As expected, Reliance Industries Ltd is at the centre of all the action. Two new deals that it reached recently – one with BP for petroleum marketing and the other with Aramco of Saudi Arabia – looks certain to change the landscape in the petroleum industry forever.

But the public sector entities are not squeamish of reworking their own alliances as well – and this provides grist to the rumour mills. For starters, there is a buzz that the merger between HPCL and ONGC – a forced and contrived arrangement – may be close to breaking down. In January 2018, ONGC had bought out the government’s 51.11 per cent stake in HPCL for Rs 369.150 billion. But even 18 months after the deal, HPCL has been refusing to recognise ONGC as its promoter and continued to name the President of India as its promoter in regulatory filings even though the government has no stake in the company anymore. HPCL seems to have finally relented reluctantly.

It now transpires that the government itself may not be too averse to reviewing the arrangement provided that ONGC gets an appropriate price for its stake. It is an acknowledged fact that ONGC was never keen to acquire HPCL. ONGC could have used that money to acquire upstream assets overseas. Though its crude and gas production is targeted to go up marginally for a short period in the next two to three years, ONGC’s stature as an E&P company has been shrinking in the absence of a commercial discovery in the last five decades. ONGC will, therefore, prefer to get rid of HPCL if it gets a good price so that it can utilize the money to strengthen its E&P activities. The government obviously will not discourage such a step and may even bless the move as it fits in with its strategy.

Enter Aramco.

Bizarre as it may seem, there is a strong possibility that Aramco may be ready to acquire HPCL as it has big retailing ambitions in India. And it won’t necessarily feel constrained by the fact that it has reached an agreement with RIL to become a strategic partner by acquiring a 20 per cent stake in its refining and petrochemicals business at an enterprise value of $ 75 billion.

Saudi Aramco’s upstream clout coupled with RIL’s aggressiveness in marketing can turn the petroleum retailing space on its head before a new order emerges. The transformation can be devastating for the state-owned oil marketing companies (OMCs). I see RIL-Aramco attempting a strategy similar to what has been done in the telecom sector through Jio.

RIL’s ability to shake up the space in which it operates cannot be underestimated. The conglomerate entered the consumer retailing segment in 2006 and became the country’s largest retailer by 2014. The turnover of Reliance Retail has crossed Rs 1300 billion which is more than the business of all the other major retailers taken together. In three years since it launched its Jio mobile telephony services, it has become the largest with a subscriber base of over 340 million. With that sort of a formidable reputation, it presents a serious challenge to the entrenched monopolies.

That is why I expect a strong response from HPCL. Will Saudi Aramco buy into HPCL? I see a strong possibility. This can happen only if it exits the proposed 60 million tonne per annum mega refinery project in the state of Maharashtra where it has committed to acquire a 50 per cent stake along with ADNOC. The refinery project appears to be in trouble. With the creeping demand slump in petroleum products, creation of fresh refining capacity looks extremely risky.

Meanwhile, there is speculation that the size of the mega refinery in Maharashtra may be pruned. Indian Oil Corporation (IOC), which leads the Indian side in the consortium, may use the uncertainty to regain its position as the lead promoter as envisaged in the original scheme of things. RIL has always been uneasy about Aramco’s involvement in the proposed mega refinery project in the neighbouring state. RIL enjoys very good relations with IOC. In the emerging scenario, a stake acquisition in HPCL may turn out to be a better option for Aramco than being a promoter of an uncertain mega refinery.(HPCL has two refineries of its own and a Joint Venture with Mittal). Such a development will be beneficial to RIL as well.

At present, RIL is only a very minor player in petroleum retailing. Even with BP and Aramco as partners, RIL’s retailing can face formidable problems in the absence of marketing infrastructure such as pipelines and depots. With public sector oil marketing companies enjoying almost total control over marketing infrastructure, the most sensible option for Aramco is to acquire HPCL and then redraw its existing arrangement with RIL and BP.

Of the 65,000 petroleum retailing outlets in the country, the private players together have only 6,800 outlets. RIL has just 1400. The PSU oil marketing companies are in the process of doubling the number of their retail outlets. This will give HPCL a lot of heft: it already has 15,471 outlets and related infrastructure spread across the country. ONGC can be persuaded to sell HPCL to Aramco which may not be averse to making an attractive offer.

RIL has traditionally enjoyed a good equation with all PSUs. In the past, several chief executives and directors of oil PSUs joined RIL after superannuation. RIL’s refining and marketing division is headed by P. Raghavendran, who was picked by patriarch Dhirubhai Ambani from IOC in the 1990s.

The PSUs are unlikely to put up a strong resistance to the aggressive marketing strategy that the RIL-BP-Aramco combine is expected to unleash. The added advantage is that the new marketing company can make attractive job offers to bright talent within the PSUs.

Under the terms of the deal with RIL, Aramco will supply 500 KBPD of crude oil on a long term basis to its Jamnagar refinery. Even a marginal reduction in the Aramco crude price to its partner – coupled with its Jio-style marketing strategy – can wreak havoc in the petroleum retailing space. RIL knows India better than any other business house. This is precisely why Aramco preferred to go with it and agreed to pay a price that put a 36 per cent premium on the current enterprise valuation of RIL’s petroleum and petrochemicals businesses.