Saeed Azhar and Nidhi verma

NEW DELHI/DUBAI – Reliance Industries Saudi Aramco Sources with knowledge of this matter stated that the valuation issues have forced the Indian state oil company (SE:) to halt a plan to purchase a share in an oil-to-chemicals division of Indian conglomerate.

They said that talks broke down regarding the value of Reliance’s oil-to–chemicals (O2C), business. This is because the world wants to reduce its dependence on fossil fuels.

Reliance, according to one source, will instead focus on signing numerous deals with companies that produce specialty chemicals at higher margins.

Aramco (the world’s largest oil exporter) has signed an agreement not binding to purchase a 20% share in Reliance O2C’s business in 2019 for $15 billion. Last week, the companies announced they would re-evaluate the deal https://www.reuters.com/business/energy/reliance-aramco-re-evaluate-stake-sale-oil-to-chemicals-arm-2021-11-19, ending two years of negotiations.

This is due to the shift in global energy markets as more oil companies are switching from fossil fuels to renewables. The deal’s collapse was a result of these changes. A second source who was involved in deal negotiations said that the petrochemical and refining asset values have fallen, especially following the recent COP26 Climate talks in Glasgow.

Reliance maintained the valuation of the O2C company at $75 billion despite this fact, he stated.

His statement was, “The valuation by the consultants indicated a significant reduction…more that a 10%”

Bernstein recently wrote that Reliance had highlighted Jamnagar’s difficulty in seperating the clean-energy business from the transaction as an excuse not to complete it. However, we believe business alignment and value were other key factors.” Bernstein was referring to Reliance’s massive refining facility in Gujarat.

According to a second source, due diligence was stopped in the “early stages assessment.” Reliance wanted advice from Goldman Sachs. Aramco needed help. Citigroup (NYSE:), sources said. They declined to comment.

Jefferies (NYSE) reduced its value for Reliance’s Energy business from $80 billion to $70 billion. Kotak Institutional Equities, however, has decreased the enterprise value for O2C to $61 billion. Bernstein estimates that the business will be worth $69 billion.

Saudi Aramco did not confirm whether or not the deal was cancelled. However, it said that they have a strong relationship with Reliance over many years and would continue looking for Indian investment opportunities.

Reliance said it would continue to be Saudi Aramco’s preferred partner for investments in the private sector in India and will collaborate with Saudi Aramco & SABIC for investments in Saudi Arabia. Reliance India is the largest Indian purchaser of Saudi oil.

A CHANGE IN STATEGY

Reliance, which seeks to be net carbon neutral by 2035, will shift to cleaner feedstock and more energy in its O2C businesses and increase production of solar power, hydrogen, and electrolyzers.

According to a source, the best way to extract full value from this integration is by recycling existing O2C assets and evaluating multiple joint ventures or partnerships in downstream ventures for specialty chemicals.

As India’s economy grows, so will the demand for specialty chemicals. These chemicals are used in many industries, including agrochemicals, colourants and dyes as well as fast-moving consumer goods such as pharmaceuticals, fuel additives and polymers. This chemical also provides better margins to companies than regular fuels. As electric cars and renewable energy become more popular, demand for diesel and gasoline will drop.

A government report predicts that the Indian specialty chemical sector will grow to $32 billion by 2019 and $64 billion annually by 2025, helping to boost exports.

The Indian conglomerate, controlled by billionaire Mukesh Ambani, has already announced a $2 billion investment in the UAE’s TA’ZIZ chemical joint venture https://www.reuters.com/world/middle-east/indias-reliance-adnoc-join-forces-chemical-project-2021-06-29 between Abu Dhabi National Oil Co. and sovereign wealth fund ADQ.

Saudi Aramco also has its eyes on renewables and hydrogen as it strives to be net-zero in 2050.