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Driven by the National Democratic Alliance (NDA) government’s desire to secure energy assets in a low price regime, state-owned firms such as ONGC Videsh Ltd (OVL) have stepped up their acquisition efforts and inked confidentiality agreements for around half-a-dozen potential opportunities.
OVL said last week it is buying a 15% stake in a unit of Russia’s OAO Rosneft, the world’s largest publicly traded oil firm, for $1.3 billion. With the agreements on the deal reached during a meeting between Russian President Vladimir Putin and Prime Minister Narendra Modi in Ufa in July, experts believe it is an example of the government’s emphasis on tapping diplomacy to secure India’s economic interests.
“OVL has been given huge targets. At any given point of time, OVL is looking at a number of opportunities. It has signed a number of confidentiality agreements,” said a person aware of the development requesting anonymity. Once a confidentiality pact has been signed for a possible deal, the sellers provide access to the information regarding an asset for due diligence.
These acquisitions assume significance because of Oil and Natural Gas Corp. Ltd’s (ONGC) concerns over its domestic production capabilities and diminishing yields at its ageing oilfields. According to ONGC’s Perspective Plan 2030, the company is aiming to produce more than 130 million tonnes (mt) of oil equivalent by 2030, of which half will come from assets owned by its overseas arm OVL.
The petroleum and natural gas ministry led by Dharmendra Pradhan is encouraging state-owned firms to acquire assets at a time when prices are depressed. The price of oil in the Indian energy basket has been around $50 per barrel, starting 4 August. The Indian energy basket represents the average of Oman, Dubai and Brent crude. The price was $48.70 per barrel on Thursday.
While queries emailed to an ONGC spokesperson remained unanswered till press time, experts agree with the government strategy.
“Broadly, three things are happening on asset acquisition front: One, given the massive correction in the crude oil prices in last 15 months, the country is saving more than $60 billion in oil imports, which gives India a huge fiscal space to make investments. Two, unlike in the past, given the global economic scenario and the developments in China in particular, there is no cut-throat competition for available assets. Three, since the NDA government has come to power, there are coordinated efforts between the ministry of petroleum and natural gas, the ministry of external affairs and public sector companies to identify the right assets and go for acquisition at the right price,” said Debasish Mishra, senior director, consulting, Deloitte Touche Tohmatsu India Pvt. Ltd.
Low global crude prices have helped the government bring retail inflation below 5%, improve its fiscal deficit target of 4.1% of gross domestic product (GDP) for 2014-15, and bring the current account deficit to 1.6% of GDP in January-March against 2% in the preceding three months. Thesituationis expected to further improve with the lifting of sanctions on Iran. India is heavily dependent on imports and sourced 189.43 million tonnes (mt) of crude oil last year.
“Equity oil provides protection from oil price risks, if not supply disruptions. The government is apparently emphasizing on equity oil investments, too, as a part of a concerted effort towards a larger energy security goal. The diplomatic efforts, institutional strengthening in NOCs (national oil companies) to secure interests and setting firm targets are the visible initiatives,” said Deepak Mahurkar, leader (oil and gas) at PwC India, a consultancy.
As soon as the NDA assumed charge in May 2014, foreign minister Sushma Swaraj asked the oil ministry to prepare a list of areas and countries where her ministry could pitch in to help strengthen India’s energy security. According to PwC India, Indian public sector units in the energy space have a presence in more than 20 countries, with a total investment of $13 billion.
OVL has a production of 167,000 barrels of oil and oil equivalent gas per day and total reserves of around 647 mt of oil equivalent from its 36 projects in 17 countries. OVL’s target is 20 mt by 2018 and 60 mt by 2030. Speaking at Mint’s annual energy conclave on 28 August, Dharmendra Pradhan said, “We have to go for overseas acquisitions. This is the time. We have to escalate energy diplomacy.”
Crude oil prices for the current fiscal averaged $59.07, $63.82, $61.75, $56.30 and $47.33 per barrel for April, May, June, July and August, respectively. Crude oil prices in the Indian energy basket averaged at $84.16, $105.52, $107.97 and $111.89 in 2014-15, 2013-14, 2012-13and2011-12,respectively.
Speaking at the same conclave, Soumen Bagchi, joint secretary, energy security in the external affairs ministry, said, “This is also a good time for our companies to pick up good acreages available anywhere in the world because most of the oil majors are cutting down on expenditure by 20-25-30%. Therefore, the government’s outlook and efforts are that this opportunity can be utilized in picking up good acreages around the world.”
India follows the US, China and Russia in energy use, accounting for 4.4% of global energy consumption. Imports account for 80% of India’s crude oil and 25% of its natural gas requirements. Petroleum product consumption in India has also been growing. According to the oil ministry, it grew 3.14% to around 163.17 mt in 2014-15 from the previous year.
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