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Analysis: Potential Reliance, Aramco tie-up seen as 'match made in heaven'

Highlights

Companies in active discussions for potential tie-up: sources

Aramco keen to play role in both refining and petrochemicals

Analysts say a deal would bring strong synergies to push growth

Singapore — Talks for Saudi Aramco to buy a stake in the downstream segment of India's Reliance Industries are in advanced stages, sources have told S&P Global Platts, a potential tie-up that could open a window of opportunity for both companies to nurture their refining and petrochemical expansion dreams.

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For Reliance, a joint venture will guarantee a stable channel for crude supplies, while for Aramco it will open up opportunities to accelerate its investment plan into top gear in one of Asia's fastest growing energy markets.

"Talks are in advanced stages between Reliance and Aramco. They are in the process of finalizing what stake Aramco will be taking in Reliance," one source told Platts.

With BP already a partner in its upstream segment, sealing a deal with Aramco on the downstream side would mean Reliance having the "best of both worlds," said Senthil Kumaran, consultant at Facts Global Energy.

"You can't ask for anything more. BP is already on its side to push its upstream dreams. And now if Reliance manages to close a deal with Aramco and sells a stake, it will be a match made in heaven," he said. "But Aramco will be looking for some kind of hybrid deal in which they play a strong role in petrochemicals and not just refining," he added.

Both Aramco and Reliance in the past have mentioned potential cooperation opportunities, but have not spelt out the kind of tie-up they were planning.

Late last year, after meeting Reliance chairman Mukesh Ambani, Saudi oil minister Khalid al-Falih tweeted: "I was delighted to meet Mukesh Ambani, chairman of the board of Reliance Industries with whom I discussed joint investment and cooperation opportunities in petrochemicals, refining, and telecommunications."

And in February this year, Ambani held a meeting with Aramco's chairman Amin Nasser. Aramco said the meeting was for Reliance to learn more about Aramco's "frontiers," including crude and chemicals.

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STRONG SYNERGY

Oil analysts say that Aramco is likely to play a crucial part in any potential refining and petrochemical expansion that Reliance decides to pursue in the future.

"If a deal happens between the two companies, it will be a win-win situation for both parties in that Saudi Aramco would be able to seek a foothold in India's fast growing refining and petrochemical sectors, while Reliance would be able to gain on crude oil supply security and financial support. Both companies can also work together to strengthen their technological advancements," said Lim Jit Yang, adviser for oil markets at S&P Global Platts Analytics.

In India, Reliance operates the world's biggest refinery operation at Jamnagar in the western state of Gujarat. It has a combined capacity of more than 1.2 million b/d, with annual runs close to 1.4 million b/d.

Although Reliance has remained tight-lipped on any possible refining expansion plans, oil ministry sources have said the company has received clearance to raise capacity, but have not specified a number.

Saudi Aramco has already committed to taking a stake in India's biggest planned downstream project being jointly built by state-run refiners Indian Oil Corp., Hindustan Petroleum Corp. and Bharat Petroleum Corp. In addition to Aramco, Abu Dhabi National Oil Co. has also signed an initial agreement to take a stake in that project.

Officials in charge of the project -- a mega refinery and petrochemicals complex on the west coast with a refining capacity of 60 million mt/year (1.2 million b/d) -- have said they were hopeful the project will move ahead soon.

But analysts have said the project could face delays as the land acquisition process had not yet been completed. This has prompted Aramco to look for alternative investment routes.

In June 2017, Reliance and BP said they would jointly invest up to $6 billion to develop already-discovered deepwater gas fields off the east coast of India, which would help to boost gas output by 30 million-35 million cu m/d (1 Bcf/d) in a phased manner over 2020-2022.

Gas output from the integrated development is expected to help reduce India's import dependence and contribute to the country's incremental gas demand by 2022. This will benefit domestic consumers at large and help India save $20 billion on account of LNG import substitution.

Platts Analytics expects India's total product demand to grow by 200,000 b/d in 2019, adjusted lower by 40,000 b/d from the beginning of the year, due to recent soft data, coupled with expected headwinds such as economic slowdown, weak vehicle sales and higher fuel prices. Nonetheless, it will still be modestly stronger than growth of 190,000 b/d seen in 2018.

-- Sambit Mohanty, newsdesk@spglobal.com

-- Edited by Wendy Wells, newsdesk@spglobal.com