For a long time the Indian oil and gas industry was dominated by its top state-owned players: the so-called ‘public sector undertakings' or PSUs. Once funded by the government, these companies are now self-sufficient, although due to fuel subsidies imposed by the government, they rely on regular compensation in order to keep themselves profitable. As a result, many of these companies, headed by new management, are now looking to diversify their businesses and make them independently sustainable, whilst continuing to play the role for which they were established; ensuring that India has access to the energy it needs.
Outside India, these companies are not particularly well known, but on the subcontinent, these companies are the public face of India's fight for energy security. From ONGC, the major E&P player in India and the country's most profitable company, to GAIL, involved across the entire natural gas value chain including pipeline infrastructure and LNG terminals; OIL, mostly onshore oil E&P in the north west of the country but increasingly growing in other regions, both onshore and offshore; IOCL, focused mostly in the downstream sector owning around half of India's refineries; and HPCL and BPCL, two companies traditionally focused in downstream and marketing activities, bringing finished products to consumers; and finally EIL, the engineering consultancy created specifically to solve the challenges that would be faced by India's fledgling oil and gas industry.
In the 1990s, the liberalization of the industry and the introduction of the NELP started to change this state-dominated environment. Companies such as Cairn and Reliance Industries have become prominent private players in the upstream and downstream sectors – Reliance Industries recently completed the world's largest refinery complex at Jamnagar, with a combined production capacity of more than 1,200,000 bpd. The development of private players, together with the fast modernization and development of India's state-owned companies, has contributed significantly to the creation of a complex and mighty service and equipment industry that is now crossing India's borders and conquering international markets.
However, this excitement about the potential of India does not yet seem to have spread to the world's major oil and gas players. The fact that only BP out of the global top ten is currently investing in India's upstream says a lot about the attractiveness of the Indian market for many large foreign companies.
|RK Singh, chairman and managing director, BPCL|
Vikram Singh Mehta, chairman of Shell India, explains this lack of investment from the international majors: "If Shell takes the decision not to invest in Indian exploration, it is not a reflection of a purposeful strategic decision not to invest in India—it is simply a decision based on the relative geological attractiveness of the various opportunities that are available to Shell, at any particular point in time, throughout the world." Though this seems clear, Shell's decision years ago to sell its Northern Rajasthan assets to Cairn was later regretted when the massive Mangala oil field of 1 billion barrels of recoverable oil was found.
|S. Roy Choudhury, chairman and managing director, HPCL|
Indeed, as Rahul Dhir, managing director and chief executive office of Cairn India points out, "based on our success, it becomes hard for us to imagine the reasons why the world's majors have not invested in India." He believe that " people still don't understand India's full potential; about 80% of our sedimentary basins are not as well explored as elsewhere, so people have been very cautious about coming in. But on the upper side, the fiscal terms are very well understood; the licensing regime is very transparent; India has one of the fastest growing markets in the world; there is a very comprehensive downstream infrastructure with India being a net exporter of refined products; so there is no shortage of access to oil and gas, with the demand for gas being constrained only by supply bottlenecks. The government is very keen on overcoming these challenges by, for instance, giving open access to the pipelines. Therefore, it is a bit of a mystery to us to understand why some majors are not investing heavily in India's upstream sector."
|AK Hazarika, chairman and managing director, ONGC|
| Interview with Jubilant Energy
For the full interview, log onto energy.focusreports.net
Why did the Jubilant Group choose to invest in a sector that is so technologically and capitally intensive, when it had so many other choices?
There is a silent revolution going on in the E&P industry in India. E&P markets opened up in India only in the 1990s, first through the pre-NELP programs, and then through the NELP. Even today, there is significant unexploited potential in this country. There are areas where we have not even done basic exploration activities. So, considering these facts, the group feels that there is great opportunity in this market. We know that the sector requires high technology, and considerable investment, but the group is prepared for that.
In many aspects, the E&P industry strongly resembles the pharmaceutical industry. In pharma, you have a very long process of drug discovery, which is akin to the exploration phase in oil and gas. Then, you have a process of drug testing—similar to the appraisal phase in O&G. Then, in both industries, you go into the production stage. In E&P, we work on 7 to 10 different exploration prospects/blocks and the success rate of 30-40% are likely to provide very good returns to shareholders. Both of these businesses require a lot of industrial expertise, a wealth of research, and a technologically focused mind frame.
The recent listing of Jubilant Energy on the AIM, raising $85 million USD, was the third largest IPO of the year on the AIM. What was your strategy to attract such high interest from the international investor community?
There were several reasons behind investor interest in our IPO. The first was the profile of India as a country, and the opportunities a company like ours has here. There are very few nations in the world, especially from an E&P perspective, that have sufficient in-house demand for everything you explore and produce in the country. That was a very strong selling point.
The second selling point was the significant under-exploitation of the Indian sedimentary basins. If you speak to the DGH, they will tell you that 70-75% of the Indian sedimentary basins are underexploited.
Another very strong theme that investors were interested in was that India is just emerging as an international E&P presence.
Jubilant is one of the very few E&P plays in the private sector in India. Yes, you have many government companies that are involved in E&P, but if you look into the private sector, you have Reliance and Cairn at the top, and then there is a huge vacuum of pure, independent E&P plays. Our objective was to show Jubilant, on the London market, as a model of such plays in India. A final aspect was Jubilant's reputation in India's capital market. Jubilant Group has always created significant shareholder value in this market. Our objective was to replicate the same model in the London market.
It seems, though, that the situation might be starting to change. Late February 2011 saw the largest foreign investment in India's energy sector to date, when BP announced that it would buy a 30% stake in Reliance Industries' assets, and form a strategic partnership together which would see a 50:50 joint venture created between the two for sourcing and marketing energy in India. Additionally, BP will take a 30% stake in Reliance's 23 oil and gas blocks, for which the company paid $7.2 billion USD plus a further $1.8 billion USD in the future through performance related payments. Deals like this will perhaps lead the way for greater involvement from the world's biggest oil and gas players.
|Vikram Singh Mehta, chairman, Shell India|
|PMS Prasad, executive director, Reliance Industries|
As PMS Prasad, executive director of Reliance Industries (RIL) points out: "This deal marks a significant milestone in India's E&P history as it ushers in the participation of a global oil and gas major for the first time ever with a material stake in Indian oil and gas blocks. There are significant synergies between both the partners given BP's deepwater capabilities worldwide and RIL's demonstrated project execution capabilities. We believe it is a potent combination to find more the hydrocarbons to meet India's energy needs."
|Rahul Dhir, managing director and chief executive officer, Cairn India|
It is not just the majors that are looking at India with hesitation; India is also struggling to attract junior players to its NELP blocks, both domestic and international. Ajay Khandelwal, CEO of Jubilant Energy, a prominent junior player who has actively acquired assets in the NELP rounds seems optimistic, but asks for improvements. "With any market that undergoes a regulatory transformation, it takes time for everything to fall into its intended place. It cannot occur overnight… The whole idea and conception of the highly transparent mechanism of NELP is great, and very successful, but there are always limitations to any such mechanism. India has gone through multiple rounds of regulatory framework, and there has to be a transition where the market becomes even more investor-friendly, such as if the Open Acreage Licensing Policy (OALP) gets enacted. So, better times to come."
|India Sedimentary basins, courtesy of DGH|
AK Arora, director general of PetroFed, India's main oil and gas association, agrees, "What would further boost new exploration intensity would be the implementation of the OALP, which requires the creation of a data repository now on its way. With the announcement of NELP IX the honorable minister of petroleum and natural gas gave a clear indication that the OALP would follow soon. It will probably be announced around 2012."
|Prem Vasistha, vice president - India, PGS|
In the same way Ashu Sagar, secretary general of the Association of Oil & Gas Operators (AOGO), sees the need to increase the number of players, especially juniors in the Indian market, "India must have many more small E&P companies; the current number is not enough. It should be easy to get in; it should be easy to get out. There should be a completely open market where the increased number of players improves the quality of service and bring competitive prices. This is not a demand. It is a paradigm for a healthy industry."
One of the major hurdles standing in the way of the planned move to an open acreage policy is the lack of seismic survey work done in the country to date; without this data, it is hard for companies to assess attractive prospects for investment. Prem Vasistha, vice president of PGS India, explains the perspective from one of the world's largest seismic companies: "for some time, PGS has been working in India, thinking and discussing with the people that have been involved in policy regarding this transition. Until the government comes up with a policy where they put everything together to make speculative survey a viable option for the major seismic companies, OALP is not a feasible option."
Vasistha believes that in order to incentivize speculative survey in India, the government must work with the seismic companies and become stakeholders in the data that is needed in order to move exploration of the country forward. "Even a small concession of a financial contribution from the government will make a huge difference. I believe that the government should consider funding 25% to 30% up front for this work, so that good service companies would be encouraged to do the survey and recover the remaining cost from sales. This would have some very positive consequences. It would help the government with faster acquisition of data, encourage more mutual trust between seismic companies and the DGH, and also make the government, through the DGH, a joint partner in eventual data sales."
The government recognizes the need to consider new options, but is rightly proud of the success of the initial liberalization of the market through the NELP, as minister of state for petroleum & natural gas RPN Singh explains; "We will look at options of what we can do to address acreages, because we need to make this policy move at a much faster rate. Without doubt we can say that NELP has been a very successful initiative of the government, and to further kick-start exploration and production we will look at other proposals." He also addresses the need to collate the data on which an open acreage policy must be based: "We are working on a National Data Repository to be set up. As soon as that is ready, we will evaluate moving to an Open Acreage Licensing Policy."
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