Well-oiled strategies

Subir Raha

India and China share a new mantra when it comes to owning oil reserves abroad "" if you can't beat 'em, join 'em.

The new buzzword is cooperation "" not competition. For the past five years, ever since it was set up, ONGC Videsh Ltd (OVL) has been slugging it out with its Chinese counterparts, bidding for equity in oilfields abroad.

Not very successfully, admittedly, with China National Offshore Oil Corporation (CNOOC) and China National Petroleum Corporation (CNPC) snatching up the best fields and deals almost every time.

But now, Indian delegations have visited China, exploring areas where information, research findings and strategies can be shared. India's Petroleum and Natural Gas Minister Mani Shankar Aiyar's visit to Beijing next month is likely to result in an overarching agreement of cooperation in the energy sector, with at least four or five memoranda of understanding being signed between Indian and Chinese companies.

"2006 will be the year of friendship between India and China, based on the five principles of cooperation," emphasises the minister, referring to the panchsheel agreement between the two countries.

Clearly, the rules of the game have changed. Why? The short answer lies in another catchphrase: energy security. Both countries consume far more oil than they produce, leaving them heavily dependent on imports.

According to PetrolWorld, at present, China imports over 30 per cent of its oil supplies, consuming 5.46 mi llion barrels a day (mbd); that's 7 per cent of world demand. India imports a frightening 75 per cent of its oil, using up 2 mbd.

Figures from the International Energy Agency place world oil demand in 2030 at 121.3 mbd, with China and India accounting for 12 per cent and 5.6 per cent, respectively. By then, it predicts, India's oil import dependency will climb to 94 per cent.

Meanwhile, oil prices have been on the up and up, too: from $34.69 a barrel in October 1990 (source: www.petroleumbazaar.com), to an all-time high of $70 a barrel (September 2005), to just over $57 on December 1, 2005.

In its April 2005 issue, the McKinsey Quarterly warned grimly: "Asia has limited strategic reserves which can soften the impact on prices in the event of a sudden supply shortage."

How are India and China responding to their common problem? Given how this story has been explained so far with buzzwords, allow us one more for the answer "" increasing resource nationalism.

In plain English, that means both countries are trying to gain as much control as possible over the source of the scarce resource, oil. But the gameplans of both countries have been hugely different "" although that looks set to change now.

"One is a hungry dragon and the other, a dancing elephant," says an industry observer. "China has gone more aggressively in terms of pricing and risk-taking," agrees Subir Raha, chairman and managing director, ONGC (the parent company of OVL) and OVL.

Money matters
Both countries started their global conquest at different times. China began looking outward back in the 1990s, a decade before OVL, and according to energy sector analysts, has acquired 60 million metric tonnes (mmt) of crude through overseas investments. The corresponding figure for OVL in 2004-05: 5.07 mmt.

According to the petroleum ministry, OVL has a target to acquire 20 mmt of oil and oil equivalent gas a year by 2010 "" a fraction of what China's decade-old headstart has produced.

That's because you get what you pay for. "China is like a European family on holiday in India. It can afford to splurge," says Abhay Mehta, a Mumbai-based energy expert.

"India's plight is that of a middle class family out on a picnic to Europe; it has to make do within its tiny budget." The budgets? OVL has an investment commitment of just over $3 billion, compared to China's $35-40 billion. More money helps China muscle its way into any deal "" sometimes even after it's been struck.

Consider the Petrokazakh (the third largest oil field in Kazakhstan) sale in August 2005. Aiyar had then alleged that India's $ 3.98 billion bid was the highest when bids closed on Friday, August 19. But when the announcement was made before offices opened after the weekend "" on a Monday "" CNPC had revised its bid to $ 4.18 billion and the sale was announced.

India's lost other deals to China, in the past: EnCana's oilfield in Ecuador; stakes in five Indonesian oilfields; and an exploration deal in Angola (although that was tied in with aid "" more on that later).

Brand ambassadors
Could Shah Rukh Khan and Amitabh Bachchan have helped swing the deal for India? Bollywood has a huge fan following in the regions where India is pitching for oil "" Central Asia and the Caspian Sea region, and Africa. So much so that, says a senior oil PSU executive, a proposal is being seriously considered to include these superstars in a future Indian delegation to these places.

The go-ahead on that is still awaited. Meanwhile, India has roped in celebrity NRI for future oil deals. OVL's parent ONGC tied up with billionaire steel magnate Lakshmi N Mittal's Mittal Investment Sarl in October, to form ONGC Mittal Energy (OMEL) and ONGC Mittal Energy Services (OMESL).

Both companies have invested $100 million in these ventures. OMEL has already swung into action: it has bagged a deal with Nigeria to produce an average 650,000 barrels a day of oil and oil equivalent gas over 25 years, from deepwater exploration blocks to be allocated by the Nigerian government.

"The Nigerian deal is a healthy mix between a private organisation "" which brings nimbleness with it "" and a PSU, which brings national interest and expertise" says Arvind Mahajan, partner, IBM Business Consulting Services.

State support
The bigger West Asian oilfields were cornered years ago by the Western oil giants. That's left India and China scrambling for a piece of the action in the Caspian Sea, West Africa and Central Asia. Unfortunately, these regions aren't exactly known for their political stability, which makes business here fraught with uncertainty.

That's where, more than the company's clout, it is the country's power that matters. "The Nigeria deal happened mostly because of government to government influence," points out IBM's Mahajan.

For its part, China certainly protects its own. In 2004, when the United Nations toyed with imposing restrictions on Sudan for human-rights abuse, China "" a permanent member of the UN security council "" threatened to veto the sanctions. It had a powerful reason: China has invested $15 billion in Sudanese oil projects and the country supplies about 7 per cent of China's oil imports (source: Time).

"The bids put in by Chinese companies are strongly backed by their government," agrees Raha.

That may mean sweetening oil deals with much more than money. In Angola, Shell wanted to sell its stake to OVL, but China swept the deal by offering aid of about $2 billion for several projects in Angola, while India offered only $200 million for developing that country's railways.

"China has used more than pure financial muscle to acquire petroleum interests. It has also bundled oil investments with several economic and other packages outside the purview of the oil sector," says Partho Bardhan, head, energy and natural resources, KPMG.

Location, location, location
As in real estate, oil exploration and production is also about where you are. India and China could take stakes in reserves across the world. But shipping the crude back home could be held up if there were a disruption (natural or war) along the way.

Not surprisingly, energy experts recommend having reserves close. Reduced distances also lead to lower transportation costs. "Transportation costs will dip by 3 to 5 per cent," says energy expert Mehta.

China has a geopolitical advantage; Russia, Kazakhstan, Myanmar and Indonesia are all close to its mainland. India, on the other hand, imports substantially from Nigeria; and from Sudan. It also has oilfields in Russia, Vietnam and Angola. The success of its March 2005 energy cooperation agreement with Venezuela, will depend heavily on whether transportation is feasible or not. Raha, though, defends Indian acquisitions.

"We believe in going a longer distance for sweet crude, rather than getting sour crude, closer home," he explains (crude is "sweet" or "sour" depending on whether it has lower or higher quantities of sulphur and impurities).

Of course, India is now exploring options closer home, through the Iran pipeline and Oman. It is also considering swap agreements with Japan and China (for gas and oil from Russia), where it will take delivery from sources closer by.

If you can't beat 'em...
So, is that the way ahead for India? OVL is a minnow compared to CNOOC and CNPC, but for a five-year-old, its track record isn't too bad: turnover of Rs 1,081.5 crore and a presence in 13 countries.

Granted, the size of its acquisitions is small, but consultants believe that may be the preferred option. "Strategically India should try and buy off smaller oil companies, instead of just acquiring reserves," advises IBM's Mahajan.

Buying integrated companies will give India access to experience across the entire value chain, besides bringing it more level with China. After all, that's also the strategy China follows (not always successfully; witness the recent failed attempt by CNOOC to buy the US-based Unocal).

Other public sector oil companies like Indian Oil, HPCL and GAIL are also exploring the possibility of expanding their overseas presence, as are private companies like Reliance and Videocon. The Indian oil story is only just beginning, say consultants. But the lack of coordination between themselves and with other players will take its toll, they warn.

That's where the new mantra of cooperation assumes greater importance. Sino-Indian collaborations in oil have already taken off. There is the Yadavaran gas field in Iran, where OVL has a 20 per cent stake and China has 50 per cent; the estimated production is 300,000 barrels a day. The Sudan Greater Nile Oil Project is also a joint venture between CNPC (40 per cent equity) and OVL (25 per cent).

Last month was the turn of Al-Furat in Syria, where OVL and CNPC have submitted a joint bid for Petro-Canada's 38 per cent stake. "India and China are significant players and will combine scale. When we go out aggressively, the seller is at an advantage," says Aiyar. This way, then, seems like a win-win.

With reports from Jyoti Mukul