Merger of RPL with RIL
Industry Analysis
INDUSTRY CHARACTERISTICS
The crude oil production for year 2008-2009 was 33.51 MMT while the refinery production was
about 156.103 MMT. India boasts of 20 refineries of which 17 are government owned with the
remaining 3 being shared between Reliance and Essar group 4. India with its abundant refining
capacity has made it a net exporter of petroleum products wherein it not only has own oil
exploration fields, but also refines crude oil and exports the various by-products.
While the product market related to RIL’s oil and gas business comprises of products that come from
refining of crude oil such as propylene and polypropylene used in textile industry, naptha etc, we
would focus on the refined oil market alone.
Crude Oil Value Chain
Industry Structure
The below table is a snapshot of the two entities involved in this merger (at pre-merger point) within
the oil industry boundaries:
Oil Industry Boundaries
RIL RPL
Exploration Owns 41 exploration blocks Not Available
domestically and another 14
internationally
Production Integrated production facility to Crude oil from imports and other oil
channel crude oil from offshore fields explorers received via pipelines over
to the refinery land and sea.
Transportation Reliance Gas Transportation Crude oil is transported via pipelines
Infrastructure Ltd/ Floating-Production- over land and sea. Uses coastal shipping
Storage-Offloading Vessel (FPSO) and for domestic crude oil and crude oil
Control-Cum-Riser Platform (CRP). The imports transport to RPL refineries. The
FPSO facility was leased from a foreign refined oil is distributed to oil retailers
provider. via terrestrial mechanisms (rail road)
and via coastal shipping.
Refining The first RPL Jamnagar refinery plant The second RPL Jamnagar refinery
with 95% capacity utilization yielded boasts of very High Gross Refining
high GRM leading up to the merger Margin (GRM) owing to highly complex
days refinery (Nelson scale 14) capable of
refining the crudest oil quality.
Distribution Operates its own retail outlets ~ 1400 Refined oil sale to competitors
in number, in addition to exports. (Domestic oil retailers such as IOCL,
HPCL etc) and exports based on pre-
signed agreements.
Demand – Supply of Crude Oil
Crude oil produced domestically and imported from abroad refined at various locations. The below
figure indicates the production and consumption of crude oil. The refinery throughput is seen
increasing consistently which can be attributed to increase in domestic consumption petroleum
products. The compound annual rate of growth for refinery crude throughput was 8.88 percent
during the period of 1994-95 to 2001-02. If the same growth rate continues, the future consumption
of crude oil (in terms of refinery throughput) will be 163 and 250 million tonnes by 2006-07 and
2011-12 respectively.
180
160 160.77
140
120
100 106.97
Consumption (In MMT)
80
Production (In MMT)
60 57.75
40 32.26
20 19.14
8.29
0 3.46
1951 1961 1971 1981 1991 2001 2009
Source: Data has been collected from RIL Annual reports
Demand Vs Supply of Petroleum Products:
The demand for petroleum products has consistently risen owing to:
Increased urbanization leading to increased use of automobiles.
Improved infrastructure facilities (roadways/shipping/air freight) which has ensured better
transportation and logistics movement.
Indian lifestyle and earning pattern following liberalization has led to changing patterns of
travel that require - petrol, diesel, ATF etc.
Increased demand for Naptha, which is feedstock for the rapidly growing sectors of
petrochemicals, power, fertilizer etc.
250
200 195
184
167
150 148
129 Demand (In MMT)
111 Supply (In MMT)
100 91
69
50
0
1998-99 2001-02 2006-07 2011-12
Source: Data has been collected from RIL Annual reports
Installed Capacity Vs Demand for Crude Oil - Growth Trend
Oil refining companies have set up additional refining capacities as both Export Oriented Units as
well as Domestic units. India had surplus refining capacity with export potential totalling around
40MMT per annum (MMTPA) in 2007 which is likely to go up to 100MMTPA.
Source MoPNG Dec 2006
CRITICAL SUCCESS FACTORS
Downstream Sector
For the downstream sector, the CSF for both RIL and RPL were essentially the same since both were
in refining & marketing
Key Success Factors in Description
downstream
Economy of Scale Economy of scale brings down the cost (low capex/opex) to
compete in the global markets
State of the art technology Flexibility to process a wide variety of crude and optimize
product mix
Technology Integration with petrochemicals plant
Strategic location Refinery location vis à vis crude sources and demand
centers
Investment along India’s Coastal regions to reduce
transportation cost and associated risks
Efficient Logistics Economies in inward crude and outward product freights
Integrated port & associated infrastructure
Faster turnaround & lower handling costs
Distribution Infrastructure Investment in ports to handle greater volumes outbound
refined trade
Third party investments in storage and pipelines
Flexibility of product mix Sophisticated refineries with conversion capacity
Product mix in tune with the export market
Quality of Products Built in capabilities to produce outputs in line with the
stringent fuel norms evolving in high demand markets
Technical capability to deliver products beyond Euro II
norms
Upstream Sector
Only RIL is present in upstream sector. RPL operates in downstream sector only
Key Success Factors in Description
upstream
Exploration expertise Technically qualified and a very strong team of exploration
experts
Maximizing reserves through Reserve Replacement to Production (R/P) Ratio: To keep on
exploitation and technology adding to the reserve base to sustain earning growth
Focus on infill and low risk step-out drilling respectively
Investment in Technology Invest in modern technology for improved exploration
Pursuit of frontier and Onshore and shelf finds decreasing. Hence key new area of
emerging basins as discovery is deepwater (>200 meters)
well as secondary exploration
for unconventional
(stratigraphic based)
plays
GROWTH STRATEGIES
Of RIL
o Introduction of new grades of petrochemical products (new grades for import
substitution)
o Exports products in newer niche markets for better margins
o Diversified revenue stream (Polyester, Polymers, Oil & Gas)
o Pursuing attractive export opportunities
o Inorganic operating strategies in upstream business: Asset purchase or corporate
merger/acquisition to add reserves/production.
o Deploying leading edge global technologies, be globally competitive in all its operations
and delivering International quality of products
Of RPL
o Maximizing production from current assets
o Enhancing global competitiveness
o Entering the business of retail marketing of petroleum products in India
o Investing in pipeline distribution infrastructure and accessing global markets
TYPE OF MERGER
The merger between RIL and RPL has provided RIL with significant economies of scale and has
strongly positioned RIL in the global oil-refining business. The merger between RIL and RPL
represents both a vertical merger and horizontal merger.
1. Vertical Merger: The merger of RPL with RIL provides the benefit of both the backward and
forward integration.
Backward integration: Before the merger, RPL's refinery supplied critical raw materials to Hazira
and Jamnagar complex of RIL2. Following are the raw material supplied that was supplied by RPL
to RIL:
Raw Material Supplied to
Naphtha Cracker unit - Hazira Complex
Aromatic Naphta Paraxylene plants -Jamnagar Complex
C3 polypropylene -Jamnagar Complex
With the merger, all these transactions have turned into interdivisional transfers from inter-
company transfers.
Forward Integration: The RPL refinery will benefit by having access to RIL’s crude oil.
2. Horizontal Merger: The merger will expand the scale of RIL’s refining operations. Prior to
merger, both RIL and RPL had refining operations. The Merger has resulted in RIL owning 1.24
million barrels per day (MBPD) of crude processing capacity, the largest refining capacity at any
single location in the world2.
References/Endnotes:
1. [Link]
2. RIL Annual Report 2008-2009
3. [Link]
4. [Link]
[Link]
5. E&Y Report – Dec 2007
6. [Link]
sense/articleshow/[Link]