ESG was the main hurdle that stalled Aramco’s deal with India’s RIL

Environmental, social and governance or ESG criteria was a key factor behind the abandonment of a planned investment by Saudi Aramco in Reliance Industries Ltd’s oil-to-chemicals (O2C) business, two people aware of the matter said.

RIL’s plan to sell a 20% stake in the business to the world’s largest oil producer also faced other hurdles such as differences in valuation, new energy and net-zero emission targets of both firms, the people said, requesting anonymity.

Last week, RIL said it and Aramco have mutually agreed to re-evaluate the Saudi oil giant’s proposed $15 billion investment for a 20% stake in RIL’s O2C business. Consequently, RIL withdrew an application it had filed with the National Company Law Tribunal (NCLT) to separate the business.

In response to queries from Mint, a spokesperson for Aramco said, “Reliance and Aramco have a longstanding relationship and will continue to look for investment opportunities in India.” “India offers tremendous growth opportunities over the long term, and Aramco continues to evaluate new and existing business opportunities with our potential partners. Updates on any business milestones will be made as and when appropriate,” the spokesperson said.

RIL did not respond to an email.

“Looking at the changing nature of RIL’s business, both companies mutually agreed to not go ahead with the deal. Besides, for Aramco to buy stake in a refining and petchem business, they would be increasing their carbon footprint which no company wants in these times,” said an industry official aware of the development seeking anonymity.

The proposed investment was announced in August 2019. As part of the deal, Aramco was to supply 500kbd (thousand barrels per day) of crude on a long-term basis to RIL’s Jamnagar refinery, representing 40% of the facility’s total refining capacity. “While Reliance has claimed that it is related to the role that Jamnagar will play in the new energy business, we suspect it could also be related to valuation and fundamental alignment of the parties,” Bernstein Research said in a 22 November report.

The global energy landscape has transformed since the deal was announced. The covid outbreak has severely dented demand for fuels, impacting crude oil price and refining and petrochemical margins.

While the deal would have given Aramco a foothold in India—one of the world’s largest growing markets for refined fuels and petrochemicals—RIL would have raised funds by monetizing its oil and gas assets and redeployed them into other businesses. Added to this is RIL’s $10 billion investment in clean energy to set up four Giga factories at Jamnagar.

Analysts believe RIL’s new plans have changed the business dynamics as Jamnagar, home to RIL’s O2C assets, could now be its centre for clean energy. “Furthermore, the focus on ESG has materially increased in last 12-18 months. This should help RIL get better access to capital at a lower cost for its clean energy initiatives,” BofA Securities said in a 22 November report.

While RIL has unveiled its target to achieve net-zero by 2035, implying a gradual move away from traditional energy to new energy, Aramco has set a goal of reaching net-zero emissions only by 2050.

With RIL deciding to withdraw the NCLT application, O2C would become an operating unit of RIL’s standalone operations and not a subsidiary, leading to cash-flow fungibility, offering RIL cash flows to fund the renewable initiatives, said analysts.

“Energy business cash flows have improved significantly, and RIL can manage its new energy investments, especially along with technology partnerships. Also, financing and capital for investments in solar panels, batteries, and hydrogen are widely available and less expensive. We estimate RIL’s balance sheet will continue to de-gear steadily by 2023 while refining margins and telco tariffs rise,” Morgan Stanley Research said in a report on 22 November.

The article was first published on livemint.com.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.