On a Buying Spree

India looking to acquire overseas assets.

In a bid to take advantage of falling global crude prices to lock in supplies to meet future demand, Indian oil companies are looking to further ties with their overseas counterparts, either by acquiring assets or stepping up investments in overseas ventures. Better pricing for such assets, as well as potential gains from geographically diversified energy sources are driving India’s decision to acquire petroleum assets outside its national boundaries. Besides, countries heavily dependent on oil export revenues are struggling to stay afloat at current crude price levels, and are thus more than willing to strike deals for their assets in return for quick cash.

In recent months, India has managed to close some important contracts for the acquisition of foreign petroleum assets. Indian Infrastructure reviews these developments…

Case for acquisition of foreign assets

There is a strong case for a net oil importing country like India to scout around aggressively for overseas assets, especially in the current scenario of low crude prices. At a time like this, assets are priced relatively lower by countries that have thus far been developing on the basis of their oil exports. Now, with lower prices, these countries are looking to get quick cash for their assets, as their revenues from oil exports are reaching new lows, thereby impacting their budgets.

For India, the time is ripe to buy foreign assets. When crude prices are high, an Indian company (that has acquired a stake in an overseas asset) will benefit from the price rise and book its income at these higher prices. This, in turn, will result in a higher inflow of foreign exchange, thereby acting as a hedge against a subsequent oil price hike.

In the process, though refiners are hit, the country benefits, as the loss incurred by one set of companies is likely to be offset by gains in another. In the absence of such overseas assets, at the time of high crude prices, India (being a net importer of the resource) ends up losing foreign reserves. This also leads to the risk of currency depreciation.

At a strategic level too, this is important. It is crucial that significant stakes in oil ventures are acquired, instead of buying smaller stakes as Indian oil companies have been doing over the years. Companies need to be given the freedom to take such decisions, as slow approval from government officials has earlier resulted in China picking up strategic assets that India was interested in acquiring.

Russia

Russia has served as an important market for India’s overseas buyouts of petroleum assets. The past six months have been a testimony to this, with events being a win-win for all. It made sense for Russia to sell some of its oil and gas assets and pare down outstanding debt, while India sealed the deal at the right time, ensuring a strong presence in the petroleum-rich country. The step is in line with India’s long-term vision for energy security, through geographically diversifying its assets.

Rosneft OJSC, the Russian energy giant, agreed to offload substantial stakes in two Siberian oil and gas fields to state-run Indian oil companies. The deals together are worth an estimated $4.2 billion (around Rs 282.53 billion). The Indian Oil Corporation (IOC), Oil India Limited (OIL) and Bharat Petroleum Corporation Limited (BPCL) finalised an agreement to purchase a 29.9 per cent stake in the Tass-Yuryakh oilfield from Rosneft. The field currently produces 20,000 barrels of oil per day (bopd) with a peak production of 100,000 bopd expected by 2021.

Another deal was signed between an Indian consortium and Rosneft for buying a 23.9 per cent stake in the Vankor oilfield. In a separate development, ONGC Videsh Limited (OVL), the overseas arm of state-owned Oil and Natural Gas Corporation (ONCG), signed an agreement to buy an additional 11 per cent stake in the Vankor field. In September 2015, OVL had acquired a 15 per cent stake in Vankor for $1.26 billion. After closing these transactions, OVL’s total stakeholding in the asset would be 26 per cent.

Vankor is Rosneft’s (and Russia’s) second   largest field in terms of production and accounts for 4 per cent of Russia’s crude output. It produces around 442,000 barrels of crude oil per day. Another agreement has been signed between the two countries to allow OIL, IOC and Bharat PetroResources Limited to make further acquisitions in the Vankor cluster.

Africa

Another resource-rich geography that India is diversifying into is the African continent. In January 2016, OVL entered into an agreement with the Republic of Equatorial Guinea for cooperation in the upstream hydrocarbon sector. Under the MoU, the Republic of Equatorial Guinea will cooperate with OVL to explore potential investment opportunities within the upstream hydrocarbon sector in Equatorial Guinea, as per OVL’s interests.

Sudan has also offered another three oil and gas blocks for exploration and production and has invited Indian firms to set up a coastal refinery to boost fuel supplies to the African continent. The country offered Blocks 8, 15 and 24 for exploration, as well as a stake in Block 17, which currently produces 7,000 bopd. The renewal of licences for assets owned by OVL in the African country may also take place in the near future. OVL already has a presence in Mozambique, Sudan and South Sudan.

According to the Ministry of Petroleum and Natural Gas, Algeria too is keen on finalising tie-ups for oil and gas exploration and the development of petrochemical projects. The country also intends to boost oil supplies to India.

Venezuela

Venezuela’s state oil company PDVSA is reportedly close to finalising a deal with ONGC for the latter to invest around $500 million in their San Cristobal joint venture (JV). The funds would go towards shoring up production at San Cristobal, which has fallen from a peak of over 40,000 bopd to around 28,000 bopd. The deal came after the announcement that Russia’s Rosneft is planning to invest $500 million in Venezuela, as it raises its stake in the Petromonagas JV (in Venezuela’s Orinoco belt region) to 40 per cent.

ONGC’s transaction is reflective of the competitive approach being taken by India as far as development of overseas assets is concerned.

Iran

India is shortly expected to finalise the modalities of an agreement with Iran for development rights for the Farzad B gas field. A consortium headed by OVL discovered the Farzad B gas field in the Farsi offshore block in 2008, but was unable to get permission to develop it due to Western sanctions against Iran over its nuclear programme. Although the exact amount for the exploitation of the field will depend on several factors (such as technological inputs and terms of the contract), a ballpark figure is an investment of $3 billion-$5 billion.

Bangladesh

At present, India is exploring participation in oil and gas infrastructure projects in Bangladesh and developing an Indo-Bangla oil and gas pipeline. Further, it has finalised participation in two downstream projects in the neighbouring country. Bangladesh’s hydrocarbon sector remains largely untapped and thus offers significant opportunities. An MoU (on the broad aspects of cooperation in downstream oil and gas sector opportunities in Bangladesh) has been signed between IOC and the Bangladesh Petroleum Corporation (BPC).

A contract between BPC and Engineers India Limited has also been signed for the installation of a second refining unit (at Eastern Refinery Limited) at Chittagong port. Besides, companies from both countries are collaborating in other areas in the hydrocarbon sector such as trade in petroleum products, exploration work and consultancy services.

Going forward

Low crude oil prices as well as oil exporting nations being in debt offer tremendous advantage to India at present, in terms of striking deals for the acquisition of overseas assets. Securing and locking long-term supplies will certainly aid the country once crude prices recover (which is imminent). Strategically too, it makes sense for India to mark its presence in the global petroleum asset markets. Meanwhile, low oil prices have also led to a slump in the cost of associated services like drilling rigs, which should be taken advantage of, for increasing domestic exploration and production activities.

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