Delayed Deal Between Saudi Arabia And India May Still Happen Against All Odds

A long-delayed deal between Saudi Arabia’s flagship oil company, Saudi Aramco, and Indian conglomerate, Reliance Industries, looks closer to going ahead following the recent appointment of Aramco chairman, Yasir Al-Rumayyan, as an independent director on the board of Reliance. Two or three years ago when the idea for the tie-up based around both companies’ oil-to-chemicals operations made some sense from both sides, now it makes great sense from Aramco’s side and no sense at all from Reliance’s, but wider geopolitical pressures mean that it is likely to go ahead anyway.

Back in early 2019, a series of meetings between the top management of Saudi Aramco and Reliance Industries took place in Saudi Arabia and India, after which Reliance announced the sale of a 20 per cent stake to Saudi Aramco, which would have cost around US$15-16 billion. At that point, Aramco had a massive positive cash position and was looking for a major private oil company that would allow it to gain traction in India’s refining and petrochemical sectors. The deal with Reliance, which is also India’s biggest private oil operation, did just that.  Additionally positive for Aramco was that it would be able to supply crude to the new sites in India. From Reliance’s perspective, having another steady supplier of large volumes of high quality crude oil in its supply chain would be welcome but even more welcome would be the US$15-16 billion in very liquid assets coming on to its balance sheets, as the Indian firm had a net debt at that point of around US$30 billion equivalent. 

Underlining how important the Saudis regarded the tie-up with India at that stage and how much money Saudi had to splash around before its disastrous initial public offering at the end of that year, a high-profile Saudi delegation to New Delhi in February 2019 - including Crown Prince Mohammed bin Salman (MbS) and the top Aramco executives - also pledged to invest US$100 billion in India. The bulk of this funding was to go towards investment in general infrastructure and the development of the energy sector, including downstream segments such as refining and petrochemicals. This pledge formed the basis for the development of the mega-refinery and petrochemicals Ratnagiri project on the west coast of India, which will have a full refining capacity of 60 million tons per year (mtpy). 

The situation now though has changed to such a degree that for Reliance there is very little reason to become involved with Aramco. Crucially, Reliance’s balance sheet is back into the black, with various longer-term investments now beginning to generate very healthy cashflow for it, most notably its telecoms and internet operation, Jio. So bright is the future of Jio, and other major Reliance business lines, that it is highly likely that it will look to scale back its oil operations over the next few years, in line with the greener energy initiatives being rolled out around the globe. Consequently, recent comments from Crown Prince Mohammed bin Salman alluding to the tie-up with Reliance being back in view – and that it might also involve Reliance buying a small reciprocal stake in Aramco - seems more wishful-thinking than grounded in any reality. 

Certainly, if the tie-up was weighted in favour of an initial cash injection via such a stake sale in Aramco to Reliance then this would be extremely welcome to the Saudi company, whose cash position is inexorably going from bad to worse due to the crippling dividend payments that had to be guaranteed in order to get anyone to buy the omni-toxic Aramco IPO in December 2019. As was predicted by OilPrice.com from well before the IPO, the more that investors got to know about Aramco the less they would want to have anything to do with it, and so it proved. So toxic from so many perspectives was (and is) Aramco - but so necessary was it to the personal reputation of MbS that it looked like a success at home – that the IPO had to use a wide variety of methods to sell any stock in the company. These included ‘encouraging’ the same senior Saudis who had been imprisoned and tortured in the Ritz-Carlton in 2017 to buy shares in the Aramco IPO, offering preferential bank loans to Saudi citizens who bought Aramco shares, and most damagingly for Saudi Arabia’s future, guaranteeing US$75 billion per year every year in dividends. In pledging to pay every year around three times the total amount that the IPO actually raised (US$25.6 billion), not only has Aramco become a bottomless money pit for any ‘strategic investor’ who becomes involved with it but also Aramco’s ability to move forward on large-scale projects – particularly complex ones abroad – has been severely curtailed, and this will worry Reliance. 

In the first full year of the cripplingly large Aramco dividend coming due, it had to be financed in large part through budget cuts over and above the US$15 billion in Aramco’s annual capital spending alluded to by Aramco’s chief executive officer, Amin Nasser, just after the first half profits figures were unveiled. This took the total down from around US$40 billion to around US$25 billion. Further reports stated that even this US$25 billion figure was reduced by another US$5 billion, taking the total capital spending in that year from US$25 billion to US$20 billion. As a result of this, and of Aramco’s sliding profits in the same period, a number of major projects had to be scaled back further, with the once much-vaunted flagship US$20 billion crude-to-chemicals plant at Yanbu on Saudi’s Red Sea coast indefinitely suspended, according to various reports. The similarly high-profile purchase of a 25 per cent multi-billion-dollar stake in Sempra Energy’s liquefied natural gas (LNG) terminal in Texas remains uncertain, although Sempra for its part has said that it continued to work with Aramco and others “to move our project at Port Arthur LNG forward.” In the same vein, according to various news sources, Aramco suspended its key US$10 billion deal to expand into mainland China’s refining and petrochemicals sector, via a complex in the Northeastern province of Liaoning that would have seen Saudi supply up to 70 per cent of the crude oil for the planned 300,000 barrels per day refinery. 

The only thing – but it is a big thing – that might still push the Aramco-Reliance deal towards and even over the finish line is U.S. President Joe Biden’s final decision on what he wants to do with Saudi Arabia. Biden has made it clear that he is no fan of either the Saudi regime in general or of MbS in particular and one of the tangential benefits for Washington of the U.S.-led ‘normalisation deals’ between Israel and Arab states is the ability for the U.S. to gradually cut loose all significant ties with Saudi. On the other hand, though, Biden and his team are cognisant of the fact that if they do this then Russia and China will move quickly to occupy the position left by the U.S.

Russia has the ideal leverage to do this with Saudi Arabia, given that Saudi is absolutely reliant on Russia for any credibility associated with OPEC supply agreements.

China, meanwhile, has also  long been targeting Saudi Arabia as a key part of its takeover of the central Middle East, along with Iran and Iraq, in line with its multi-generational power-grab project ‘One Belt, One Road’ and has recently increased its activity in this regard. If Biden decides to keep Saudi Arabia as a core ally – even after Iran is brought back under supervision when the new ‘nuclear deal’ is agreed later this year – then tying Saudi Aramco into India’s Reliance is likely to go ahead. India is the  key alternative end-user to China for the new U.S. oil and gas policy element of its relationship normalisation-centred policy.