Reliance to hive off $75 billion oil-to-chemicals business into separate unit for sale to Aramco

Reliance Industries Ltd (RIL), India's largest company, on Thursday said its board has approved hiving off its USD 75 billion worth oil-to-chemicals business into a separate division to enable the sale of 20 per cent stake in the unit to Saudi national oil company Aramco. The hiving off will be subject to the approval of the National Company Law Tribunal.

After the approval, the oil-to-chemical (O2C) business will become a separate vertical with independent balance sheet just like the conglomerate's digital arm, Jio Platforms. RIL had organised all its digital businesses including Reliance Jio that has 388 million telecom subscribers, into Jio Platforms. It last week agreed to sell a 9.99 per cent stake in Jio Platforms to Facebook Inc for USD 5.7 billion.

RIL Board "approved a Scheme of Arrangement for transfer of O2C Undertaking of the company to Reliance O2C Ltd as a going concern on slump sale basis for a lump sum consideration equal to the income tax net worth of the O2C Undertaking as on the appointed date of the Scheme," it said in its fourth-quarter earnings statement.

O2C undertaking of the company comprises entire oil-to-chemicals business of the company consisting of refining, petrochemicals, fuel retail and aviation fuel (majority interest only) and bulk wholesale marketing businesses together with its assets and liabilities.

"The scheme is subject to necessary statutory/regulatory approvals under applicable laws including approval of National Company Law Tribunal," it added.

In August last year, RIL head Mukesh Ambani had announced initial agreements to sell a 20 per cent stake in the oil-to-chemical business to Saudi Aramco for an asking of USD 15 billion.

The deal covers all of Reliance's refining and petrochemicals assets as well as the remainder of stake the firm has in fuel retailing business after selling 49 per cent to BP Plc of UK for Rs 7,000 crore.

The deal, which valued the oil-to-chemical business at USD 75 billion, was to close by March 2020 but it is now expected to close within the current calendar year.

Reliance has pivoted away from energy to the new economy. But refining and petrochemicals are cash cows for Reliance and still account for the bulk of its EBITDA.

As part of the August deal, Saudi Aramco will supply 500,000 barrels per day (25 million tonnes a year) of crude on a long-term basis to RIL's Jamnagar refinery complex (more than a third of the 1.36 million bpd refining capacity).

The deals give Aramco and BP access to the fastest-growing refined fuels market in the world.

Market analyst firm Bernstein in a recent report had stated that it expects RIL to grow their petrochemical and refining business given the secular growth opportunities.

"While bears will argue that Reliance is stepping away from energy to digital, we see this deal as an opportunity to expand the downstream business in India with a solid partnership. For Aramco, the deal provides direct access to what is widely expected to be the fastest-growing refined oil product market over the next 20 years," it said. "For Reliance, it provides cash to fund the expansion of their digital business and further expansion of downstream capacity with an experienced partner."

While talks with Aramco continue, the BP deal has been finalised. Reliance's existing 1,400-odd petrol pumps, as well as 31 aviation fuel stations, will be transferred to the new joint venture where BP will hold 49 per cent equity stake. Reliance will hold the balance 51 per cent in the entity, which aims to expand the retail network to 5,500 petrol pumps in the next five years.

This is the third joint venture between Reliance and BP since 2011.

BP had in 2011 bought 30 per cent stake in 21 oil and gas exploration and production blocks of Reliance for USD 7.2 billion. At that time, another 50:50 joint venture, India Gas Solutions, was set up for sourcing and marketing gas in India.

The country currently has 69,109 petrol pumps, with public sector retailers owning 61,811. PSU retailers have plans to double this network and have already started appointing dealers.

Russia's Rosneft-backed Nayara Energy, formerly Essar Oil, has 5,702 petrol pumps and has plans to scale them up to more than 7,000 in two-three years.

Royal Dutch Shell has 189 outlets and is slated to add 150-200 more petrol pumps.

BP had in 2016 received a licence from the government to set up 3,500 petrol pumps in India.

French energy giant Total SA too is keen on entering the Indian retail market and has tied up with Adani Group for the same.

The Saudi national oil company, along with its partner UAE's Abu Dabhi National Oil Co (ADNOC) has taken a 50 per cent stake in a planned USD 60-billion mega refinery-cum-petrochemical complex in Maharashtra by state-owned oil companies, and has a bullish outlook on India's energy demand and is keen on investing here.

Reliance operates two refineries in Jamnagar, Gujarat, with a total capacity of 68.2 million tonnes per annum.

It plans to expand its only-for-exports special economic zone (SEZ) refining capacity to just over 41 million tonnes from the current 35.2 million tonnes.

Saudi Arabia, on the other hand, is keen to get a foothold in the world's fastest-growing fuel market to get a captive customer for the crude oil it produces.

Crude oil is the basic raw material for the manufacturing of petrochemicals.

Saudi Aramco is also keen on retailing fuel in India. A refinery in India can also be a base for it to export fuel to deficit countries in Europe and the Americas.

India has a refining capacity of 249.9 million tonnes, which exceeded the demand of 213.7 million tonnes.

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