What Saudi Aramco's cut in capex could mean for mega deals in India

The oil producer is a JV partner with Indian state-run oil refiners to set up a mega refinery, and also plans to pick a stake in RIL's O2C business

Energy giant Saudi Aramco, according to a recent Bloomberg news report, has suspended a $10-billion China oil refinery venture as it looks to cut down on spending. This, could in turn raise doubts on its international deals, including India.

A Reuters report earlier this month, said Aramco's capital spending plan for 2021 will be "significantly lower than previous guidance", Amin Nasser chief executive officer for the company said on an analyst and investor call after the company's quarterly results.

Analysts at Credit Suisse do not see the reduction in capital expenditure as good news for planned acquisitions. “The Financial Times (August 12) stated that capex may be as low as $20-25 billion in 2021. Upstream oil-related capex is likely in the ballpark of $13 billion and the rest is spent on gas and downstream. With these cuts, it is natural that its international investment plans are being scrutinised, which includes refining projects,” they said in an August 25 note.

Saudi Aramco initiated discussions for a stake in Reliance Industries' oil-to-chemicals (O2C) business in August last year. In addition, Aramco is also in partnership with Indian state-run oil refiners to set up a mega refinery. While There is no formal interest expressed yet, Aramco was also seen a potential buyer for a majority stake in Bharat Petroleum Corporation (BPCL).

The Credit Suisse report added, “Aramco has many framework agreements, memorandum of understanding (MoU)s, letters of intent (LOIs) et al, as naturally many don’t move forward, but you need some that can so that you can deliver on your long term ambition of 8-10mbd of gross refining capacity, but there is no rush."

In August 2019, RIL announced Saudi Aramco’s intent to invest in RIL’s oil to chemicals (O2C) business, which was expected to fetch $15 Billion for a 20 per cent stake. In its latest annual general meeting in July, RIL informed shareholders the deal has not progressed according to the original timeline.

Credit Suisse in its report noted, with Aramco’s revised capex plans, the RIL deal would suffice to meet targets. “Aramco stated in the second quarter of 2020 that it currently has gross refining capacity of 6.4 mbd and plans to grow that to a range of 8-10mbd. With the current/live developments coupled with the RIL letter of intent (LOI) (for 20 per cent stake in the downstream business), which is likely also being scrutinized, then it would get into that target range,” the report said.

In 2018, Saudi Aramco and Abu Dhabi National Oil Company (ADNOC) expressed interest to partner state-run refiners Indian Oil Corporation (IOC), Hindustan Petroleum Corporation (HPCL) and BPCL, to develop a 60 million tonne refinery  and petrochemical complex in Maharashtra. The project since has seen little progress owing to several land related issues.

The Indian government also plans to sell its stake in BPCL, where analysts saw Aramco as a potential investor. Saudi Aramco's cautious approach towards new investments may now raise doubts on the same.