By Prof. D. M. Deshpande
The proposed plan of Reliance Industries to invest in Texas, United States is typical of Trump and his tendency to announce mega deals. Though his claim of a $300 billion deal appears to be more of a sensational headline, there is little doubt about the size of the deal being quite big. It may actually come near the stated figure if one takes into account the 20 year period of agreement and its value in terms of reducing the current US trade imbalance with India. Coming amid a raging war that is threatening a worse global energy disruption than anticipated, the announcement is, without doubt, a very significant development in business, trade, diplomacy and ties between our two nations.
The details in the public domain are scanty and hence a better informed debate and analysis will only unfold later. Yet, even on the basis of what is known, it is worth exploring the ramifications and significance of the deal. Mukesh Ambani is a well known personality, the richest Asian and runs a successful industrial conglomerate. He has grown and diversified his empire at a pace that has no parallel in Indian corporate history. He is also known for causing disruptions in industries and establishing his entity as a leading player; the latest examples in this regard are telecommunications and financial services.
That he lives with his family in a multistoried palatial, luxurious high rise-Antilia-is widely known. But very few people know that he lived in a trailer while establishing a world class refinery at Jamnangar in Gujarat. He acquired the title of a ‘Master Builder’ for doing what was nearly thought of as impossible and in record time. Later execution of projects before time became a norm with Reliance. In 1990’s under the tutelage of Dhirubhai Ambani, this refinery project was undertaken against the advice of almost every global consultant and expert- lack of water, power, no roads, all formidable hurdles. Today it stands as a testimony to the indomitable spirit of enterprise and will power of Ambanis. It is the largest refinery with a huge capacity of refining 1.24 million barrels per day that has changed the global oil production and trade. It is complex to run but capable of refining different kinds of crude oils-thick, sour, heavy of the Venezuela type and also the sweet and light ones’. Not surprisingly therefore, the Jamanagar facility has a Nelson Complexity Score of 21.1, again the highest in the world. The score signifies the capability to produce high value products.
The US has 132 refineries with a combined capacity to refine 18.4 million barrels of crude per day. Compare this with the new proposed facility of Reliance at Brownsville port in Texas which will have a capacity of refining 1,68,000 barrels of shale oil per day. Decades old refineries in the U.S were built to process heavier oil but not suited to refine shale oil. Reliance has partnered with America First Refining (AFR) a startup company in this greenfield project. This will be the first major oil refinery to be built in 50 years in the US.
The shale oil boom began in the mid-2000’s that significantly increased the crude output. But due to shortage of refining capacity of sweet shale oil, much of it was exported. At the same time the U.S continues to import large quantities of refined oil. Between 2014 and 2024, the U.S exported close to 10 billion barrels of crude oil and imported 28 billion oil that cost the American consumers more than $1.8 trillion according to AFR.
As per reports, Reliance has entered into a 20 year agreement to buy output of the refinery. The AFR states that the long term offtake by Reliance is estimated at 1.2 billion barrels of shale oil valued at $125 billion. The agreement also covers 50 billion gallons of refined oil products including gasolene, diesel and jet fuel valued at $175. Since the plant will be located at deep waters in the Port, it will facilitate easy transport-both domestic and international.
As of now, it appears to be a win-win proposition. The timing could not have been more opportune in order to derisk and diffuse energy supplies in the wake of virtual closure of Strait of Hormuz. The US will gain by this huge project in terms of investments, jobs and greater control over vital energy resources. It does make profound economic sense, politically as well, as midterm polls are due in Nov and Trump cannot afford to lose in Texas.
India will gain by securing a stronger and longer term foothold on vast energy resources in America. Reliance wouldn’t have committed to a purchase agreement with AFR had it not been for the strong and robust domestic demand for energy in India. As of investment, as per AFR, Reliance will be less than $1 billion initially although it may add up to a huge value over a long 20 year period. Even as per industry experts, the cost of setting up a new refinery will be in the region of $ 4 to $ 5 billion.
Potentially, the project will vastly improve economic ties between the two nations. India will benefit enormously from ‘tariff insurance’ this long term deal may bring about. The energy security and along with risk diversification it may help India to strengthen its position in the emerging world order. Two risks need to be kept in mind. One, Trump’s unpredictable nature and second the future life of fossil fuels, given that clean energies are fast replacing them. India seems to be entering a transformative phase; after navigating the global forces and compulsions, it appears to be now playing a vital role shaping the new world order. Credit must be given where it is due; here to the government, diplomacy and stalwarts of Indian industry.
The author has four decades of experience in higher education teaching and research. He is the former first vice-chancellor of ISBM University, Chhattisgarh
