Failure Story of Reliance Petroleum

Failure Story of
Reliance Petroleum
About the Company
 In 1991, Reliance industries set up a new subsidiary, Reliance Refineries
Private Ltd. The subsidiary later changed its name to Reliance Petroleum
Limited.
 In 1993 , Reliance became the first Indian company to raise capital on the
foreign market.
 Reliance's opportunity for entry into petroleum refining came in 1997,
when the Indian oil industry reached a state of near collapse.
 They announced a plan to build one of the world's largest and most
modern petroleum refining complexes in Jamnagar, Gujarat, at a cost of
some $6 billion.
 The site's production capacity was double that of any other Indian refinery
and ranked among the top five in the world.
Company’s Information
Mission Statement
Refining Life Redefining Growth.
Goal
To harness an emerging value creation opportunity in the global refining
sector.
Employees : 12,540
Employee Growth : 3.5%
The company is India's largest petrochemical firm and among the
country's largest companies (along with the likes of Indian Oil and
the Tata Group).
Principle competitors
Indian Oil Corporation Ltd.; Hindustan Petroleum Corporation Ltd.;
Bharat Petroleum Corporation Ltd.; Indian Petrochemicals Corporation Ltd.;
Mangalore Refinery and Petrochemicals Ltd.; Kochi Refineries Ltd.;
Chennai Petroleum Corporation Ltd.
Management
It is headed by Dhirubhai Ambani’s son, Chairman Mukesh Ambani.
Promoters
Reliance Industries Limited (RIL) owns 70.38% & Chevron India owns 5%
of the equity share capital. An offer in 2008 made to Chevron to
increase its share in equity share capital further by 5%.
Corporate Ranking
 It featured in the Fortune Global 500 list of ‘World's Largest
Corporations' for the fourth consecutive year.
 Ranked 269th in 2007 having moved up 73 places from last year.
 Featured as one of the world's Top 200 companies in terms of
Profits.
 Featured among top 50 companies with the biggest increase in
Revenues.
 In September,2008 it was the only Indian Company which was
featured in forbes top 100 list.
Reliance’s SEZ Refinery
 This refinery has the capacity to process 580,000 barrels of crude
oil per stream day.
 This refinery has more than 40 process units apart from a large
network of off sites, utilities and other Infrastructure facilities.
 It is designed with high level of flexibility to change grades based on
economy and to capture margins based on market dynamics.
 The refinery has been the first in India to produce large number of
US grade gasoline such as R-BOB, RFG, US conventional, etc.
 It has a state-of-the art centralized control centre, laboratory, fire
station and a large green belt.
 All its process units have successfully demonstrated their ability to
operate smoothly and safely, producing high quality transportation
fuels.
Growth Strategy
 Maximizing production from existing assets, enhancing global
competitiveness, entering the business of retail marketing of petroleum
products in India, investing in pipeline distribution infrastructure and
accessing global markets.
 RPL is the first Indian company to offer an opportunity to all
shareholders for participating in an international offering of its shares.
 Capital cost per barrel produced is USD 10,000. When compared to the
capital cost of other companies which is at USD 25,000 is very less and
is promising for the investors to give better returns.
Shut down of retail outlets
 Surging crude prices : High crude prices led to weakening of product
cracks and refining margins across regions.
 Absence of government subsidies : Government stops providing
subsidies to the private crude oil players. This leads to rise in the prices
of oil of private players.
 Differential between private and public companies kept widening :
It is because of oil bonds for state-owned oil marketing firms and
discounts from upstream oil companies.
 RIL sells petrol and diesel at between Rs 6 and Rs 14 more than
PSUs : This drove away customers, forcing the pumps to go dry.
Breaking up in 2006
 Dhirubhai Ambani died in 2002, and the Ambani brothers took
over as heads of the company.
 In that year, the company increased its dominance of the
country's petrochemicals sector through its acquisition of main
private-sector rival Indian Petrochemicals Corporation.
 In the second half of the 2000s, the company planed a $6 billion
extension of the Jamnagar site, doubling it in size and making it
the world's largest complex refinery by 2009.
 The company also announced that it intended to spend $10
billion on further oil exploration efforts, targeting the international
market.
 In the meantime, rising tensions between Mukesh and Anil
Ambani came to a head in late 2005, breakup of the company
took place.
Retain Underperform on RPL
Several risks in RPL
 Further weakening of refining margins after RPL start-up. RPL’s
capacity is large enough to add 1% to global diesel and gasoline supply
at full capacity
 There is a risk that minimum alternate tax (MAT) may be imposed on
units in special economic zones (SEZ) like RPL. If done it will mean
RPL will have to pay tax at 11% despite the 5-year tax holiday. This will
mean downside of 7- 8% to RPL.
 Problems in stabilizing refinery. Track record of the Reliance group in
implementing and commissioning projects is impeccable but problems
can never be ruled out.
Conclusion
 Reliance petroleum opened its own retail outlets with a huge
investments of Rs 5000 crore at various places across India. But
suddenly it announced to close down all of its retail outlets.
 The main reason behind this was the lack of support from government.
 Government of India controls the prices of petrol and diesel in India. So,
all the petroleum retail outlets have to sell their petroleum products at
discounted prices.
 Government provides subsidies to the Public sector oil companies but it
refused to provide subsidies to the reliance petroleum ltd.
 Reliance it tried to open them again by trying to make a deal with IOC,
BPCL and HPCL but the effort was not successful.

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