 "No free lunch for the government; businesses need returns to invest: Mayank Ashar")
As Cairn India gets ready to merge with its parent entity, Vedanta, it is grappling with issues that range from tax notices to expiry of the production sharing contract (PSC) with government-owned Oil and Natural Gas Corporation (ONGC) for its flagship asset in Barmer. Mayank Ashar, managing director and chief executive officer, talks on these issues with Jyoti Mukul & Sudheer Pal Singh. Edited excerpts:
How would the merger with Vedanta, when completed, affect the larger business strategy of Cairn India?
The merger requires the approval of minority shareholders. Until that time, it is the normal way of doing business. Once they decide, there will be a process (to carry the merger forward). I do not see any material change after the merger, recognising that it is a process. The business strategy remains unchanged. We have a range of issues and challenges with commodity prices, including oil prices. There have been huge changes in China over the past few weeks which have impacted all commodity prices. The idea is to keep running our assets in a way that generates healthy cash flow and making sure we grow with a plan that takes into account the changed commodity prices scenario.
We want to make sure the shareholders have the requisite information, so that they can take the right decision. Yes, there has been a fair amount of noise but it is normal. There is still a fair amount of time for shareholders to vote and I am sure they will do what is right for them. It is too early to speculate how this will go.
You have stated in the past that for Cairn India shareholders, the value of Vedanta's natural resources business would also accrue. Would you elaborate?
Attractiveness of a company is determined not by what is the stock price today or next week. It is determined by long-term fundamental value creation. And, what is the engine of financial performance, both in the short and the long-term. What is good about this merger is that it makes us India's largest diversified natural resources company. An economy as large as India cannot grow with a huge natural resources deficit. It is important to have a company that competes at world-scale, with world-class technology.
There is a lack of clarity over some of the key issues that will determine Cairn's long-term sustainability - contract extension for Barmer, permission to export crude oil, the mega tax claim, etc. Is there a sense of frustration with the government?
We do tell the government what we think they ought to do. Energy policy is complex. At a macro level, the strategic task for India is how it could provide the background contracts and environment such that its energy needs are met domestically. Purchasing resources is easy but a large country has to have an economic strategy. Maximising domestic natural resources is far better than importing. India imports 80 per cent of its energy. There should be a good policy that promotes domestic production. Business would invest but they should get risk-adjusted returns. So, all these issues of PSC extension, cess and export are all the elements that determine the return. The International Energy Agency says India needs to invest $16 billion a year in the energy space but the actual investment is $6 billion (Rs 40,000 crore). That is a huge gap.
These issues do not seem to have been resolved by the new government.
We have a dialogue with the government and tell them that if these issues are resolved, it is going to be good for the government and Cairn. It is important that the energy policy is responsive to the needs of the nation and not only of Cairn. If we are allowed a proper market price for oil, for every dollar we get, 70 per cent of that will go to the government and ONGC. The government understands these issues.
But, on the issue of tax, there does not seem to be a change in the government's stand. In fact, Cairn withdrew the case, only to file it again.
There have been some (favourable) changes in the past few days regarding MAT (minimum alternate tax). Nobody likes it when things go to the court. We do not think we are liable for this (paying the tax). At some level, the government, too, understands that these things have consequences, not only for investments by Cairn but even bigger. And, that we need both domestic and foreign investment. Otherwise, you become a buyer, which works fine only as long as oil prices are $40-50 per barrel. If you are doing business in India, you have to have hope. The other aspect people do not recognise is that the investment cycle is as long as 10 years. So, you cannot look at the oil price today and decide the policy.
With India hugely dependent on imports and Barmer being one of the key fields to have come into production, do you think the government would look at allowing exports from Barmer?
India can have exports along with increased domestic production. We have floated the idea of a swap. So, if we export a million barrels of oil, we can also tie that to a million barrels of imports. In times of national emergencies, we can stop exports. The trade increases the value for everybody. These exports also work as a pricing mechanism, as selling to three people domestically is less preferable over selling to 100 people through exports, as you get a better price.
Any reason why Cairn came out with an advertisement last week?
Companies communicate in a variety of ways with their stakeholders. And, it is a positive advertisement. It talks about what Cairn has contributed to the government, which is substantial.
What is the status on extension of PSC for Barmer?
We need an investment horizon. The PSC expires in 2020 and, typically, a project will have returns over five to 10 years. If they (government) take too long, we will not invest. It shouldn't take that long. If we get that now, it gives us the confidence to invest. The ideal time was two years ago. The sooner you do it, the better. A lot of potential investment will not be made if you wait till 2020. It weighs on the back of our mind every time we make an investment.
Even the Ravva PSC is expiring.
Ravva has been a fantastic field, producing oil for 20 years. There is still some potential there. Even though production is declining, it is cash-positive. The PSC for that comes for extension in 2019 but the volumes, investment and the potential are much larger in Barmer.
The government has introduced revenue sharing in marginal fields. Do you think it should be introduced in NELP blocks, too? Is there enough incentive for companies to invest?
The government has to think about how to encourage investment. Businesses will invest only if there are returns. If you do too little, companies will not invest because they are there to earn financial returns. They are not there only to pay tax. We don't have an issue with the formula itself, whether it is production or revenue sharing - what is important is the return to the investor. There is no free lunch for the government. In our businesses, there is risk. The formula itself is not good or bad. The critical thing is to know whether it is working and you know that when there is vigorous investment.
In the energy industry, if you look at the investment profile, importing 80 per cent of oil, we are under-investing in natural resources. Just like no business will invest if returns are poor, no business will walk away from a reasonably attractive investment. The reality is, there is no sufficient private sector investment. It has not been vigorous enough.
Will Cairn India invest in marginal fields?
At the current (price) rate of crude oil, a lot of projects are challenged, so it does require one to be careful. Our home base is India and anything here, we will be interested. You could say Cairn got a marginal field from Shell 25 years ago (Barmer) but it is not marginal any more.
How would the merger with Vedanta, when completed, affect the larger business strategy of Cairn India?
The merger requires the approval of minority shareholders. Until that time, it is the normal way of doing business. Once they decide, there will be a process (to carry the merger forward). I do not see any material change after the merger, recognising that it is a process. The business strategy remains unchanged. We have a range of issues and challenges with commodity prices, including oil prices. There have been huge changes in China over the past few weeks which have impacted all commodity prices. The idea is to keep running our assets in a way that generates healthy cash flow and making sure we grow with a plan that takes into account the changed commodity prices scenario.
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Minority shareholders do not seem too happy with the merger announcement. How is the company tackling the concerns?
We want to make sure the shareholders have the requisite information, so that they can take the right decision. Yes, there has been a fair amount of noise but it is normal. There is still a fair amount of time for shareholders to vote and I am sure they will do what is right for them. It is too early to speculate how this will go.
You have stated in the past that for Cairn India shareholders, the value of Vedanta's natural resources business would also accrue. Would you elaborate?
Attractiveness of a company is determined not by what is the stock price today or next week. It is determined by long-term fundamental value creation. And, what is the engine of financial performance, both in the short and the long-term. What is good about this merger is that it makes us India's largest diversified natural resources company. An economy as large as India cannot grow with a huge natural resources deficit. It is important to have a company that competes at world-scale, with world-class technology.
There is a lack of clarity over some of the key issues that will determine Cairn's long-term sustainability - contract extension for Barmer, permission to export crude oil, the mega tax claim, etc. Is there a sense of frustration with the government?
We do tell the government what we think they ought to do. Energy policy is complex. At a macro level, the strategic task for India is how it could provide the background contracts and environment such that its energy needs are met domestically. Purchasing resources is easy but a large country has to have an economic strategy. Maximising domestic natural resources is far better than importing. India imports 80 per cent of its energy. There should be a good policy that promotes domestic production. Business would invest but they should get risk-adjusted returns. So, all these issues of PSC extension, cess and export are all the elements that determine the return. The International Energy Agency says India needs to invest $16 billion a year in the energy space but the actual investment is $6 billion (Rs 40,000 crore). That is a huge gap.
These issues do not seem to have been resolved by the new government.
We have a dialogue with the government and tell them that if these issues are resolved, it is going to be good for the government and Cairn. It is important that the energy policy is responsive to the needs of the nation and not only of Cairn. If we are allowed a proper market price for oil, for every dollar we get, 70 per cent of that will go to the government and ONGC. The government understands these issues.
But, on the issue of tax, there does not seem to be a change in the government's stand. In fact, Cairn withdrew the case, only to file it again.
There have been some (favourable) changes in the past few days regarding MAT (minimum alternate tax). Nobody likes it when things go to the court. We do not think we are liable for this (paying the tax). At some level, the government, too, understands that these things have consequences, not only for investments by Cairn but even bigger. And, that we need both domestic and foreign investment. Otherwise, you become a buyer, which works fine only as long as oil prices are $40-50 per barrel. If you are doing business in India, you have to have hope. The other aspect people do not recognise is that the investment cycle is as long as 10 years. So, you cannot look at the oil price today and decide the policy.
With India hugely dependent on imports and Barmer being one of the key fields to have come into production, do you think the government would look at allowing exports from Barmer?
India can have exports along with increased domestic production. We have floated the idea of a swap. So, if we export a million barrels of oil, we can also tie that to a million barrels of imports. In times of national emergencies, we can stop exports. The trade increases the value for everybody. These exports also work as a pricing mechanism, as selling to three people domestically is less preferable over selling to 100 people through exports, as you get a better price.
Any reason why Cairn came out with an advertisement last week?
Companies communicate in a variety of ways with their stakeholders. And, it is a positive advertisement. It talks about what Cairn has contributed to the government, which is substantial.
What is the status on extension of PSC for Barmer?
We need an investment horizon. The PSC expires in 2020 and, typically, a project will have returns over five to 10 years. If they (government) take too long, we will not invest. It shouldn't take that long. If we get that now, it gives us the confidence to invest. The ideal time was two years ago. The sooner you do it, the better. A lot of potential investment will not be made if you wait till 2020. It weighs on the back of our mind every time we make an investment.
Even the Ravva PSC is expiring.
Ravva has been a fantastic field, producing oil for 20 years. There is still some potential there. Even though production is declining, it is cash-positive. The PSC for that comes for extension in 2019 but the volumes, investment and the potential are much larger in Barmer.
The government has introduced revenue sharing in marginal fields. Do you think it should be introduced in NELP blocks, too? Is there enough incentive for companies to invest?
The government has to think about how to encourage investment. Businesses will invest only if there are returns. If you do too little, companies will not invest because they are there to earn financial returns. They are not there only to pay tax. We don't have an issue with the formula itself, whether it is production or revenue sharing - what is important is the return to the investor. There is no free lunch for the government. In our businesses, there is risk. The formula itself is not good or bad. The critical thing is to know whether it is working and you know that when there is vigorous investment.
In the energy industry, if you look at the investment profile, importing 80 per cent of oil, we are under-investing in natural resources. Just like no business will invest if returns are poor, no business will walk away from a reasonably attractive investment. The reality is, there is no sufficient private sector investment. It has not been vigorous enough.
Will Cairn India invest in marginal fields?
At the current (price) rate of crude oil, a lot of projects are challenged, so it does require one to be careful. Our home base is India and anything here, we will be interested. You could say Cairn got a marginal field from Shell 25 years ago (Barmer) but it is not marginal any more.