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Adi Karev, Deloitte Touche Tohmatsu
Oil prices were around $100 a barrel and the industry had become comfortable with it. With the Iraq crisis, what impact do you see on global crude oil prices and for how long?
The price has been relatively stable, hovering around $100 but it also reached $95 and $108 in that period. Right now, the high price of crude is a market-driven reaction -- the producing fields are in the far south or east of Iraq and the rebels are reported to be fighting in the north or west. So, there is no production impact yet. But if the fighting escalates and there is impact on production, the price impact will be severe. A production disruption will have a lasting impact.
With the changed relationship between Russia and the West, do you see any change in the US policy on gas exports?
Eventually, the US policy is going to be pragmatic. There will be a balance with domestic manufacturers, who want a lower price. They are going to allow crude to be exported. Natural gas is a regional resource. The current price takes into consideration that there will be production coming from the US and Canada.
In India, there is a proposal to link domestic gas prices to the global price. Is it a correct move?
It depends on how important gas is to the Indian government. Also, on what they want gas to be used for—power, petrochemicals or manufacturing. The price of the end-product should reflect that India does not have enough gas. To a large degree, India has to be a price taker. There is going to be gap between the price at which you can get gas to the shores of India and the price at which you sell. If that gap is positive, then there is nothing to be done but if it is negative, someone has to pay for it. The question is how important is gas in the energy portfolio. If the component of natural gas imported to India is high, the price of gas in the domestic market has to reflect it.
Where do you see the current activity for buying and selling of oil properties?
From a transaction perspective, much of the activity happening today in comparison to the past four-five years is in areas with less geopolitical risk. The less risks today are in North America. Almost everyone who can, has money, know-how and regulatory approval,wants to be in some transaction in the US. Sellers are those who have been there for 10-15 years. They’re now finding ways to rationalise their portfolio and there are buyers ready to pay higher prices. And, it makes sense for them to sell. More so in the US than in Canada; it is expensive and also because it is difficult to move crude and gas.
Africa continues to be a place worth exploring for large national oil companies (NOCs). One reason there is a lot of activity is because international oil companies are rationalising portfolios. NOCs are going to Africa where they can buy assets that are of higher quality which are closer to production than exploration.
In addition, there are a substantial number of medium and small size producers because they have capacity to make money with lower overheads. They have loaded too much on one dollar. There are a lot of opportunities in the range of $100-200 million. This translates into pieces of assets or smaller assets. The NOC focus is more on conventional than non-conventional because it is easier, cheaper and there is more technology.
Indian companies, especially ONGC Videsh, have faced the problem of valuations going wrong. How can this be prevented?
When is a valuation wrong--now, when you lose the bid or 10 years down the lane? If your intention is to go in to secure reserves and you won the bid, then it is not a wrong price. If your intention is to get the cheapest price and you pay more than the cheapest, then it is a wrong valuation. But who decides whether the valuation is right or wrong? No one ever says you underpaid but the overpaid statement needs to be carefully looked at. One of the components of price is the need for an NOC to go and secure reserves. To buy an asset and win, you have to pay more than others, if the objective is to secure reserves and not necessarily to make a return.
You sell the output in the market or bring it to the home market. There is always a premium. I’m not sure that there is a wrong valuation but there are statements later that prices have been higher. It’s a question that should be weighed heavily. There are many players in the field out there that consistently try to underpay and consistently lose the bid. It could be people who do not have enough money and those are waiting for stressed assets to come to the market. There are others who play in the market. There are players who pay more like the Chinese. Valuation is done on a set of characteristics. A decision to buy is done on another set of characteristics, plus a geopolitical fit. One of the pieces for valuation is what is the price of output, which is basically valuing on the basis of crude oil and gas.
