US firm, which has 5% in RIL arm, is quitting unprofitable projects.
Amidst waning refining margins and tumbling demand, US oil major Chevron Corp has plans to exit unprofitable ventures that may include its investment in Reliance Petroleum (RPL), a subsidiary of Mukesh Ambani-led Reliance Industries (RIL).
Chevron has not yet signed a crude supply and product off-take agreement with RIL to take forward its plans to increase stake in RPL beyond the existing 5 per cent, said sources close to the development.
On January 30, Chevron chief executive officer David O'Reilly told analysts that the company has pulled out of some unprofitable refining markets, and will continue to do so. However, he had said that Chevron is continuing talks with its refining joint venture partner RIL that would determine whether it keeps a foothold in Indian refining.
The US firm had picked up a 5 per cent stake in RPL about two-and-a-half-years ago. As per the agreement with RIL, Chevron could raise its stake to 29 per cent after three months of the commissioning of an RPL refinery in Gujarat's Jamnagar or April 2009, whichever is later.
According to the sources, the current market condition is not in favour of increasing the stake by investing $1.85 billion (around Rs 9,000 crore).
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In an email reply to Business Standard, Chevron India president John Digby said, “For competitive reasons, we are not commenting on our investment plans in India.” RIL officials declined to comment on the development.
If Chevron buys 24 per cent more stake, RIL would fall below the majority stake position to 46 per cent. Mukesh Ambani-led promoters, who hold around 54 per cent stake in RIL, may be less comfortable with their stake position in RPL.
RIL had last year set up global oil trading teams in Houston, London and Singapore, indicating that an earlier plan for Chevron to market the refinery's exports in the US would have fallen through, said sources.
Meeting the deadline, RPL had commissioned its 580,000 barrels-per-day refinery at Jamnagar in Gujarat on December 25. But the company will take another three to four months to begin refining in full capacity. Currently, the synchronisation of supporting units with system is underway, said sources.
“An agreement with RIL requires Chevron to either increase its stake in the new refinery or pull out of the project entirely, this year. If they decide to exit, Chevron will have to sell the existing 5 per cent stake back to RIL at Rs 60 a share, the price at which it bought in 2006. For increasing the stake, the US refiner will have to pay the current market price,” added sources. RPL share closed at Rs 83 on Tuesday.
In previous years, Chevron said its refining strategy would focus upon Asia-Pacific, and its minority stake in the RIL plant was a key to that effort. However, waning refining margins and a global recession that has stymied demand for refined products has lent uncertainty as to whether Chevron will remain involved in the venture.
“We are continuing to rationalise our refineries,” O'Reilly said on a conference call.
Chevron previously pledged to improve its refining performance by focusing on core geographic areas and improving refinery reliability.