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Lagniappe
The
Mogul of Mumbai
Mukesh
Ambani, Reliance
Chief
By
Christopher
Helman with Naazneen Karmali
Mukesh
Ambani is creating India's first fully integrated private-sector
oil company. And he's not stopping there.
At dusk the port city of Jamnagar glitters like a vast diamond
brooch. The port's 600,000-barrel-per-day oil refinery is the
jewel in the crown of the largest private-sector enterprise
in India, Reliance Industries Ltd. Built six years ago at a
cost of $3.4 billion, India's largest refinery is an audacious
entrepreneurial achievement in a nation still shackled by state
controls and monopolistic practices. Situated in the western
Gulf of Kutch, a short trip by oil tanker across the Arabian
Sea to the Persian Gulf, Jamnagar is also the cornerstone of
an ambitious attempt by Reliance Chief Mukesh Ambani to build
the first fully integrated private oil company--from exploration
to gas pumps--on the subcontinent. "I think oil is found
in the minds of men," says Ambani. Translation: There's
plenty of it out there, if you are smart enough to find it.
India
certainly needs it. With a GDP galloping at 7% or more a year,
India now imports 70% of the 2.5 million barrels it soaks up
every day; 520,000 barrels come from government-owned Oil &
Natural Gas Corp. ONGC gets most of its output from a field
discovered in 1974 and in decline since 1991. National demand
is expected to reach 3.1 million BPD by 2010. And Reliance,
which earned an estimated $1.9 billion on $18.5 billion in revenue
for the fiscal year ended Mar. 31, wants to pick up that slack.
"Over the next two years we will be developing competencies
from scratch," says Ambani, 49. And spending boatloads
of money. There's a $6 billion plan to double the size of Jamnagar
by 2009 and make it the largest refining complex on earth. He
has earmarked another $10 billion over five years for international
oil exploration and to develop Reliance's recent discoveries,
including a field with 14 trillion cubic feet of natural gas
off India's east coast in the Bay of Bengal. His goal is to
push production from a current 40,000 barrels of oil (or the
natural-gas equivalent) per day to 400,000 in a decade. Ambani
is spending another $1.5 billion to build out his chain of Reliance
gas stations from 1,200 to 6,000. There are already 100 restaurants
in the A1 Plaza chain of truckstops.
How to pay
for it, with long-term debt at $3.5 billion and climbing? Through
operations, a $1.5 billion syndicated loan, $2 billion in private
placements and the public offering in April of $650 million
in shares of Reliance Petroleum on the Bombay Stock Exchange.
The issue was met with a massive oversubscription. Separately,
U.S. giant Chevron (nyse: CVX - news - people ) has carved out
a 5% stake with an option to go up to 29%.
Quite a leap
for a family business that started modestly in 1958. That's
when Mukesh's dad, Dhirubhai, returned to India after nine years
in Yemen, where he'd worked at a gas station and dreamed big.
Renting a desk for two hours a day, his family living in modest
Mumbai surroundings, Dhirubhai learned to work India's thick
red-tape socialism, securing import and export licenses for
nylon, rayon and polyester. In 1966 Reliance began making polyester
fabric and clothes, launching what became the bestselling Vimal
brand. Then began a long diversification up the value chain.
Rather than importing polyester yarn from the West, Ambani bought
the latest technology from DuPont (nyse: DD - news - people
). Young Mukesh, a chemical engineer, left his Stanford M.B.A.
studies and came back to India to build a yarn plant. Mukesh
spent the 1980s constructing plants to make polyester ingredients
like terephthalic acid and monoethylene glycol and plastics
such as high-density polyethylene. In 1986, when Dhirubhai suffered
a stroke, Mukesh and his younger brother, Anil, assumed day-to-day
control.
Bringing
Reliance closer to its petroleum sources was all but impossible.
New Delhi had nationalized India's oil industry in 1976 in response
to soaring fuel prices triggered by the Arab embargo. The state
grabbed refineries built by Shell and Esso and handed them to
the likes of Hindustan Petroleum and Bharat Petroleum. India
then was still self-sufficient in oil, and only state-owned
companies were allowed to drill in India's oil basins. But production
declined, and by 1993 fuel subsidies and price caps had siphoned
off any profits the state exploration giant could have used
to explore for and develop new fields. When politicians floated
a plan to allow private-sector companies like Reliance into
the oilfields, 25,000 ONGC workers went on strike.
The breaking
point came in 1997. Starved by price caps and lacking capital
for exploration and badly needed refinery construction, the
oil sector fell victim to New Delhi's financial straits when
the government couldn't even pay ONGC for months of delivered
crude, forcing the company to default on loans.
Just
the opening Reliance needed to take a crowbar to state monopolies.
With 20 years of chemical construction behind him, Mukesh Ambani
laid out a plan to build a refinery at Jamnagar that would easily
be twice the size of any other in India, capable of handling
600,000 barrels of crude a day. Reliance financed the construction
with the help of a $100 million, 100-year bond in the U.S.,
yielding 10.25%. Consultants said the project wasn't viable
and wouldn't
Micromanaging
the construction, Mukesh spent three years taking the hour-and-a-half
flight from Mumbai on a tiny Beechcraft propeller plane four
times a week. Sometimes he was joined by his wife, Nita, who
set up a school in Jamnagar. Even at home Ambani's own three
children were living the project: "Jamnagar" was reportedly
his son's third word, after "mummy" and "papu."
A cyclone in 1998 caused severe damage, but in a few nonstop
weeks Jamnagar's 85,000 workers had it back on track. By the
time it opened in 1999, Jamnagar ended up costing 30% less than
a similar refinery BP had built in Malaysia. As a finishing
touch, on the greenbelt mandated for the site Dhirubhai Ambani
ordered the planting of India's most magnificent mango orchard.
With 102,000 trees, it surpasses the legendary orchard of Mogul
Emperor Akbar of 400 years ago. Today Jamnagar is one of the
most profitable refineries in the world, grossing an average
$10 a barrel last year, compared with $7 or so for the average
refinery in Singapore.
Meanwhile,
privatization began to unfold. In 1999 the government put 25
exploration blocks up for an auction at which bidders competed
not with cash but with royalty percentages. Reliance ended up
with 12 blocks; ONGC nabbed but 8. "Absolutely inspired,"
as he says, by the state oil companies' sluggishness, Ambani
poached explorers from his rivals and hired oilfield service
companies like Schlumberger and Halliburton (nyse: HAL - news
- people ) to do seismic testing and Transocean to begin a frenzied
campaign of offshore drilling.
Its biggest
strike: the Krishna-Godavari Basin in the Bay of Bengal. ONGC
and others had looked there and come away empty-handed. But
Reliance braved tall waves, swift currents and moving sediments
through the monsoon season to drill its very first well in 2002.
What it found was the biggest new Indian field in two decades--a
giant natural gas reservoir initially thought to hold 7 trillion
cubic feet. Subsequent drilling delineated twice that.
Praveen Martis,
analyst with Wood Mackenzie, figures the gas field is worth
some $5 billion but that it will cost Ambani nearly that amount
to build out the wells and pipelines to get the gas to market.
Though Ambani has never tackled a deepwater project before,
he says that for now he's dedicated to managing the buildout
in-house. That could turn out to be a costly mistake, says Martis,
who thinks Ambani needs to partner with a global energy giant
if he is to deliver by 2010 the promised 1.4 billion cubic feet
of gas a day, the energy equivalent of 250,000 barrels of oil.
After heated
negotiations, Mukesh agreed to send half of the field's production
to a $2.2 billion, 3,740-megawatt, gas-fired plant Reliance
Energy is planning to build in northern India. Why were negotiations
heated? Reliance Energy is controlled by Anil Ambani, 46. The
brothers had a much-publicized falling-out over control of Reliance
Group after their father died in 2002. It took their mother,
Kokilaben, to establish a cold peace and divide the kingdom.
Mukesh (net worth $8.5 billion) got the tiger's share: chemicals,
plastics, polyester and oil. Anil (worth $5.7 billion) has the
power generation, telecom and financial businesses, which earned
an estimated $500 million on revenue of $5.4 billion in fiscal
2006.
Mukesh has
other fights ahead of him. Leasing blocks of unexplored territory
in Oman, Sudan, Colombia and Yemen, Reliance is bound to lock
horns eventually with state-owned oil companies and multinationals.
ONGC has already squared off against Chinese oil companies--and
come away the worse for it, failing in the last year to win
significant assets in Ecuador, Angola and Nigeria. In December
the state-owned oil company teamed up with steel baron Lakshmi
Mittal in a $3.9 billion bid for PetroKazakhstan (nyse: PKZ
- news - people ) but lost to China's CNooc, which paid $4.2
billion for the prize. "On Friday night we had the highest
bid," says ONGC Chairman Subir Raha. "Monday morning
came the announcement--China had won. It's unfair that over
the weekend we could get outbid, with no chance to raise our
offer."
For now Ambani
seems willing to let ONGC vie for the heavyweight title. Well
aware that Reliance isn't yet in any position to bid against
the Chinese, it has instead decided to join them, in December
making a deal with CNooc to explore for oil in Africa. "Worldwide,
any producing assets are fully priced," says Ambani. "We
can only create value with our own exploration efforts."
Such
partnerships also allow him to make hay at home. With much of
the oil industry still in government hands, Ambani is looking
at totally unregulated businesses. In January Reliance announced
it would spend $750 million over the next few years to launch
a chain of discount superstores.
Christopher
Helman with Naazneen Karmali
wrote
this article for Forbes Magazine. Petroleumworld not necessarily
share these views.
Editor's
Note: This commentary was originally published in by Forbes
Magazine, on 05/08/2006. Petroleumworld reprint this article
in the interest of our readers.
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News 05/20/06
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Christopher Helman with Naazneen Karmali. All rights reserved
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