Mumbai: US-based Chevron Corp.’s spending programme for 2009 has not factored in plans to exercise an option to raise its stake in Reliance Petroleum Ltd by 24 percentage points—an investment seen as crucial by many experts for the Mukesh Ambani-run company.
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RPL, an arm of India’s most valuable company Reliance Industries Ltd, recently commissioned the world’s sixth largest refinery in Jamnagar, Gujarat. If Chevron, the world’s fourth largest oil firm by market capitalization, decides to raise its stake in the company to 29% from the existing 5%, RPL would gain access to the oil company’s strong global distribution networks and ensure feedstock availability.
Chevron has till June to exercise its option of increasing its stake in RPL, but sector analysts were expecting its yearly statement of capital expenditure across projects globally to lend some clarity on whether it intends investing more in RPL. In its $23 billion (Rs1.1 trillion) “capital and exploratory spending programme for 2009”, released on 29 January, Chevron has eluded dishing out any such hope.
“Chevron’s enhanced partnership and supply-product off-take agreement will give Reliance access to (the) former’s strong global distribution networks besides ensuring feedstock availability. This capital plan was supposed to give some indication,” said an analyst with a domestic brokerage, who didn’t want to be named as he is not authorized to comment in the media.
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“Since we have not made a decision on increasing our stake in Reliance, the capital needed for this investment is not included in our recently announced 2009 capital budget,” Chevron spokesman Lloyd Avram said in an emailed reply to Mint. “The option is open to mid-year.”
He declined to comment on if and when Chevron would take a call or if it would exit RPL completely. A questionnaire emailed to RIL on Monday remained unanswered.
A person close to Reliance explained that Chevron’s buying additional stake was more of an investment decision that does not have to feature in its “capital spend” programme.
The oil and gas company had bought a 5% stake in RPL in April 2006 for $300 million, weeks before its initial public offer. It had an option to buy “an additional 24%...on conclusion of the collaboration agreements between Chevron and Reliance”, an RIL statement had said then.
The two companies are yet to finalize a feedstock supply and product off-take agreement under which Chevron would provide 35% of the crude oil requirements of the new Jamnagar refinery and buy 45% of the refined products for 10 years.
Sustained improvement: The Reliance Petroleum refinery in Jamnagar. Rajan Chaughule / Bloomberg
Reliance Industries currently owns 70.4% in RPL, which started its 580,000 barrels per day (bpd) refinery on 25 December. The export-oriented refinery can refine the dirtiest of crudes into high quality fuels. Clubbed with RIL’s 660,000bpd refinery next door, they form the world’s biggest refining complex.
Announcing “a $22.8 billion capital and exploratory spending programme”, Chevron chairman Dave O’Reilly said in the statement that “about 75% of this was for upstream oil and gas exploration and production projects worldwide” while “another 20% is associated with the company’s downstream businesses that manufacture, transport and sell gasoline, diesel fuel and other refined products”. The outlay has set aside funds for upstream projects in deepwater US Gulf of Mexico, western Africa, Indonesia, China and Thailand and a smaller sum of $4.3 billion in downstream, or refining, projects in the US and Korea.
A 3 January report by brokerage Anand Rathi Securities Ltd said, “Neither its (Chevron’s) press release nor its 2008 earnings call provided any clarity regarding its RPL plans.” The brokerage, with a “buy” rating on RPL and a target share price of Rs100, calculates that if the US company decides to pick up the additional stake at current market prices, it would have to shell out about $1.9 billion for a 24% stake in RPL.
A sector analyst with a foreign brokerage, who didn’t want to be named, wasn’t surprised about Chevron’s spending plans and said he wasn’t sure if the company would buy into a refinery at a time when refining capacity is more than adequate. If Chevron decides to exit, it gets its $300 million back. “They will like to keep their options open till the last, especially when their investment sum is protected,” the analyst said.
RPL’s export-oriented refinery has come at a time when global slowdown has depressed demand for high-octane fuels in Western countries and refining margins have stayed subdued for the October-December quarter. RIL has set up wholly owned subsidiaries in London and Singapore to tap opportunities in these markets of petroleum products.
Reliance Global Energy Services Ltd in London was to be headed by Peter Ward, formerly of Shell Trading’s gas and power division and Reliance Global Energy Services Singapore Pte Ltd was to work under Michael Ng, a former executive of Fair Energy.
One factor that can tip the deal in favour of Chevron deciding to put more money on the table for the Jamnagar refinery is a sustained improvement in the refining cycle—a process that has already begun, yielding higher margins than a few weeks before.
According to Bloomberg data, Singapore gross refining margins—the profit from turning crude into various fuels—have improved steadily from $0.4 a barrel on 28 November to $5.1 on 31 December, $7.4 on 31 January and $9.2 on 2 February.
RPL’s shares rose 1.6% on Bombay Stock Exchange to close at Rs83 on Tuesday when the bellwether index Sensex closed 0.91% higher.