Are Saudi Aramco and Reliance Breaking Up?

The Indian conglomerate’s investors are feeling down after the news that a planned deal might be scrapped. But it signals Reliance’s commitment to diversifying away from fossil fuels, and that should be good news for them.

Asia’s richest man and the world’s biggest oil company: it seemed like a match made in heaven. A planned tie-up that would have seen state giant Saudi Aramco take a 20% stake in Mukesh Ambani’s oil-to-retail conglomerate Reliance Industries is now slowly unraveling. But in this breakup, the market shed most of the tears. That may have been an outsized reaction.

Announced back in 2019, the partnership had been on the rocks since 2020, when the oil price collapse threw a wrench into the deal. Investors still seemed surprised, to the tune of a 4% drop in Reliance stock on Monday following the news. Analysts had seen the deal as an easy win-win: giving Reliance access to the latest technologies, in exchange for Aramco’s entree to the fast-growing Indian market.

That shows the market hasn’t fully priced in the extent to which the energy transition is shifting corporate behavior.

The public explanation for the split was Reliance’s newfound focus on the clean energy business. Chairman Mukesh Ambani is a man on a mission to remake himself and his company as a global climate champion. He announced a three-year, $10.1 billion investment in clean energy earlier this year and said the company would go net-zero by 2035, 35 years ahead of India’s overall decarbonization target.

Like other net-zero announcements, it came without a lot of specifics. Reliance has been snapping up stakes in cleaner businesses, like US-based battery company Ambri Inc. But around 60% of the company’s revenue still comes from oil and petrochemicals, so it’s unclear how it would get emissions down to zero in 15 years without a major divestment.

Could Reliance follow in BP’s footsteps at some point and ditch the petrochemicals business? It’s possible, but for now, Ambani is focused on building out his clean energy ambitions.

At first glance, Reliance and Aramco seem to be aligned on that vision. Aramco set its own decarbonization target--but left out scope 3 emissions from customers burning its fuel, which makes up around 80% of the total. Its energy transition creds are hampered by the fact that oil is still one of the only games in town, making it a less attractive partner in a world where billionaires like Ambani seem to be competing for the title of greenest billionaire.

Ambani has said he will pump $50-70 billion into clean energy over the next decade. The investment from Aramco could have helped to fund expensive projects like the four renewable energy “gigafactories” Reliance is building. Viewed on its own, that makes the breakup seem like a questionable financial move.

But Saudi Aramco isn’t the only one wooing Reliance these days. Telecoms-turned-digital business Jio Platforms has attracted interest, and funding, from the likes of Google and Facebook. It raised over $20 billion last year, more than the $15 billion value of the planned stake sale. Reliance may just not need Aramco anymore.

To be sure, Ambani isn’t showing any signs of winding down the oil-to-chemicals business just yet. That segment made up the biggest chunk of revenue in the most recent quarter, benefitting from a gas shortage that drove gas-to-oil switching and sent refining margins soaring.

Even so, there were reasons for Aramco to reconsider the deal, too. While the crude producer’s free cash flow has improved with the fortunes of the oil market, its overall trajectory has been to turn down the tap on capital expenditures. That may reflect a view that sky-high oil prices won’t last forever. Reliance would be a source of reliable dividends, but oil-to-chemicals isn’t the kind of ambitious diversification the kingdom needs.

Another possibility is that Aramco wants a piece of the new clean-energy pie. Reliance left the window open for a new deal with its statement that it will remain Aramco’s preferred partner in India.

The on-and-off pair could still reconcile if they find common ground. One possibility: both have ambitions of becoming the world’s hydrogen supplier. India has a slight cost edge in hydrogen production, according to Bloomberg New Energy Finance, and would enjoy lower shipping costs to energy-hungry Asian buyers. A stake in the Indian conglomerate could be a way for the Saudis to hedge their hydrogen bet.

And it may make sense for both parties to reevaluate the terms of the deal after the dust settles in the oil market.

But ultimately, investors aren’t buying Reliance for the petrochemicals exposure, and they shouldn’t worry if the relationship with Saudi Aramco sours a little. If Reliance’s foray into green energy succeeds, suitors will no doubt be lining up.