First for US & RIL in 50 years

When the late patriarch Dhirubhai Ambani started his Indian operations as a textile trader in the 1960s, he never imagined that Reliance Industries Ltd (RIL) would construct the largest grassroot refinery. Despite the apocryphal stories that he wanted an oil empire as big as that of British Petroleum, he never thought that RIL would build a mega refinery in the US, the first in the past half-a-century. Well, even the second dream, which was once hazy and nebulous, will soon turn into reality over the next few years, if everything goes according to the plans concocted by the US president, Donald Trump.

Without hints from RIL, or speculation in Indian media, Trump unleashed an oil bombshell, unlike the attacks on Iran’s oil assets, and Iran’s counter on oil targets in the Middle East. “This is a historic $300 billion deal, the biggest in US history,” he announced in a social media post. He thanked RIL, India’s largest privately-held firm, “for this tremendous investment.” The new port refinery will be in Texas, and the US president claimed that it will “strengthen our national security, boost American energy production, deliver billions of dollars in economic impact, and will be the cleanest refinery in the world.”

It will be the first refinery in the US in 50 years. Media reports indicate that it will use American shale oil, and will be co-developed between RIL and American First Refining. In a statement, the American firm stated that it received a “9-figure investment from a global supermajor at a 10-figure valuation.” It added that the supermajor, now revealed as RIL, has inked a 20-year-deal to “purchase, process, and distribute shale oil sourced and produced stateside.” The refinery will process 1.2 billion barrels of US light shale oil, valued at $125 billion, and produce 50 billion gallons of refined products worth $175 billion.

According to the executives of American First Refining, America has a surplus of light shale oil, apart from prominent shale gas sources, but there is a shortage of refining capacity. The Reliance investment will correct this input-output mismatch. Hence, the new mega refinery will strengthen the domestic petro product supply chain. Over the past decade or so, refining capacity globally has undergone a shift.

Expansions were witnessed in Asia and the Middle East, even as capacities contracted or stagnated in North America and Europe. Over the past two decades, refining capacity was up 15 per cent despite a decrease in the absolute number of refineries since 2011.

Hence, the announcement of a mega refinery in the US is a major one. As Trump admitted, this is the first such deal in 50 years. One is not sure how the demand-supply arithmetic will work. There is availability of fuel, this is for sure. There is a demand for the refinery products, this too is sure. But does the US need a large refinery for local demand? Or will the mega refinery look at exports and local sales? These are some of the questions that have rattled the experts, even the investors.

What is more important is that Reliance’s experience with American shale oil and gas is not a happy one. According to AI-driven search, “RIL exited its US shale gas projects between 2017 and 2021 primarily due to sustained low oil and gas prices, which led to poor financial returns, negative equity, and asset devaluation. The projects, acquired between 2010 and 2013 became economically unviable, prompting RIL to divest its Marcellus and Eagle Ford shale assets….” The sales were at lower valuations compared to the purchase prices. RIL decided to shift to high-growth Indian areas, and exit volatile foreign assets.

According to a media report, “A fall in (oil and gas) price affects shale gas business more than traditional oil and gas as shale assets are economically viable only if crude prices remain at a certain threshold.” Generally, the threshold keeps changing depending on the shale assets, and their complexity. Obviously, at nearly $90, although it is down from $120, the global crude prices are quite attractive to explore all kinds of shale oil and gas assets across America. At a price measure, this is the opportune time to enter the refining business based on shale oil.

But as the past experiences prove, and as RIL’s experiences in the US show, the scenario can change rapidly. What seems lucrative and attractive can become worthless within no time. This mostly happens to non-crude energy assets such as gas and shale-based sources. If the Iran war ends, and crude prices plummet, the whole refinery’s financials and commercials can go for a spin. For RIL to invest in a $300-billion refinery, and that too based on shale oil, is fraught with risks. These risks raise their heads quite quickly. But then, RIL has managed one of the largest refineries at Jamnagar, and an export-oriented one.

Hence, it understands the dynamics of the oil and refinery products businesses. Over the past few years, despite the volatility in both crude and petroproducts prices, the financials of the Jamnagar refinery were stable and consistent. There were profit fluctuations but not wild ones. There was always something that saved RIL. If crude went up, somehow some other margins improved to bolster and support the profits. Hence, this game of rising and falling input prices is something that RIL has played, and won in most years. Doing this in India is easier than doing it in the US, as the shale gas assets sell-off shows.

Investors are not sure of the American mega refinery proposal. After a spike in prices in the first hour of yesterday’s trading, the stock came down. It ended the day more than 1.5 per cent lower. Maybe after the initial enthusiasm of such a big and unexpected news, and that too from the social post of Trump, numbed the investors into undue excitement and enthusiasm. Possibly, the realisation stuck later. A refinery in the US, which is based on shale oil, has different dynamics and economics compared to an export-oriented refinery in India.

Trump remains upbeat about the refinery, as he is with everything, even if it means nothing. It credited the proposal to “America First Agenda, streamlining Permits, and lowering Taxes that have attracted billions of dollars in deals.” He said that the mega project will generate thousands of jobs in Texas, and bring “long-awaited economic development. It will power global exports, and bring… jobs and growth to a region that deserves it,” Trump said in a social media post.