Where there is a will, there are oil cos for a bargain

Where there is a will, there are oil cos for a bargain

With 17.5 per cent of the world’s population, and just 1.9 per cent of the world’s landmass, India cannot produce everything it needs, especially natural resources, and needs to rely on imports.

This import dependence is most pronounced in the case of energy, especially crude oil. Petroleum is the single-biggest item on India’s import list — oil imports added up to $112.7 billion during FY15. India currently relies on imports to meet 78 per cent of its petroleum needs, a figure that may increase to 90 per cent by 2040, according to the International Energy Agency — from 3.8 million barrels/day now, oil imports could increase to 7.2 million barrels/day by 2040.

Given the high volume of oil imports, and the role of oil in India’s economy, high oil price is a perennial concern. Second, the politically unstable West Asia accounts for over 60 per cent of India’s oil imports. Civil unrest or a war in this region could push up oil prices, and also hit supplies to India. Attempts to encourage oil and gas production in India are welcome, but domestic production cannot meet India’s oil needs. At best, it could mean that instead of 90 per cent, India may need to import 85 per cent of its energy needs. But clearly, India will still need to rely on imports to meet the bulk of its petroleum needs.

Being dependent on oil imports is not a problem in itself — the world’s top economies, including the US, China, Japan, and Germany — all depend on imported oil for a big chunk of their needs. What India needs, as a developing and a low income nation, is access to plentiful energy at a fair and affordable price. Since oil is an internationally traded commodity, it will be available at a market-determined price — which could be too expensive for India. This had happened from 2011-2014, when oil prices averaged over $100/barrel — resulting in an annual outflow of over $100 billion from the Indian economy.

Capturing value

While India cannot dictate the price of oil, it can try to capture more of the value that it pays out for its oil imports. India needs to acquire oil and gas fields overseas, so that it can capture a greater part of the energy value chain. This is something that India’s public sector firms have been trying to do for some time — ONGC Videsh (OVL), the overseas arm of ONGC, has been acquiring oil and gas assets across the world for over a decade now.

Other public sector firms such as Indian Oil and Oil India have also acquired oil and gas assets, at a smaller scale. So far, these firms had been trying to acquire assets in a market where oil price was continuously going up. As a result, asset prices were high — and prime assets, meaning fields with good reserves, were simply out of reach. Also, they were up against their counterparts from China — Sinopec, CNOOC and others — which were also trying to acquire oil and gas fields, for the same reasons as India. The Chinese firms have more cash, and were able to outbid the Indian companies for a number of lucrative assets.

Therefore, Indian companies have not been very successful so far in this quest. OVL’s production from its fields outside India added to 8.5 million tonnes during FY15 — against India’s total oil imports of 189 million tonnes. Other public sector firms don’t have any significant oil and gas production from outside India.

M&A at rock bottom prices

These public sector companies, however, now have a once-in-a-generation opportunity to redress the imbalance. The drop in oil prices over the past 12 months has meant that many oil and gas companies are now worth a lot less than what they were a year back. Many mid- and small-sized oil and gas companies with significant petroleum reserves can be acquired for a fraction of the price that would have had to be paid a year or two back.
UK-listed Tullow Oil, which has made significant oil discoveries in Africa, is a prime example. The stock market valuation of this company has fallen by over 75 per cent since early 2014 — and now stands at $2.8 billion. This means that in theory, an investor can buy up the entire shareholding of this company for this amount.

Tullow has potential oil reserves of 1.2 billion barrels, and currently produces just under four million tonnes/year of oil. Another example is US-based Chesapeake Energy, which has 2.4 billion barrels of oil reserves and produces five million tonnes/year of oil and a much large volume of gas — currently valued at $3.67 billion. The market value of this firm has fallen by over 70 per cent in the past 12 months. There is a large number of small and mid-sized oil and gas companies listed in the London and New York stock exchanges, with significant reserves and oil production.

Indian companies need to take advantage of the low valuations of these companies, and buy up promising assets now — and lock in energy prices for the future. High oil prices have always been a big worry for the Indian economy — there is a chance to put these worries to a permanent rest. Indian companies need to seize the moment.

(Amit Bhandari is Fellow, Energy and Environment Studies, at Gateway House: Indian Council on Global Relations, a Mumbai-based foreign policy think tank. He can be contacted at bhandari.amit@ gatewayhouse.in)

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