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Thu 19 Oct 2017 03:44 PM

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Look east for the future of energy in India

Why Saudi Aramco is investing in India to grow its business

Look east for the future of energy in India
The future of India’s domestic energy production looks positive due to programmes such as a simplified licensing regime and clarity on contracts

The world’s biggest oil exporter Saudi Aramco is looking to buy into the world’s fastest growing energy market in a bid to secure supply channels and meet India’s growing energy needs.

Plans to invest billions in refineries and exploration in the world’s third-largest oil consuming nation (China and the US come in at number one and two) makes sense on several levels, as Saudi Aramco CEO Amin Nasser said at the India Energy Forum held in New Delhi this month.

“We are determined to reflect our expanding and diversifying business portfolio by creating a fully integrated business here in India,” he told the audience. This includes oil supply, refining, marketing, the manufacture of petrochemicals and lubricants as well as research and development, and technology, he said.

The announcement came with the inauguration of a new Saudi Aramco India office in Gurugram, southwest of Delhi on October 8, which India’s petroleum minister Dharmendra Pradhan said “will help turn the existing buyer-supplier relationship to a strategic partnership in the HC [hydrocarbon] sector.”

Aramco also said it plans to buy a stake in a west coast oil refinery being developed by three Indian oil companies in the Maharashtra state. The 60 million tonne oil refinery is expected to be the world’s largest of its kind, Nasser said. India Oil, BPCL and HPCL, the progenitors of the project, said they would create a new company to carry out the $35-$40bn project, and intimated plans to induct investors at a later stage.

This was followed by an announcement last week of plans by the state-owned IOC, HPCL and BPCL to build a 60 million mt/year (over 1 million b/d) refinery in Maharashtra, along with another with a capacity of 9 million mt/year developed by HPCL in Rajasthan.

Nasser described Aramco’s pivot to Asia as a “mega-investment” as India’s oil consumption is expected to grow from 4.6 million barrels per day (bpd) to 10 million bpd by 2040. Saudi Aramco currently supplies around 19 percent of India’s crude oil imports and 29 percent of liquefied petroleum gas (LPG) imports.

While that’s a substantial figure, according to Giorgio Cafiero, CEO of Gulf State Analytics, Aramco’s renewed engagement with India is not only about meeting the demands of its 1.2 billion population, but also that officials in Riyadh are worried about the kingdom losing its position as India’s most important supplier of oil.

Iraq replaced Saudi Arabia as the Asian country’s top oil supplier earlier this year, while other OPEC members, in addition to the US, threaten to weaken Saudi’s role as a major source of India’s energy imports. The situation remains in flux, however, as fears were stirred last week after fighting erupted between Iraq and Kurdistan, threatening to disrupt the supply chain into Iraq’s key market, India.

Regardless of whether these geopolitical changes allow Saudi to regain the top spot, experts say the move is part of a strategy to invest in refineries in major markets to lock in customers ahead of its proposed initial public offering (IPO) next year.

Mohammed Atif, the Middle East and Africa regional manager for energy consultancy DNV GL, thinks Aramco can secure the Indian market by absorbing the country’s oil refineries into its supply chain. “Its presence would be a signal that they are a reliable source of supply in one of the most important and fastest growing markets in the world,” he says.

Covering the spectrum

Developing its downstream operations also helps Aramco to provide an unbroken chain in the supply industry’s three major sectors: upstream, midstream and downstream. “A strengthening of ties across the value chain, from supply to refining, gives Aramco more influence from the downstream [refining] part of the business,” says Atif.

Nasser has been with Aramco for over 30 years

The downstream sector focusses on refining petroleum crude oil and processing and purifying raw natural gas, as well as marketing and distributing products derived from crude oil and natural gas. “It gives them an unbroken chain to the final market so it helps them to plan better; it helps them to sell better; it gives them access to a wider range of products downstream,”Atif continues.

It will also make next year’s proposed IPO of close to five percent of the company more attractive by offering “the whole package”. If it happens – and some analysts say it is an if – it would be the biggest IPO in history, and part of a vast economic reform programme aimed at reducing the kingdom’s reliance on oil after the OPEC kingpin lost billions in oil income following the 2014 crash in global crude prices. “The more international operations Aramco gets involved in, the more attractive its IPO begins to look,” Atif adds.

Certainly it seems to have other oil giants thinking the same way. Abu Dhabi National Oil Co (ADNOC) announced last week that it too is considering an IPO of minority stakes in some of its services.

Giorgio Cafiero also notes that the “prime geographical spot between supplier and consumer” its also a good fit for the goals of Vision 2030 which would position Saudi as a forward-thinking energy provider that moves way beyond being just a supplier of cheap crude oil.

Turning to Asia

Aramco’s intentions to move into India has been expected by analysts since it made a play to buy the Essar oil refinery in Gujarat in August. Aramco lost that bidding war to Russia’s Kremlin-owned Rosneft, its biggest competitor in the oil export market.

“It’s a natural trend for Saudi and all the other big oil exporters to look at the Asian markets,” says Gulf energy expert and CEO of Qamar Energy, Robin Mills. “The global energy market is shifting to Asia and all the major producers feel they have to be there. More and more crude oil is being locked up in the refineries, rather than being sold to an end user,” Mills adds.

India has the second largest refining capacity in Asia after China with 21 refineries and a total refining capacity of around 4.6 million bpd, representing nearly 13 percent of the refining capacity in Asia Pacific.

Dharmendra Pradhan, India’s Minister of Petroleum and Natural Gas

Sushant Gupta, research director of Asia-Pacific Refining at UK-based energy consultancy Wood Mackenzie, says the expansion into India signals a new oil order in global refining markets.

“As the balance of oil demand growth tilts towards India and Southeast Asia, these markets will lead in increasing Asia’s refining capacity. This is an important shift for the refining markets in Asia as both India and Southeast Asia national oil capacities [NOCs] have traditionally been slow in adding refining capacity.”

Tapping India’s refineries

India also continues to invest heavily in its petrochemical capacity, in an attempt to be more self-sufficient in meeting its fast-growing petrochemical consumption needs. S Mitra, executive member at the Chemical and Petrochemical Manufacturing Association trade body, estimates a jump in demand from 30 million tonnes to 40 million tonnes in the next three years to 2020, growing the country’s petrochemicals market to around $65bn-$70 bn.

India’s state oil refiners plan to move away from churning out fuel for plastic and cooking, with plans to pump $35bn into developing their petrochemicals industry to meet an expected spike in demand for goods ranging from plastics to cement.

In July, India’s Minister of Petroleum and Natural Gas, Dharmendra Pradhan, said the government wants to set up petrochemical clusters around refineries in eastern, western and southern regions, while the world’s biggest crude refinery being established on India’s west coast will be linked to a petrochemical plant.

Experts suspect Aramco’s next move in India will be a surge in trading activities in oil and oil products.

Atif from DNV GL expects Saudi Aramco to expand its downstream operations by introducing hydrocarbon engineering services.

“It may enter into more joint ventures or even coordinate with Indian-based companies to develop more novel technologies. Moving into petrochemicals and controlling the refining operations is a good way to extract high value and boost rates of return, because there’s more value in the end product,” he says.

Kings of crude

Reforms in India in the last 40 months since Prime Minster Narendra Modi took office have created an environment ripe for companies like BP to revive $6bn in investment plan in gas, while French energy giant Total issued a call in September for a local partner to begin retailing petrol and diesel in India.

PM Modi (left) and Saudi King Salman Bin Abdulaziz discussed energy, security and trade cooperation during the Indian leader’s visit to Riyadh in 2016

“The international oil companies have been doing this for a long time. Aramco’s biggest competitors, US-based oil companies, Exxon Mobil, Total, BP, all have upstream and downstream operations around the world,” says Mills. “It’s interesting to see a national oil company like Aramco become more internationalised and looking to replicate the tactics of some of the Russian companies, such as Rosneft and Gazprom, who have been investing in assets around the world for a while now.”

Looking to the future, India will surpass China as the fastest-growing petroleum product market in Asia with fuel consumption rising six percent in 2018, according to EIA data. Under Modi’s government, Saudi Arabia and India have enjoyed trade, energy imports, cultural exchange, and security cooperation that may help mitigate some of the usual challenges and costs of moving into a new market.

“There are always issues when moving into new markets, but there’s a strong history of cooperation between India and Saudi, [and] there’s a huge Indian expat population in Saudi Arabia,” Atif says.

“I can’t see any major challenges. It’s a very smart move, because they are accessing a billion-person market in a more direct way. It’s also a very competitive business, but I think Aramco has the economy of scale to make it work.”

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