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Press Release [FREE Access]
Petro Intelligence » Aramco-Reliance Alliance Sparks Jitters

Deal Street has been unusually quiet for some time. So, it is natural that interest would pique when Aramco’s chief executive Amin Nasser started a flurry of meetings with Reliance Industries’ chairman Mukesh Ambani. What has emerged from those talks is a proposed deal under which the Saudi oil giant will acquire a 25 per cent stake in India’s biggest oil refiner and, possibly, explore other areas of collaboration.

The development has sent a frisson of alarm through the state-owned oil refiners which have already signed an agreement with Aramco to participate in a $ 44 billion refinery in the country’s west coast.

No one in the oil industry has publicly expressed any negative opinions about the Aramco-Reliance Industries alliance but there is no denying the trepidation in the state-owned oil industry and the implications that the Aramco-Reliance association may have on its fortunes since it could blow away the entrenched monopolies in the petroleum retailing business.

The initial impression in the corporate circles was that Aramco’s investment in RIL’s refinery and petrochemicals must have been prompted by the promise of an attractive rate of return. Experts reckoned that from India’s perspective selling equity in an existing refinery at a premium would be a better option than allowing Saudi Aramco to build a greenfield mega refinery.

Reliance, which so far shied away from joint ventures at home, must be keen to sell equity in its refinery and petrochemical business because it needs to create a cash buffer that will back stop its forays into the capital-guzzling sectors like telecom where it has successfully shredded legacy competitors like Airtel, and e-commerce where it is up against formidable rivals like Amazon and Walmart. But first RIL must pare its Rs 3 trillion debt. The deal proposing a 25 per cent equity stake for Aramco in RIL, therefore, is considered sensible for both the parties.

But it is only now that the implications of such an association between the world’s largest crude oil exporter and India’s biggest private conglomerate have started to sink in, sending jitters through the industry. Saudi Armco is a colossus and has the political backing of the Saudi kingdom. Reliance Industries has been rated as India’s most politically powerful corporate whose growing clout has been a matter of concern not only for the PSUs but for other private corporates as well.

Are these fears genuine or are they exaggerated? Saudi Aramco has said from the very beginning that it is interested in India’s vast retail market. Not many believed it. How could a giant like Aramco enter India’s overcrowded retail market? Long before it announced its decision to invest in the mega refinery project, Aramco commissioned a study on India’s retail market.

RIL, the single largest refiner, is already a retailer in India with 1,400 retail outlets. Though its retailing is not rated a great success, Aramco can depend on it to make a foray into retailing in India. BP is also executing its licence for retail outlets in collaboration with RIL. Mukesh Ambani-controlled RIL had no experience in telecom when it launched Jio. It took on the established telecom players so easily that they are now struggling to survive. There is a fear that the same can be repeated in petroleum retailing as well. Not so easily.

India’s petroleum retailing is practically controlled by the three oil PSUs: Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum. Together, they operate 57944 retail outlets. They almost totally control the pipelines and storage facilities. In comparison, private players such as RIL, Nayara and Shell together own only 6,680 retail outlets and do not have the basic infrastructure such as pipelines or storage facilities.

Establishing new retail outlets is not going to be that easy in a vast country like India. The PSUs have already announced their plans to set up another 50,000 retail outlets in the next five years. In fact, they have already swung into action acquiring land for these outlets. For new players, finding a suitable location for retail outlets is going to be a big problem.

That is where Reliance’s political clout comes in. The proposed deal with Aramco will raise Reliance’s magnitude of influence in the corridors of power. The politically strong Aramco comes with the backing of the Saudi government. With President Donald Trump imposing sanctions on Iran, crude oil purchases from that country has all but dried up. Saudi Arabia is an obvious alternate source of oil. The PSUs cannot normally be forced to part with their infrastructure. Such a move can trigger a controversy that could be damaging for the party in power. Moreover, the PSUs cannot be forced to participate in a joint venture with the Aramco-RIL combine.

A willing government, however, has the option of selling its stake in one of three PSU marketing companies. Until now, such transactions have been confined within the public sector space. The only exception was the sale of IPCL – a sick public sector plastics maker – to the Reliance group in 2002. It was merged with RIL in 2007. Sickness can be induced if the political leadership so desires. It is feared that a Jio-type operation can be used to bleed some of the retail outlets by slightly lower pricing, prompting the government to sell its stake in one of the PSU marketing companies. Aramco will bring the upstream muscle that Reliance lacks today.

These fears look exaggerated just now. But it is certainly within the realm of possibility. The Aramco-RIL combine is unlikely to attempt such a strategy in the immediate future. Aramco is not known to adopt such aggressive business strategies but RIL is. The Indian public will certainly welcome any deal that promises fuels at lower prices. Healthy competition will be welcomed. But in Indian conditions, competition doesn’t endure and the people could find these illusory benefits vanish over time.

Saudi Aramco seems to have a long-term strategy for the Indian market. The decision to invest in RIL’s refinery and petrochemical projects has not changed its commitment to the mega refinery project in Maharashtra. It seems to have realised that India moves slowly and it needs patience to succeed in the Indian market. It is not upset with the delay over the execution of the mega refinery nor has it objected to the state government’s decision to shift the location of the mega refinery from the coast to the interior. Aramco seems prepared to play a long waiting game.



To download the latest issue 'Volume 26 Issue 3 - May 10, 2019', click here
Petro Intelligence [FREE Access]
Aramco-Reliance Alliance Sparks Jitters
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Kuwait Petro: Left High And Dry
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ONGC Resists Niti Aayog, Regains Its Mojo
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Overseas Investment
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Domestic Natural Gas Price and Price Cap for Deepwater, High temp High Pressure Areas
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Capacity Utilization of LNG Regasfication Terminals in FY 2018-19
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Global LNG Fleet
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Increasing Dependence of Imported RLNG
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Russian Company Gazprom’s Average Gas Production Cost
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Natural Gas Price: Global / India
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India’s Sectoral Consumption of Natural Gas (FY 2018, FY 2023 & FY 2030)
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CFSR Study Report - Seamless Development of Gas Value Chain
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Potential LNG and FLNG Projects Aiming for FID in 2019-2020
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Advantage of strong Regulatory Environment for CGD Industry
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Domestic, Global Natural Gas Price Trends
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Market Natural Gas and CGD: Attractive Industry
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Adani Gas: Infrastructure Development to Propel Gas Demand India
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Update: Coal Bed Methane (CBM) Gas Development In India
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LPG Business Continues Its Robust Saga
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Data Section
Monthly Upstream Data
Monthly Downstream Data
Historical database
Data Archives
Special Database
Indian crude basket price in April 2019 (in $ per bbl)
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India’s Petroleum Products Import Drops In FY 2018-19
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India Imports 226.642 MT Crude Oil In FY 2018-19
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Decline In Sales Of Passenger Vehicles A Matter of Concern
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Power Availability In March 2019
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Share of Domestically Produced Oil Shrinks To 16.3 % In Total Consumption
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Percentage share of High Sulphur (HS) & Low Sulphur (LS) crude oil processing
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Update: Oil Import - Volume and Price
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Reserve Replacement Ratio (RRR): Oil, Gas & CBM
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World Oil Demand 2018 & 2019
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Retail Selling Price (RSP) of major products in India & neighbouring countries
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Global Rig Count Vs Crude Prices
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