Saudi petro-dollars in India: Win-win for both nations

As the world struggles with the disruption in oil production after the loss of 50% in Saudi oil supplies following an aerial attack on its oil fields earlier this week, this is an opportune time to look at how and why India should facilitate Saudi Arabia’s Aramco to invest in our oil sector.

Saudis have invested $44 billion in India since Prime Minister Narendra Modi’s visit to Saudi Arabia in 2016. When Prince Mohammed Bin Salman visited India this year in February, he had announced that Saudis would invest $100 billion more in the next two years.

Though the Saudis have indicated that they would like to invest not only in energy but in sectors like agriculture, infrastructure and manufacturing, a majority of their investment will be in oil for strategic reasons. In December 2015, Aramco had agreed to take up 51% interest, along with Abu Dhabi National Oil company, to invest in a 60 million-ton refinery-cum-petrochemical complex along with Indian Oil, BPCL and HPCL in Maharashtra. The original cost estimated was Rs 3 lakh crore ($43 billion), which has since gone up to Rs 4 lakh crore ($57 billion). In August of this year, Aramco entered into an agreement with Reliance Industries to buy 20% interest in Reliance’s 60 million-ton refinery and petrochemical operations for $15 billion, including debt. The agreement provides for Aramco supplying 500,000 to 700,000 barrels per day of crude oil on a long-term basis. Negotiations are still at a preliminary stage.

In the 1960s, when world oil production capacity exceeded oil demand, oil companies believed in controlling all elements of the oil chain from production to transportation to refining to marketing. Aramco seems to be adopting such a strategy now, though other oil companies like ConocoPhillips, Marathon, etc. have given up on it. From the late 1980s, there was the talk of ‘peak oil’ with oil being in short supply. Now, we increasingly hear of ‘peak demand’, with the possibility of oil reserves being stranded.

Aramco’s refining capacity in Saudi Arabia is about 5 million barrels per day, which is far short of their current production of 10 million bpd. It is this huge gap and possible peak demand scenario that is driving their investment in India’s refineries.

In April, Aramco invested $1.5 billion in South Korea’s Hyundai Oilbank. This gave them access to sell oil on a long-term basis to its five refineries at 650,000 bpd. Aramco owns the largest — 600,000 bpd — Port Arthur refinery in the US since 2017. Its proposed investment in India’s refinery sector will give it access to 1.5-1.7 million bpd.

There are some uncertainties concerning the Aramco-Reliance deal, and even more uncertainties about the mega refinery complex in Maharashtra (original site in Ratnagiri was dropped because of farmers’ protest), it will be prudent on the part of the petroleum ministry to promote the idea of selling HPCL to Aramco to fully benefit from the heightened interest of the Saudi rulers to invest in India.

The forced marriage of ONGC and HPCL does not seem to be working well. If Aramco buys HPCL, all involved will be winners. This will help Aramco to move towards larger integration by getting access to about 540,000 bpd of HPCL’s refining capacity and its marketing outlets. HPCL can remain independent of ONGC management and will have access to Aramco’s huge cashflow to expand. ONGC will have more capital to invest in upstream after divesting its interest in HPCL. Finally, the Government of India would have inched towards its goal of privatisation. Thus, all will be winners.

From Aramco’s point, there is one more important consideration. The Reliance refinery is a highly complex one, built to handle the ‘worst’ possible crude oil (extra-heavy oil with high sulphur content) in the world. This gives it an unusual advantage of buying crude oil at an attractive price.

Saudi crude oil, though heavy with high sulphur content in comparison to sweet and light crude oil, is better than, say, Venezuelan crude oil. This is the problem faced by the US refineries after the shale oil boom. US refineries were converted to handle heavy sour oil to exploit the increasing price gap between heavy sour and light sweet oil. With shale oil being sweet, the US is exporting light sweet oil and importing heavy sour oil. Thus, Reliance’s Jamnagar refineries may prefer Venezuelan-type lower-priced crude oil rather than Saudi crude. This may create a conflict of interest between Aramco and other shareholders in the Reliance refinery complex. This problem will not be there in the case of HPCL, of which Aramco will be the sole owner.

Also, for private investors, return on investment (ROI) is paramount. However, for oil-producing countries, revenues secured by selling oil itself is the driving force and ROI is of lesser interest. This was the situation faced by the giant oil companies in the 1960s, which led them to expand downstream operations to place their crude oil. Perhaps it is this factor that might have led to the break-up in the joint venture between Shell and Aramco in their refinery investment in the US. Irrespective of which projects Aramco invests in, it will set a sound platform for it to expand not only in India’s oil sector, but also in renewable energy, power plants, storage, etc. India is the only major market where there is likely to be significant growth in oil demand, requiring at least 100 million bpd additional refining capacity by 2030.

Thus, while Aramco gets ample opportunity to find market for its crude oil, India gets an investor with surplus capital to invest in the energy sector and a reliable supplier of oil. This will help India to reduce its need to build additional strategic petroleum reserves. Thus, this is a win-win situation for India and for Saudi Arabia.

(The writer is former governing council member of Manipal Institute of Technology, and an international oil expert.)