Reliance's partnership with Saudi Aramco not a retreat from energy business: Report

Reliance Industries' partnership with Saudi Aramco for its USD 75 billion oil-to-chemicals business signals expansion rather than retreat as growth opportunities are expected to boost the petrochemical and refining vertical, market analyst firm Bernstein said.

Billionaire Mukesh Ambani had in August last year announced initial agreements to sell a 20 per cent stake in the oil-to-chemical business to the Saudi national oil company. Also, a 49 per cent interest in fuel retailing business was sold to UK's BP plc for Rs 7,000 crore.

"Reliance has pivoted away from energy to the new economy. But energy still accounts for 64 per cent of EBITDA. While RIL has divested stakes to BP and Aramco, we expect RIL to grow their petrochemical and refining business given the secular growth opportunities," it said in a report.

Stating that India has significant secular expansion (that is, unaffected by short-term trends) ahead in refined products and petrochemicals, it said with the lowest demand per capita of 1.3 barrels per person, demand for refined products will grow by 5 million barrels per day over the next two decades, more than any other major market.

Ethylene demand could grow ten-fold from 5kg per person per annum to 50-60kg pp/pa as consumer demand rises.

"Reliance partnership with Aramco and BP signals expansion ahead rather than retreat," Bernstein said. "Aramco's investment is to secure market access and growth. While refining is a cash cow for the business, we believe that there are significant opportunities for petrochemical expansion ahead given demand growth and synergies with refining."
"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 expansion of their digital business and further expansion of downstream capacity with an experienced partner."
"In comparison to global oil majors, Reliance has relatively less refining capacity at 1.24 million bpd versus peers at 2.62 million bpd. However, Reliance has one of the best positions to grow its capacity over time given India's structural growth in oil demand over the next 20 years," it said. "Moreover, Reliance has one of the most profitable refining business relative to peers owing to the higher complexity of Jamnagar. Whether Reliance will choose to expand its existing footprint is not clear, but the relationship with Aramco (assuming the deal goes through) means that there could be options for further expansion."