Column: Sovereign wealth for energy assets

Written by Noor Mohammad | Noor Mohammad | Updated: Mar 24 2010, 03:02am hrs
The petroleum ministry has mooted the idea of a sovereign fund to help finance acquisition of energy assets by Indian companies abroad. The ministry has proposed setting aside a part of Indias $254 billion forex reserves for this purpose. This is a welcome move because it would help Indian companies like ONGC Videsh (OVL) to take on competition from their Chinese counterparts that are backed by a similar fund created by the Chinese government.

Significantly, the availability of assets for acquisition is declining. But energy consumption in India and China is growing fast as their economies continue to roar along. So the competition of oil and gas assets is expected to get fiercer .The Empowered Committee of Secretaries (ECoS) mechanism put in place by the government to fast-track OVLs investment proposals has proved very successful. However, the ECoS has the power to approve investment proposals of up to Rs 300 crore only. Any investment proposal of value beyond that has to be approved by the Cabinet only. This can prove a serious constraint. The success of the ECoS dispensation shows that in the hunt for overseas energy assets, an institutional mechanism is much more effective than individual efforts of companies. The facility of a sovereign fund will provide more financial flexibility to companies hunting for hydrocarbon assets overseas. For example, OVL borrows money from its parent company ONGC to finance its acquisition of oil and gas assets. Besides, it also leverages balance sheets of ONGC for raising funds from the market. So indirectly, ONGC bears risks emanating from OVLs acquisitions.

The success of the sovereign fund mechanism would also crucially hinge on modalities that the government works out for disbursing money from the fund for acquisition of oil and gas assets abroad. For example, the government will have to take a decision on what terms and conditions companies can access the fund on. The government will have to decide whether it wants to make the money available to companies on demand, or if it would undertake due diligence like a banker. Further, the government will also have to decide if it wants to provide full or partial funding. It will also have to take a decision on whether it would provide funding as equity investment or as a soft loan.