Tying up the knot: RIL's Mukesh Ambani (left) and Dave O'Reilly, Chairman & CEO, Chevron

A few days before Reliance Petroleum Limited (RPL) was slated to hit the capital markets with its initial public offering (IPO), brokers were taken to Jamnagar where they spent time at Reliance Industries Ltd's (RIL's) 30 million tonne refinery (this will be expanded to 60 million tonnes by fy09) and heard Chairman Mukesh Ambani unveil his plans for his oil and gas business. Not too many people, it is gathered, paid attention to one comment made by Ambani as a part of his speech. He said he was recently in the US where he spent about 12 hours with energy major Chevron's Chairman & CEO Dave O'Reilly. It was at this meeting where both discussed the global oil scenario and agreed that the future was in gas and not so much in oil.

Some people at that briefing sensed that a major announcement from RIL was underway and given that RPL's proposed $1.2 billion (Rs 5,400 crore) IPO was just round the corner, this seemed quite logical. True, RPL as a standalone refiner may have little to do on the gas front, but by getting a foot into the integrated Reliance conglomerate, which extends upstream to oil and gas exploration, Chevron could in future work out several other areas of cooperation beyond just refining. Sure enough last fortnight reports surfaced that Chevron and Reliance were looking to set up a joint venture for oil (for marketing natural gas). Chevron reportedly is likely to acquire a stake in Reliance's Krishna Godavari (kg) basin, which is supposed to have gas reserves of an estimated 60 million tonnes. Reliance, in turn, will import liquefied natural gas (LNG) from Chevron's overseas markets, and will also get an opportunity to buy into such international ventures over time.

Reliance, of course, also gets a welcome dose of capital, immediately as well as in the long term. Whilst Chevron has agreed to pick up 5 per cent in RPL for $300 million (Rs 1,350 crore), it has the option to go up to 29 per cent. The deal was struck at Rs 60 per share and if the additional 24 per cent is acquired at the same price, RPL will be richer by $1.74 billion (Rs 7,830 crore). The proposed new refinery is primarily an export-oriented projected involving an overall investment of Rs 27,000 crore. RPL intends to develop a refinery with a crude capacity of 5.8 lakh barrels per day, and it will be ready to roll towards the end of 2008.

RIL's rig: Digging deep

Now consider the benefits for Chevron: The Asia-Pacific market is not unfamiliar territory for Chevron and for the $193 billion (Rs 868,500 crore) major, its presence cuts across key markets like China, South Korea, Thailand and the Philippines. Just consider the fact that Chevron's operations in the Asia-Pacific region account for over a third of its international oil production which is more than what Chevron produces from any other region in any other part of the world. For the record, Chevron's operations cut across 180 countries that comprise Africa, Asia-Pacific, Eurasia and Europe. Chevron's strength comes from the fact that it is present in every segment of the oil and gas industry-exploration and production, refining, marketing and transportation. In terms of sheer numbers, last year, Chevron produced more than 2.5 million barrels of oil equivalent per day and has a huge marketing network that supports over 26,000 retail outlets in about 90 countries. "For RIL, petrochemicals remains the key competence and it really has not proven itself as far as something like exploration is concerned. In that context, it could not have chosen someone better than Chevron," thinks Arun Kejriwal, Director of Mumbai-based KRIS Securities. To Chevron, from a strategic point of view, India was a market that it necessarily had to be in. The company also has expertise in the areas of advanced energy technologies and renewable energy applications.

Ambani for his part could do with Chevron's immense expertise in global gas exploration, where it has projects ongoing right from Angola to North America. Also, given that there are virtually no refineries coming up in most parts of the world, RPL with its export focus appears to be well-equipped to handle the demand-supply scenario for a while to come. For the moment, the marriage between RPL and Chevron looks extremely good and with each bringing unique skill sets to the table.