By R. Sasankan

It is rare for me to return to the same subject featured in an earlier column - Refinery Politics: Where Will Aramco Commit Its Money?, which appeared in Petro Intelligence in the issue of www.indianoilandgas dated September 10, 2020 - but the provocation for this unusual step was the huge response I got from the readers. I firmly believe that the article was a perfectly balanced piece; neither for nor against any party. However, some readers were aggrieved that I had not adequately focused on the advantage that Aramco would derive by staying invested in the mega refinery project proposed in Maharashtra.

My basic premise was that if Aramco snagged Bharat Petroleum Corporation Ltd (BPCL), which is being privatized, there is a very strong possibility that it might be forced to reconsider its investment in the mega refinery project at a time when crude oil prices have turned decidedly weak. I cited the reported decision of Aramco to pull out of the $ 10 billion refinery cum petrochemical project in China to buttress my argument.

I do agree that for Aramco, the proposed investment in the mega refinery is quite puny and the advantage that it will derive is commensurately enormous. But there can be no denying the fact that in several pandemic-hit economies, oil behemoths have started to cut back on plans, mothball projects and flirt with cost-cutting strategies to conserve cash. Aramco cannot buck the trend and that is where the decision to opt out of the Chinese project stems from. But several readers felt that as far as Aramco is concerned, India stands on a different wicket. The share of fossil fuel is shrinking in the industrialised countries which will weaken the economies of oil producers. India is perhaps the only major market where fossil fuels will continue to dominate the energy mix for at least the next 30 years. That in itself is justification enough to remain invested in such a huge market.

The Middle East, more particularly countries like Saudi Arabia and United Arab Emirates, have shied away from India and baulked at investment opportunities here. But the change in the leadership in both countries has sparked an unprecedented level of interest in the Indian market. These leaders have developed a close personal rapport with Prime Minister Narendra Modi and their closeness is visible because of their changed perceptions on geopolitical issues as well. The perceived wisdom in these quarters is that India cannot be equated with whatever else is happening elsewhere in the world. I acknowledge the merit in this line of argument -- and much will depend on how the various moving pieces in this intricate puzzle sort themselves out.

Let us face the facts: there can be no guarantee that Aramco will gain control of BPCL. Aramco has a formidable rival in Russia’s state-owned Rosneft, which already has a strong presence in India on the basis of the large refinery and the fairly large retail network that it got by acquiring the erstwhile Essar Oil. Russian President Vladimir Putin has a strategy for India too and the Modi government is keen to accommodate Aramco but it will not do anything that will be seen as unfair in any way to Rosneft. There is one way to break the deadlock: bring Hindustan Petroleum Corporation (HPCL), the third oil marketing and refining PSU, into play and, thereby, accommodate the ambitions of both the petroleum giants.

Aramco signalled its abiding faith in India's retail market when it signed the memorandum of understanding (MoU) for the mega refinery. The question that hovers in the air is this: will it pull out of the star-crossed refinery project if it bags BPCL? Many will see such a prospect as grossly unfair and an action that isn't expected from the Saudi Crown Prince Mohammed bin Salman who has been striving to set the Saudi economy on a different trajectory. One cannot ignore the enormous benefit that Aramco will derive from sustained crude supply to the mega refinery which will only beef up the business revenues of the Saudi giant.

The speculation that Aramco might quit the mega refinery was triggered by an article in The Wall Street Journal. Coming as it did in the wake of the uncertainty created by the pandemic Covid-19, almost the entire petroleum industry was ready to believe that the rumour had something going for it. We chose to pick up the idea for critical analysis and linked Aramco’s participation to the outcome of the race for BPCL. In the past, we have written about the uncertainty that has dogged the mega refinery. We do not feel that the agitation against the location of the refinery was all that spontaneous and still believe that all the consortium partners have not remained equally committed to the project.

But we cannot ignore the sobering truth that the finances of Aramco -- like all the big oil companies -- have been badly mauled as a result of the oil price crash. Its debt has been rising even as the crude price shows no sign of going up from current levels. But for a company like Aramco, the investment required for its share of equity in the mega refinery cannot make any significant dent to its finances. But equally, let us not forget that even in these difficult times, Aramco has forked out an estimated $75 billion for payment of dividend.

The 60 MMTPA mega refinery project is estimated to cost $45 billion (the so-called revised cost is a matter of speculation). If the debt-equity ratio is pegged at 2:1, then debt will come to $30 billion and equity will be $ 15 billion. So, a 50% equity share for the overseas investors, works out to an investment of $ 7.5 billion -- which will be shared between Aramco and ADNOC. The cash call (share of equity to be paid) will be spread over the period of construction which could extend to 5-6 years, given the pace of implementing projects in India.

For Aramco, which is entering India for the first time, three crucial decisions will have to be taken in the next few months. The proposed investment in the yet-to-be-carved-out RIL’s oil-to-chemicals division will have to be settled first. The difference of $ 2 billion in the asset value estimates between Aramco and Mukesh Ambani is proving to be the obstacle to a deal. If it wins the race for BPCL, it will have to hammer out a strategy for the Indian market and find a partner to smoothen issues out. A decision on its role in the mega refinery will have to be made abundantly clear so that there is no scope for speculation. The three projects taken together can make Saudi Aramco a rising force in India’s petroleum sector.