Policy
US Crude Turns Unattractive For India, PSUs In A Fix
more...


HPCL-MRPL May Merge With IOC After BPCL’s Fate Decided
more...


Freeing Up Gas Price: Agreed But Reluctant To Act
more...


Challenges In Transforming GAIL After Mandated Unbundling
more...


Refineries Operate At Lower Capacity As Demand Remains Low
more...

Regulation
India’s Natural Gas Consumption Makes Significant Recovery
more...


Mangala Field Completes 11 Years Of Successful Production
more...


PNGRB Acts To Regulate Force Majeure Invocation In CGD Sector
more...


Status Of Shale Oil & Gas Development In India: An Assessment
more...

Alternative Energy / Fuel
GAIL And CCSL Sign MoU For CBG Projects
more...

New Projects
CPCL To Infuse Rs 18.50 Billion In BS VI Auto Fuel
more...


CPCL Cauvery Basin Project Gets Environmental Nod
more...


BPCL To Commission Bokaro LPG Bottling Plant In December
more...


India To Divert 100 MT Coal To Gasification Projects
more...

Market Watch
IOC To Use Solar Power At Retail Outlets
more...

Companies
Nabors Industries Ltd
more...


ONGC Reports East Coast Deep-Water Oil And Gas Find
more...


IOC Raises Borrowing Limit
more...


Engineers India Wins New Order
more...

Press Release [FREE Access]
Petro Intelligence » Refinery Politics: Where Will Aramco Commit Its Money?

By R. Sasankan

The world has turned topsy-turvy after the outbreak of the Covid-19 pandemic -- and with it the global economy is staring at the prospect of one of the worst recessions in decades. The situation has been exacerbated by the need for severe lockdowns in most geographies to slow the spread of the infection with a ruinous blow back effect on the fortunes of large multinational corporations.

The global oil industry was going through a pretty hellish phase already as crude oil prices started tumbling more than a year as many economies had already started to slow down long before the pandemic broke. Suddenly, oil behemoths had started to cut back on plans, mothball projects and flirt with cost-cutting strategies to conserve cash.

Saudi Arabia's Aramco -- which had emerged as world's most valuable publicly traded company in December last year after its $ 25 billion IPO last December -- had been bracing to make investments around the world. In February last year, Saudi Crown prince Mohammed bin Salman, who has been driving a massive social change in the desert kingdom and looking to sever its preponderant links to fossil fuels, struck a landmark deal with China. He was present in Beijing when Aramco signed the deal to invest $ 10 billion joint venture refinery cum petrochemical project in China's North-Eastern province of Liaoning. A year on, Aramco has had to walk away from that proposed venture. It must have a gut-wrenching decision to make but, in the changed circumstance, it was inevitable.

When the Chinese deal was struck, the price of crude oil was ruling around $ 63 a barrel and there was no indication that Covid-19 would darken prospects for global investors in such a brutal fashion. The outbreak of the pandemic and the oil price crash has played havoc with the fortunes of all oil companies in the world and Aramco, the largest and the most profitable among them, was no exception. The virus’ impact on energy demand changed the calculations for all energy projects in the world and the Chinese partners must have been resigned to Aramco's decision to drop its investment plan.

The Chinese episode has many lessons for India as well which had come out sometime ago with a grandiose plan for a 60 million tonne per annum (MTPA) refinery in the west Indian state of Maharashtra. Way back in April in 2018, Aramco signed an MoU with a consortium of Indian PSUs such as Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation to set up a 60 million tonne per annum (MTPA) refinery. Aramco was offered a 50 per cent stake but this was later whittled down considerably when Adnoc of the UAE was also persuaded to join the project. There was a jinx over this project from the start: environmental protests scuttled plans to find suitable land to house it. The bust-up in the petro-dollar universe and simmering discontent within IOC over partners who had been foisted from the top did not help matters either.

When the MoU was signed, the world crude price was ruling around $ 72 a barrel. At that time, Aramco had not even considered an investment in Reliance Industries' oil-to-chemicals division which is due to be spun off from the giant company. Nor had government announced its plans to privatise Bharat Petroleum Corporation either. The mega refinery project, however, got delayed by two years, which isn't unusual in India, but must have come as a big surprise to Aramco and Adnoc which are not used to bureaucratic wrangling or public protest. Originally, when the MoU was signed the cost of the project was estimated around $ 44 billion but later revised to $ 60 billion.

The oil-price crash has hit the finances of Aramco badly. Its debt has been rising even as crude price shows no sign of going up from the present level of $ 40-45 per barrel. In its second quarter results for the period ended June 30, the Saudi giant announced that its gearing ratio --which is a measure of how much of its operations are financed by debt -- rose sharply to 20.1 per cent from minus 0.2 per cent at the end of December last year. Aramco’s decision to pay out $ 75 billion in dividend this year will inevitably force it to cut its capital spending.

A prompt decision on investment in China was inevitable as project execution moves very fast there but, in India, everything plods down a slow lane. Aramco is still undecided on its investment in RIL’s O2C division as both parties have bickered over the final price. On present reckoning, the valuation difference of $ 2 billion looks unbridgeable but a final decision may depend on other factors as well.

The future of mega refinery project is also linked to the outcome of the race for Bharat Petroleum Corporation which is being privatised. If Aramco gets it, which on present reckoning looks a strong possibility, it can easily opt out of the mega refinery. Given the present state of its finances, it would be hard to expect it to stand committed to both projects. Moreover, Aramco has shown a greater preference to enter India’s retail market.

The pandemic has forced a thorough review of investments in petroleum projects the world over. How profitable is investment in refineries these days? “I cannot really be specific but I do believe we have a large overcapacity in refining worldwide. With razor sharp refining margins, adding new capacity does not make sense,” said an acknowledged energy expert who was part of the Government of India till recently.

Oil expert Bhamy Shenoy looks at the issue slightly differently. “There are far better and cheaper alternatives for oil exporting countries from the Persian Gulf who are looking for long-term opportunities to sell their crude. In India, they can buy into the public sector refineries or buy into the mega refinery complex of Reliance. There is more than enough refinery capacity in the world. Why invest in a brand new refinery which has to compete with the depreciated refineries which will be able to sell products at lower cost,” he asked.

In the rapidly changing market scenario, only a miracle can bail out India’s mega refinery project. But a formal announcement will in all probability be made in another couple of months. Aramco is determined to enter the Indian market and the Indian government is keen to accommodate it. It need not be through a mega refinery. Aramco is equally keen that its Indian business should not be at the cost of its relations with Mukesh Ambani’s RIL. This creates a piquant situation -- and everyone is walking on eggshells just now.

The original idea of a large refinery in the state of Maharashtra with participation of all PSU refineries emanated from Indian Oil Corporation. Aramco entered with the blessings of the Modi government.

If Aramco exits, IOC will get a shot at establishing a mid-sized refinery on the west coast, either on its own or with other partners. The location of the refinery will not be a problem if IOC leads the consortium. It may also rope in a foreign company with a minority stake. After all, IOC always prefers to call the shots.



To download the latest issue 'Volume 27 Issue 11 - September 10, 2020', click here
Petro Intelligence [FREE Access]
Refinery Politics: Where Will Aramco Commit Its Money?
more...

Aramco’s Due Diligence: The new twist in a riveting ‘Sop Opera’
more...

BPCL Privatisation Must Be Anchored To A Sectoral Strategy
more...

High Fuel Prices Can Implode A Faltering Economy
more...

Foreign Investment
Total Sees Growth In Battery Business In India
more...

Overseas Investment
ONGC Not In A Hurry For Investment Overseas
more...

Gas Scene
Natural Gas Price Trends: Global And Domestic
more...


Recoverable Coal Bed Methane Reserves
more...


Domestic Natural Gas Scene in July 2020
more...


Import of Liquefied Natural Gas (LNG)
more...


Natural gas price trends: Global & Domestic
more...


Sector-wise Consumption Of Natural Gas In June 2020
more...


Changing Fortunes of India’s LNG Regasification Terminals
more...


LNG Consumption By Power Sector Jumps, Power Consumption drops
more...


India’s Rising Gas Import Dependency
more...


Sector Wise Demand And Consumption Of Natural Gas
more...


Competiveness Of Pipelines vs LNG
more...


Transnational Pipelines - Operating or Under Construction
more...


CGD Growth Over The Years
more...


India’s Increasing Gas Import Dependency
more...

Data Section
Monthly Upstream Data
Monthly Downstream Data
Historical database
Data Archives
Special Database
Specific Energy Consumption of PSU Refineries - An Update
more...


Crude Oil and Natural Gas Production in North-East
more...


Upstream activity And Declining Global Rig count
more...


India’s Rising Self-Sufficiency Petroleum Products
more...


Prices In Indian Crude Basket In August 2020
more...


Expansion of Existing Refineries & Refining Capacity Addition over the years
more...


Update: The level of taxes on Petrol and Diesel and the Price Build Up in the capital city of Delhi
more...


Retail Selling Price Of Major Petroleum Products In India & Neighbouring Countries
more...


Refining Capacity & Refinery Crude Throughput
more...


Petroleum Products Import Up Even As Crude Import, Refining, Consumption Down
more...


Crude Oil Processing In July: Share of Domestic Crude Up, High Sulphur Crude Down
more...


India’s Crude Oil Import Plunges In July, OPEC Share Shrinks Further
more...


Power supplied and deficit: Region-wise position for July 2020
more...


Product-Wise Consumption In July 2020
more...


Update: FDI in India’s Petroleum Sector
more...


Update: Status of blocks under NELP (As on 1st April 2020)
more...


Distillate yield of PSU refineries: An Update
more...


Indian Rig Count vs. Indian Basket Crude Price
more...


Global Rig Count Falls In June 2020, US Worst Hit
more...


Indian Crude Basket prices in July 2020
more...


India’s Crude Oil Import Declines In June 2020, OPEC Share Shrinks
more...


Negative Growth In Vehicle Sales Impact Consumption Of Petrol, Diesel
more...


Covid-19 Impact Minimum In Offshore Oil and Gas Investments
more...


Covid -19 Impacts India’s Crude Oil Demand
more...


Crude Oil Import- Volume And Value
more...


Petroleum Sectors Contribution To Ex Chequer
more...


Declining Demand For PDS Kerosene
more...


Self-Sufficiency In Petroleum Products - An Update
more...


Capital Expenditure Of PSU Oil Companies - An Update
more...

Tenders [FREE Access]
ONGC Neelam & Heera Asset, Mumbai
more...