Staking out an energy future

Updated: Oct 7 2013, 08:00am hrs
An important plank of India's energy security policy is to build up a portfolio of international oil and gas assets. The government recognises that hydrocarbons are tradeables and can be purchased on the open market. But given the volatility of the international petroleum market, they do not want to rely on arms length transactions only. They believe that equity ownership offers greater security. They have therefore encouraged public and private sector companies to compete for equity oil and gas production overseas. These companies have hitherto achieved commendable results. But looking ahead, they are likely to face stronger competition. The Chinese, for one, are pulling out all the stops to secure their energy requirements. The government must therefore tweak its institutional structure and streamline the decision-making process to enable Indian companies to respond with greater agility. It should also consider putting its own weight behind their efforts.

ONGC VIDESH (OVL), the 100% subsidiary of ONGC, has significantly broadened its international footprint. In 2001, it had a stake in one producing asset in Sudan and its equity share of oil production was 2,50,000 tonnes per annum. By 2012, it had extended its presence to 16 countries and had an interest in 32 assets. Its equity share had increased to 7.25 million tonnes. OVL has achieved these results despite three constraints.

One, as a public sector entity it does not have operational and financial autonomy. Prior to submitting a bid, it has to secure the approval of its shareholder, ONGC, the ministry of petroleum and the committee of secretaries. At times it also has to pass muster with the empowered group of ministers. The consequences of this layered and time-consuming approval process is that the bids are often leaked and OVL has difficulty meeting bid deadlines.

Two, the playing field has not always been level. The bidding process in many countries in Africa and Central Asia, where the resources are controlled by the government, is not transparent. The Chinese exploit this opacity in many ways, but often by simply sweetening their bid for an upstream asset with a "behind the scenes" commitment to invest in downstream infrastructure like refining, power generation, fertiliser units, roads and railways. These "two for one" offers have paid off handsomely in countries like Kazakhstan and Nigeria.

Three, CNOOC and SINOPECthe two Chinese state-owned companieshave been aggressively backed by their government. They thus bid with the balance sheet of their petroleum industry and the weight of the sovereign behind them. A few weeks ago, for instance, Chinese President Xi Jinping undertook a whirlwind tour of Central Asia. He signed a plethora of oil supply deals in Uzbekistan, Kyrgyzstan and Turkmenistan, and made a point of attending the ceremony to celebrate the start of production of oil from the giant Kashagan field in Kazakhstan. While there, he announced financial support for the construction of Kazakhstan's fourth refinery. CNOOC had earlier been granted a stake in the Kashagan field.

OVL's success has been reinforced by some dramatic portfolio wins by the downstream company Bharat Petroleum (BPCL). There was a time not long ago when every public sector entity had an aspiration to be an integrated company. ONGC wanted to build refineries and enter marketing, and IOC, BPCL and HPCL wanted to carry out exploration and production. They all set up subsidiaries for this purpose. None of the upstream subsidiaries had any success except Bharat Resources (BRL), the upstream subsidiary of BPCL. BRLs strategy was to acquire a small (10-20%) non-operating stake in exploration assets around the world. Two of these acquisitions have struck dirt. A field in Mozambique in which BRL has a 10% stake has confirmed gas reservesat last count, over 60 trillion cubic feet (tcf) of gas reserves. I say last count because the number keeps going up with every well drilled. To put this discovery into perspective, the Reliance D6 find, which was billed as one of the large gas discoveries of the year, was listed at 15 tcf and ONGC has just paid Videocon (which had invested on the back of BRL) nearly $3 billion for its 10% stake. The second is a discovery in the sub-salts basin of Brazil. It is too early to put a reserve figure on the discovery, but it could well be the prelude to the unlocking of a super giant reservoir. BRL and Videocon have a 10% stake each in this discovery.

These successes should not make us complacent. As noted, the Chinese have been aggressively expanding their portfolio. They have taken stakes in Iraq and Egypt. They have tied up gas supplies from Russia and are strong-arming the Africans. There are three things that the government should do to counter this competitive threat.

First, OVL should be unshackled from intrusive bureaucratic oversight and cumbersome approval procedures. As it is, this is an infructuous exercise. The bureaucrats and politicians do not have the technical knowledge to challenge OVL's bid proposal, for it is technical and stuffed with geological, reservoir and financial data. All that these committees can do is to make sure that the company is following the government's mandate on international acquisitions. But that is a check the OVL board could easily carry out.

Second, OVL' s balance sheet should be bolstered by putting the weight of "India Energy Inc" behind it. Perhaps the biggest of our energy companiesNTPC, ONGC/OVL, Coal India, Gas Authority of India Ltd (GAIL), etcshould be brought around a table to hammer out an international energy acquisition strategy, and to agree that whenever a strategically important asset that meets the threshold criteria of profitability and return is put up for sale, these companies would bid together as a consortium. Or, if that is not legally possible, then they would offer the strength of their balance sheet to support the bid and if required, consider going beyond an offer for just the upstream asset. The private sector could join the consortia on a case by case basis a la the BPCL/Videocon model.

Third, the government should put its sovereign weight behind an international bid. Currently, the ministry of external affairs provides advisory support to companies on the international hunt. But that is not enough. The government should become a partner in the quest. The Chinese do it unabashedly. Other countries do it more subtly. That is the competitive reality. The government should redesign its institutional and decision-making structures such that its key agencies and officials can go out on a limb and bat for all international initiatives, whether it be for the acquisition of an oil and gas asset, the securing of an oil supply deal or an LNG contract and/or the negotiation of a construction contract. If that happens, Indian companies may well be able to move closer to pole position.

Vikram S Mehta

The writer is chairman of Brookings India and senior fellow, Brookings Institution