By R. Sasankan
Relationships are always more valuable than deals in the world of big
business. Reliance Industries has seen a blizzard of high-value
transactions in an intense, Covid-fraught, lockdown-hit period which has
justifiably earned Mukesh Ambani the reputation of the world's
best-known dealmaker this year. But every once in a while, even the Man
with the Midas touch can falter.
In August last year, Ambani had announced at the company's annual
general meeting that Aramco of Saudi Arabia had tentatively agreed to
pick up a 20 per cent stake in the oil-to-chemicals business that RIL
intended to spin off at an enterprise value of $ 75 billion. The $ 15
billion Aramco deal, he said, would be the biggest foreign investment in
India.
A year later, things have not panned out as Ambani had envisaged. With
the world economy heading into a deep recession -- a situation worsened
by the outbreak of a global pandemic -- that valuation is no longer a
feasible option.
“Due to unforeseen circumstances in the energy market and the Covid-19
situation, the (Aramco) deal has not progressed as per the original
timeline,” Ambani told shareholders at the virtual AGM in mid-July. It
was the first admission that things were not going to plan -- and it
prompted talk that the deal was off the table, at least for now.
There has been a great deal of disappointment on both sides but both RIL
and Aramco have not allowed the setback to cloud their decades-old
relationship. So, it came as no surprise that Aramco tried to soothe any
ruffled feelings by talking of an extended due diligence process on the
deal -- more to save Ambani from any embarrassment than any realistic
prospect of clinching a deal in the future.
At an earnings call with analysts, Aramco CEO Amin Nasser was asked a
pointed question about the status of the negotiations. He said: "With
regard to the Reliance deal, all I can say at this stage, it's going
through due diligence. So, depending on the due diligence, we will make
our decision …This is a big deal. So, we need to take our time to review
and then decide based on the outcome of the due diligence study."
It is the first time that Aramco has officially commented on a deal that
the Saudi oil giant had pursued with vigour when the influential Khalid
al-Falih was the country's oil minister. However, he was shifted out of
the ministry when the deal had reached an advanced stage of
negotiation.
There is no evidence to suggest that Khalid's exit had anything to do
with the deal that Aramco was negotiating with RIL. But it is clear that
his successor was not completely convinced about the valuation of the
asset. Put simply, Aramco is not willing to pay more than $ 13 billion
for the 20 per cent stake in the O2C business even as Mukesh Ambani had
been negotiating hard for $ 15 billion.
Amin Nasser's latest announcement may have rekindled the smouldering
embers of hope that a deal might still be struck, but that looks
unlikely as Ambani isn't budging from his price, sources say. But the
two sides are keen to ensure that the outcome of the negotiations does
not in any way strain the extremely cordial relations that the Ambanis
have with the leading figures in the Kingdom. The best way to paper over
the differences would be to prolong the process of due diligence but it
cannot drag on indefinitely.
This could also be read as an overture by Aramco to look further afield
in its desire to cement its long-standing relations with RIL. Aramco’s
interest in India is not confined to RIL's mega refinery; it has made no
secret of its ambitions to develop a beachhead in India's vast
petroleum retail market. It is this abiding interest in India that has
been one of the factors that has influenced the Indian government’s
decision to privatise Bharat Petroleum Corporation Ltd (BPCL). Be it
Aramco or ExxonMobil, no one can succeed in India’s petroleum retailing
sector without a chunk of the marketing infrastructure which is almost
totally controlled by the three public sector oil marketing companies.
By deciding to privatise BPCL, the Indian government has guaranteed a 25
per cent retail market share to whoever takes control of BPCL. Aramco
will have to get into a scrum with a number of rivals who are expected
to participate in what promises to be an intense international
competitive bidding process which has already been initiated.
This is where the ties with Mukesh Ambani's RIL can come in very handy
for Aramco. It is tough for an outsider to negotiate the labyrinth of
India's power corridors; it will need someone like Ambani to guide them
through it. Aramco may find it eminently sensible to have RIL as a
partner for its retail foray in India now that its deal with RIL for
equity stake in O2C is in danger of collapsing.
It remains to be seen how keen RIL will be to partner Aramco in BPCL.
RIL may well baulk at Aramco's offer since it already has a
petro-retailing arrangement with BP and the joint venture is being
strengthened. Moreover, Mukesh Ambani announced a few days ago his plans
to move into sustainable energy in 15 years' time. If that is true,
BPCL or a new mega refinery may not fit in with his future plans.
Observers reckon that the timing of Mukesh’s announcement is important.
It is not going to be easy for Aramco to find any other partner in India
with sufficient heft to partner it in BPCL. Meanwhile, there is some
talk of Saudi Arabia's Public Investment Fund -- the sovereign wealth
fund -- investing as much as $ 1 billion in Reliance Jio's fibre assets.
This comes on top of PIF's $ 1.5 billion investment in Jio Platforms
for a 2.32 per cent stake.
Aramco’s biggest problem in India emanates from Russia’s Rosneft which
is making an all-out effort to wrest BPCL. Rosneft's strategy is guided
by President Vladimir Putin who commands respect in India and is a force
to reckon with. “The Russians and the Saudis want to enter the Indian
market and it would be ideal for them to do this via a company such as
BPCL instead of setting up a new refinery and establishing a retail
network from scratch. The Saudis will need a local partner more than the
Russians,” said an acknowledged energy expert.
The Indian government has the option to accommodate both Aramco and
Rosneft. The state-owned upstream major, ONGC, is facing an extremely
serious liquidity crunch. Last year, it was forced to acquire the
government stake in oil marketing company Hindustan Petroleum
Corporation Ltd (HPCL). As a public sector undertaking, it could not
oppose the government decision (read policy item 2). Later, the
government granted it the freedom to sell the stake in HPCL if it so
desired.
The ONGC leadership may not be bold enough to come out with a proposal
to this effect. The petroleum ministry can prompt it do so. Here is an
out-of-the-box solution: why not put both BPCL and HPCL on the block
together? If it is enticingly packaged, overseas bidders may rise to the
bait. India needs both oil and gas in large quantities. Aramco and
Rosneft are in a position to help India in meeting these requirements at
a reasonable cost. That will ultimately decide who gets BPCL or HPCL.
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