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Saudi Aramco seeks earnings diversification through Reliance downstream stake

Saudi Arabian Oil Co.'s proposed US$15 billion investment in Reliance Industries Ltd.'s downstream oil business will allow the world's largest oil producer to secure a market for its crude oil production while mitigating its exposure to a volatile crude oil market.

Under the terms of the nonbinding deal, Saudi Aramco would supply 500,000 barrels per day of crude oil to Reliance's 1.24 million-barrel-per-day Jamnagar refinery on a long-term basis.

The company provided investors with their first glimpse at company earnings following its blockbuster debut on the international bond markets. Saudi Aramco reported that net income for the first half fell by $6.12 billion year over year as average realized crude oil prices declined from $69 per barrel to $66/bbl.

Reliance called the nonbinding deal one of the largest foreign investments ever made in India. The deal also marks a milestone for Saudi Aramco.

"The move would represent one of Aramco's biggest forays overseas and comes as it is trying to win over potential global investors for a possible listing that is now back on the front burner among Aramco executives and Saudi government officials," PRICE Futures analysts Phil Flynn said Aug. 12.

"Saudi Aramco has increased its investments in Asian refineries in recent years as it has long sought a bigger presence in India to take advantage of the country's rising oil demand and to lock in sales of Saudi crude in the coming years," Mizuho analyst Paul Sankey wrote Aug. 12. "The deal would deepen ties between Saudi Aramco, the world's largest oil producing company, and Reliance, which owns the enormous refinery and petrochemicals complex in Gujarat on India's west coast."

The deal is part of both companies' "commitment to creating an integrated global downstream refining and chemicals business" and the wave of "large-scale M&A" analysts predicted would come following Saudi Aramco's March 27 announcement that it would acquire a 70% stake in petrochemical manufacturer Saudi Basic Industries Corp.

The oil giant aims to roughly double its global refining footprint to between 8 million bbl/d and 10 million bbl/d, with half of its total downstream capacity growth slated for Asia. The company reported oil and gas production averaged 13.2 million barrels of oil equivalent per day during the first half, of which 10.0 million bbl/d was crude oil and condensate production, while refining gross throughput averaged 4.6 million bbl/d. Reliance's integrated refining and petrochemical plants are capable of processing 1.82 million barrels of crude oil per day, and Saudi Aramco's acquisition of a 20% stake in the Indian business would add 364,000 bbl/d to its downstream portfolio.