a binding agreement, which would sell a minority stake in RIL’s oil-to-chemical division to Aramco, the world’s largest oil producer. However, differences had emerged over the deal’s structure and both parties were reportedly working to overcome these; there was even a suggestion that the deal could fall apart.
In the letter to shareholders released in RIL’s Integrated Annual Report 2019-20, Chairman Mukesh Ambani said Reliance was working to “complete the contours of a strategic partnership with Saudi Aramco. The partnership gives our refineries access to a wide portfolio of value-accretive crude grades and enhanced feedstock security for a higher oil-to-chemicals conversion.”
In his address, however, Ambani said the deal had not progressed as per the original timeline, due to the “unforeseen situation in the energy market and COVID-19 situation”.
On Thursday, Reuters quoted sources saying Aramco was unable to pay the price agreed to “pre-COVID”, citing terrible refining margins which are expected to “remain subdued in Q3 at least”.
“In reality, Aramco does not have the money,” the source said. The report quoted another source as saying that Reliance would wait for the market to recover before settling on a “drastic” revaluation of the asset.
So far, neither Reliance nor Aramco have responded to the report.
It is not just COVID-19 that has been hurting Aramco’s significant fortunes. In the first quarter of the year, Aramco reported a 25 per cent fall in net income, blaming the same on low crude oil prices, declining refining and chemicals margins and inventory re-measurement losses.
The failure of OPEC+ talks in March had led to a price war between Saudi Arabia and Russia, pushing oil prices to all-time lows. The impact of COVID-19 on demand added to this, taking prices for future's contracts to negative territory in the United States, as the cost of storing oil started to exceed the price of purchasing it, prompting buyers who had already agreed to purchase oil to dump the contracts before they received supplies that would prove too expensive to store.
In Jamnagar, Gujarat, RIL runs the world’s largest crude-oil refinery, capable of processing 1.24 billion barrels per day.
Initially, RIL planned to use the proceeds from the Aramco deal to achieve its goal of becoming net-debt-free. On April 30, its board approved hiving off the $75 billion oil-to-chemicals business into a separate division to enable to sale of a 20 per cent stake to Aramco.
With the slump in oil demand, and forecasts from the International Energy Agency estimating that demand may not recover until 2021, there are many challenges to the deal. The news that the Aramco deal was delayed from the AGM contributed to RIL stock tanking by 4 per cent after the AGM—notwithstanding a slew of announcements by Reliance, which has ambitious plans to expand beyond energy.
In addition, Reliance managed to become net-debt-free nine months ahead of schedule through ever-expanding rounds of investment in Jio Platforms, which raised over $20 billion in exchange for around 33 per cent of stake in the firm sold to over 13 investors including Facebook, Google, Intel and Qualcomm, as well as through a Rs 53,125 crore rights issue.