On Monday, Reliance Industries Ltd (RIL) chairman and managing director Mukesh Ambani announced a proposed $15 billion deal with Saudi Arabian Oil Co. (Saudi Aramco). Once the deal happens, state-run Saudi Aramco will acquire a 20% stake in RIL’s oil-to-chemicals (OTC) business, whose enterprise value is pegged at $75 billion. Though the Saudi state suffered a severe public image setback globally as a result of the Khashoggi affair, it hasn’t shelved plans for an Aramco IPO a year or so in the future. To enhance its own valuation, forging business alliances with large-scale consumer firms such as RIL makes sense. Perhaps, as some suggest, Aramco would also learn the art of shareholder management by working with RIL. That the Saudi firm can count on RIL buying its crude oil supplies goes without saying. On current information, Aramco is expected to supply RIL half a million barrels a day of the stuff.
The contours of the deal look promising from RIL’s perspective as well. It would assure RIL the security of input supplies from a volatile region, and that too of a commodity whose market price is infamously sensitive to geopolitical tensions. Saudi Arabia also holds significant weight with the Organization of the Petroleum Exporting Countries, a cartel whose production levels influence global prices to varying degrees. What delights RIL shareholders, however, is the prospect of the Indian company lightening its debt burden—estimated at $65 billion in 2018-19—with Aramco’s money. With a more reasonable debt-to-equity ratio, RIL will be in better shape to expand and reward shareholders.
Aramco’s India plans also include a partnership with Indian state-run oil companies for setting up the world’s largest oil refinery and petrochemical complex in Maharashtra. Driven by the same rationale, Abu Dhabi National Oil Co. (Adnoc), the state-run oil firm of the United Arab Emirates, has also picked up a part of Saudi Aramco’s stake in the $44 billion refinery. All of this points to a future of close Indo-Saudi ties in the energy sector.
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