Reliance Industries and Saudi Aramco have called off a deal to buy a stake in the oil-to- chemicals business of the Indian conglomerate due to valuation concerns, sources with knowledge of the matter said.
They said that the world is moving away from fossil fuels and reducing emissions because of the talks over how much Reliance's oil-to- chemicals O 2 C business should be valued.
One of the sources said Reliance will now focus on signing several deals with companies to produce specialty chemicals for higher margins.
Aramco, the world's top oil exporter, has signed a non-binding agreement to buy a 20% stake in Reliance's O 2 C business for $15 billion in 2019. The companies announced last week that they would re-evaluate the deal, ending two years of negotiations.
The collapse of the deal reflects the changing global energy landscape as oil and gas companies shift from fossil fuel to renewables.
After the recent COP 26 climate talks in Glasgow, a second source involved in the deal talks said that the valuations of refining and petrochemical assets have gone down.
Reliance had kept its $75 billion valuation for the O 2 C business in 2019 despite this, he said.
Evaluation by consultants showed a significant reduction in valuation. He added that there was more than a 10% cut.
Reliance has highlighted the difficulty of separating Jamnagar from the clean energy business as the reason to not complete the transaction, although we suspect business alignment and valuation were also key reasons, according to a recent note by Bernstein in a recent note, referring to Reliance's huge refining complex in Gujarat.
A second source familiar with the process said Reliance was seeking advice from Goldman Sachs and Aramco was seeking help from Citigroup, sources said. The banks didn't want to say anything.
Jefferies has cut the enterprise value of O 2 C business to $61 billion, while Kotak Institutional Equities has cut the enterprise value of Reliance's energy business to $70 billion from $80 billion. Saudi Aramco said it will look for investment opportunities in India despite the fact that the deal has not been called off.
Reliance will continue to be Saudi Aramco's preferred partner for investments in the private sector in India and will collaborate with Saudi Aramco SABIC for investments in Saudi Arabia. Reliance plans to become net carbon zero by the year 2035, switching to cleaner feedstock and energy at its O 2 C business, and expands its solar power, batteries, electrolyzers to produce hydrogen and hydrogen fuel cells.
A source familiar with the matter said that the full value of the integration is best extracted by repurposing existing O 2 C assets and evaluating multiple joint ventures and partnerships in downstream ventures in specialty chemicals.
In India, demand for specialty chemicals is expected to increase as the economy expands, as well as in agrochemicals, colourants, dyes, fast-moving consumer goods, pharmaceuticals, fuel additives, polymers, and textiles. As demand for gasoline and diesel decreases as more electric vehicles and renewable energy increases, these chemicals yield better margins for companies than conventional fuels.
According to the government report, the Indian specialty chemicals sector is expected to increase from $32 billion in 2019 to $64 billion by the year 2025, helping boost exports.
The TA'ZIZ chemical joint venture between Abu Dhabi National Oil Co. and the sovereign wealth fund ADQ has already been announced by the Indian conglomerate, controlled by billionaire Mukesh Ambani.
Saudi Aramco is moving towards net-zero by the year 2050 and has turned its focus to hydrogen and renewables.