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 per cent or more a year, India now imports 70 per cent 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, US giant Chevron has carved out a 5 per cent stake with an option to go up to 29 per cent.
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. Young Mukesh, a chemical engineer, left his Stanford MBA 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 nationalised 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 US, yielding 10.25 per cent. Consultants said the project wasn't viable and wouldn't make money. But to help it to do so, Ambani enjoyed an exemption from a law that all crude imports had to go through state-owned Indian Oil. That ensured better prices and a more reliable supply of oil.
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 per cent 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, privatisation 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 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 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.