Why cornering oil assets is important to India

Picking up stakes in Middle-East oil companies will have positive effects on the currency as well as on India's energy security

A bear market is generally considered as the best time for value picking. If this rule holds true for investing, then it makes even more sense for companies who acquire distress assets in a bad market. Unfortunately, few companies have the foresight or excess cash during business cycle troughs to capitalise on such opportunities. So-called vulture funds or private equity investors generally fill this gap of acquiring deep distress assets.

But the game of acquiring or picking up strategic stakes in distress assets is now being played at a much bigger level. Learning from China’s aggressive acquisition of oil assets globally, India is now considering picking up stake in oil rich Middle East countries.
 

In an interview, oil minister Dharmendra Pradhan said that India is in talks with Middle East nations to pick up stakes in oilfields in the region for the first time ever. India, through its public sector enterprises – ONGC, ONGC Videsh and Oil India invests in strategic oil sector assets globally. India already has presence in Russia, Africa and even US Shale but has no stake in the oil and gas rich Persian Gulf.

Low oil prices have already starting to have an impact in the Middle East. A recent conference call by Indian companies who have business interests in the Middle East suggests a sharp slowdown in business activity in the region. News reports say that remittances from Indian labour working in the region have come down by nearly $1.5 billion in FY15 to $68.9 billion. Gulf countries’ distress can also be seen in the financial markets where they are withdrawing their savings. Saudi Arabia has in fact announced that they will be selling a part of their stake in their crown jewel Aramco oil company.

This is probably the best time to book India’s oil requirement from these oil rich countries. Not only does this ensure a steady supply of oil but also gets a better price for it.

This is how it works. Assuming an Indian company, say ONGC (although the same logic is valid for private sector players), picks up a stake in an oil field. If oil prices move up Indian companies will have to import oil at higher prices which will result in outflow of foreign reserves. But as ONGC will have a stake in the oil field in gulf, it will benefit from the price rise and book its income at higher these higher prices, thus bringing in more foreign exchange in the country and acting as an hedge to oil prices.

In the process, though refiners will be hit, the country benefits as the loss of one set of companies (especially public sector ones) is to an extent set-off by gains in the other. The impact on currency on account of higher import bill and current account deficit will also be muted.

The key is in taking a meaningful stake in these oil ventures rather than smaller ones that Indian oil companies have been doing over the years. Oil companies should be given a free hand in dealing with it as they are the experts in the field. These public sector companies had complained of slow approval from government officials which resulted in China picking up some strategic assets earlier. Cornering oil assets is of strategic importance to a fast growing country like India.