Reliance Industries and Saudi Aramco have canceled an agreement for the state-owned oil giant to acquire an interest in the oil-to-chemicals segment belonging to the Indian conglomerate due to value issues, sources who are aware of the issue told.
Discussions broke out over the extent to which Reliance’s Oil-to-Chemicals (O2C) business is worth as the world strives to move off fossil fuels and cut down on emissions, they claimed.
In the meantime, Reliance will now focus on signing multiple contracts with companies that produce special chemicals with higher profits, one of the sources told.
Aramco is the world’s leading oil exporter, has signed an agreement that is not binding to purchase 20% of Reliance’s O2C business for $15 billion in the year 2019. The two companies last week said they would revisit the dealafter two years of talks.
The failure of the agreement reflects the evolving global energy landscape with oil and gas companies move away from fossil fuels to renewable sources. The value of refining and other the petrochemical sector have declined particularly following last week’s COP26 climate negotiations in Glasgow A second source in the discussion stated.
In spite of this, Reliance had stuck to the valuation of $75 billion that the O2C business in 2019, the company said.
“Evaluation by consultants showed a significant cut in valuation…more than a 10% cut,” the consultant added.
“Reliance has highlighted the difficulty of separating Jamnagar from the clean energy business as a reason to not complete the transaction, although we suspect business alignment and valuation were also key reasons,” Bernstein wrote in a recent letter that referred to Reliance’s enormous refinery facility located in Gujarat state.
Another source who is familiar with sufficient diligence claimed that the process was stopped in “early stage assessment”.
Reliance sought guidance to get advice Goldman Sachs and Aramco was looking for assistance from Citigroup sources told. The banks have not made any comment.
Jefferies has reduced the value of Reliance’s energy business down to $70 billion, down from $80 billion. Kotak Institutional Equities has cut the value of its O2C company to just $61 billion. Bernstein estimates that the business is worth $69 billion.
While not confirming if the deal has been canceled or not, Saudi Aramco said it has been in a long-term relations to Reliance which will allow it to seek opportunities to invest in India.
Reliance stated that it will remain the preferred partner of Saudi Aramco to invest in private companies of India and will work together with Saudi Aramco & SABIC for investment into Saudi Arabia. Reliance is the largest Indian consumer for Saudi oil.
Reliance is aiming to be carbon neutral in 2035, is planning to shift to a cleaner energy source and feedstock within its O2C business and will expand its business into batteries, solar power and electrolyzers that produce hydrogen as well as hydrogen fuel cells.
“The full value of this integration is also best extracted by repurposing existing O2C assets as well as evaluating multiple joint venture and partnerships in downstream ventures in specialty chemicals,” an individual who is familiar with the subject said.
The demand for specialty chemicals – that are used in industries like dyes, agrochemicals, colourants as well as fast-moving consumer goods such as fuel additives, pharmaceuticals, textiles and polymers are set to grow in India as the economy grows. They also offer more profit for businesses than traditional fuels, as the demand for diesel and gasoline will decrease as a result of increasing use of electric vehicles and renewable energy sources.
There is a huge opportunity for the Indian specialty chemicals industry is projected to grow to $32 billion by the year 2019 to of $64 billion before 2025, helping increase exports as global companies are seeking to lessen the risk of their supply chains that are dependent on China according to an official report.
It is the Indian conglomerate, owned by billionaire Mukesh Ambani, already made an investment of $2 billion in Dubai’s TA’ZIZ Chemical Joint Venture that is owned by Abu Dhabi National Oil Co. and the sovereign money fund ADQ.
Saudi Aramco has also turned its attention towards renewables and hydrogen as it strives to be net-zero by 2050.
(Adapted from TheGlobeAndMail.com)