Reliance AGM 2021 | RIL’s pivot to clean energy makes strategic and economic sense

There is no doubt that Saudi Aramco is the king of fossil fuels, being streets ahead of rivals in reserves of oil and gas. The company also reports into a government that wants the country’s economy to quickly diversify and reduce its dependence on oil -- exactly what Ambani is doing as he transforms the conglomerate into the “new Reliance”.

In January, Crown Prince Mohammed bin Salman announced “The Line” project, a key ingredient of the post-oil economy. He said the project was “a city of a million residents with a length of 170 km that preserves 95 percent of nature … with zero cars, zero streets and zero carbon emissions.”

The city will have 1 million residents and create 3.80 lakh jobs by 2030. It would cost $100 billion to $200 billion.

One can expect Aramco Chairman Yasir Al-Rumayyan, who will sit on Reliance’s board as an independent director to dutifully toe the monarch’s line. The fossil fuel giant is also funding start-ups in new areas of the Saudi economy including e-commerce and renewable energy, which RIL is also pursuing.

Moreover, Aramco, which is expected to pick up a multi-billion dollar stake in the oil-to-chemicals business, will also add enormous value to RIL’s refining segment. Saudi Arabia’s oil minister once said that Reliance’s Jamnagar plant consumed more Saudi crude oil than any other refinery in the world.

The renewables opportunity

There is no doubting the future of renewable energy. However, making money from new energy, particularly at the scale that the Ambanis are used to, is not going to be easy. Renewable energy companies in India operate with razor-thin margins while equipment makers struggle to compete with cheap Chinese supplies.

However, RIL has the advantage of its proven project-execution ability, global scale, top talent, tough cost control, phenomenal bargaining power and fully integrated operations. The company that operated in the chain of fabrics, yarn, petrochemicals and oil & gas production is planning a similar integration in new energy.

It will spend over $10 billion to build four Giga Factories to manufacture and fully integrate all the critical components of the New Energy ecosystem.

“We will start with raw silica and convert this to poly silicon which we will then convert to ingot and wafers. These wafers would be used to make high efficiency solar cells and finally assembled into solar modules of highest quality and durability. We will target to achieve costs that are lowest in the world to ensure affordability of our solar modules,” Ambani told shareholders.

Reliance will also build an advanced energy storage battery factory as well as an electrolyser factory for the production of green hydrogen. To generate power from hydrogen, it will build a fuel cell factory.

Further, its Jamnagar complex will provide infrastructure and utilities to manufacture ancillary material and equipment needed for the factories, making all critical material available in time. It will also support independent manufacturers in the ecosystem.

While the company hopes to emerge globally competitive in its new line of business, Ambani himself told shareholders that it is challenging.

“New Energy is the most exciting, most challenging and most purpose-driven mission I will be pursuing in my life,” he said.

Economic sense

Shareholders may debate the merits of the decisive turn that the company is taking given the returns they have enjoyed from RIL’s conventional operations, particularly the world’s largest refinery at Jamnagar, which can produce the cleanest fuel from the dirtiest crude oil with margins that global peers envy.

Actually, there is nothing to debate. A company that wants to remain prominent and profitable in the medium to long term has no choice but to become carbon neutral. Global oil majors who thought differently have egg on their face.

Take the case of ExxonMobil, the big daddy of global oil. It was the most valued US company for years, but a decade ago, Apple overtook it when the value of both firms was about $400 billion. Today, Apple and Microsoft are in the $2 trillion league (a level touched by Aramco in 2019) while Exxon’s value has fallen significantly since then.

Exxon was ejected from the Dow Jones index last year after being a star for almost a century. It was replaced by Salesforce.com, which sells software. In the S&P 500, the share of energy has contracted from about 11 percent a decade ago to 2-3 percent now, while technology’s share is close to 30 percent, up from about 19 percent ten years ago.

Recently, activist investors managed to win seats in Exxon’s board, much to the embarrassment of the top brass of the oil major, which reported a loss of $22.4 billion in 2020. The reason why shareholders voted for green board members was primarily because the activists persuaded them that being sustainable was vital for long-term profitability of the company -- not merely noble concerns of health and the air people breathe.

The Ambani family realises this. The company’s chairman was not exaggerating when he said “Our world has only one option: rapid transition to a new era of green, clean and renewable energy”.

Reliance has already succeeded in reducing excessive dependence on oil and gas for its profit. The rapid growth of its telecoms and retail businesses is a testimony. At the shareholders’ meeting, Ambani proudly declared that consumer businesses accounted for almost half of RIL’s EBITDA.

“One of these consumer businesses, Retail, is only about a decade old. The other business, Jio, is only five years old,” he said.

And now, the company is launching yet another new business. With this, Mukesh Ambani will remembered for making a decisive turn towards sustainability, apart from the fact that the company will make more money from the businesses that he launched compared to those he inherited.

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