Sorry, Aramco, Ambani just isn't interested in you

Could one of the energy industry's longest-running on-again, off-again romances be catching fire again? Saudi Arabian Crown Prince Mohammed Bin Salman seems to think so.

"There are discussions happening right now about a 1 per cent acquisition by one of the leading energy companies in the world" in state-owned Saudi Arabian Oil Co, he said in a local television interview Tuesday.

Prince Mohammed didn't disclose which company might make the investment, but you don't have to be a Jane Austen protagonist to work out the most likely partner. Reliance Industries Ltd., owner of the world's biggest oil refinery, has been dancing the quadrille with Saudi Aramco for nearly two years. At current prices, 1 per cent of Aramco would be worth about $19 billion - not far off the $15 billion price tag put on 20 per cent of Reliance's energy division, at the time the Saudi company first took an interest in buying a stake in 2019.

A tie-up with Reliance is exactly what Aramco has in mind, the Financial Times reported, citing people familiar with the matter. The two companies would initially exchange shares, with cash payments from the Saudis over subsequent years making up the balance of the transaction, the paper reported.

It is a truth universally acknowledged that an Asian company in possession of an oil refinery must be in want of a Middle Eastern strategic investor. In this case, though, it's hard to see the attraction for Reliance's Chairman, Mukesh Ambani.

First, consider why the Saudi company is looking to sell a stake in the first place. Back in 2019 when the deal was first mooted, Reliance was in a tough financial spot. Net debt had more than tripled to Rs 2.05 lakh crore ($30 billion) in March that year, from Rs 67,000 crore five years earlier, as the company plowed cash into its fast-growing telecommunications and internet arm Reliance Jio.

Aramco, meanwhile, was awash with oil cash and expecting to be even more flush after its initial public offering, which eventually raised about $29 billion in December of that year. By offering to put down a 10-figure amount in return for a fifth of Reliance's energy business, Saudi Inc. was following a time-honored tradition of using its bottomless funds to get a strategic midstream or downstream asset in one of its consuming countries. That would put the deal in line with long-standing tie-ups over oil storage in Japan, and a venture proposed earlier in 2019 to build a $10 billion refining complex in northeast China.

How things have changed. Faced with paying an over-generous $75 billion annual dividend, as well as the $69 billion purchase price of state-owned chemicals business Saudi Basic Industries Co - at a time when all its peers are cutting their oil-price forecasts - Aramco is no longer swimming, Scrooge McDuck style, through piles of money. Though funds are hardly tight, they can no longer be treated as limitless.

That Chinese refinery project was put on ice last August, while investments in the US and elsewhere are being wound back, the Wall Street Journal reported the following month citing people familiar with the matter. Another $44 billion refinery near Mumbai, in which Aramco and Abu Dhabi National Oil Co. would have taken a joint 50 per cent stake, has also ground to a halt. Aramco's most prominent deal this year - the $12.4 billion sale of its pipelines network to EIG Global Energy Partners - saw cash coming into the Saudi business, rather than going out of it.

Reliance's balance sheet has moved in the opposite direction. Investments from Alphabet Inc. and Facebook Inc. in its Jio business, combined with a rights issue, brought in Rs 2.2 lakh crore last year. That left the company effectively with a net cash position by December. A breakneck pace of growth at Jio will likely cause it to overtake petroleum and chemicals as the biggest contributor to earnings, with or without a stake sale. Right now, Ambani isn't particularly in need of cash. He certainly doesn't need shares in one of his biggest suppliers, least of all when they're locked up on a foreign stock exchange in a currency whose long-standing dollar peg is looking less secure than it once did.

Looking at his comments at the time of Reliance's last annual general meeting in July, it's clear that the allure of a conventional petroleum business is rapidly fading: "The catastrophic impact of climate change calls for the legacy energy industry to reinvent itself on a war footing," he said, before committing the company to net-zero carbon emissions by 2035 and promising investments in hydrogen, wind, solar, fuel cells and batteries. Already at the time of Reliance's 2019 talks with Aramco, it was looking to shift from a traditional focus on road fuels into jet kerosene and petrochemicals.

It's important not to overstate how much Reliance is likely to change. The world's biggest oil refinery will continue to earn billions from processing crude and producing chemicals for a long time to come, and Ambani wouldn't be the first fossil-fuel boss to overstate the pace of his green makeover for the sake of some shareholder adulation.

Still, a business that's flush with cash and sees its future in technology and zero-carbon chemicals doesn't really need what Saudi Aramco is offering. If Prince Mohammed wants to seal this betrothal, he's going to have to offer a far more generous dowry. (Bloomberg)