By R. Sasankan
The Indian petroleum industry is in a whirl with a flurry of deals and a
realignment of relationships – all of which has whipped up a wave of
speculation over new arrangements that bristle with opportunities and
raises the prospects for a new and exciting game of winners and losers.
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.
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