Opinion - Leader Page Articles

India and oil exploration

By Kannan Srinivasan

We are left in the irrational position of auctioning off domestic blocks for exploration while draining out scare funds for oil fields abroad.

INDIA IS making massive investments in overseas oil, even as it is trying its best to sell off its own deepwater blocks to private parties. Does this strategy make sense? India really has only three ways of getting oil: to import it; to invest in oilfield blocks abroad; and to explore in its own deep waters. The third route is the cheapest and continues to hold the promise of substantial supplies. Unfortunately, domestic exploration is being abandoned in favour of the other two.

The investments being made abroad are massive. ONGC Videsh Ltd (OVL), the overseas subsidiary of the state-owned Oil and Natural Gas Corporation, has acquired 20 per cent of the Russian oilfield Sakhalin-I for $1.7 billion (Rs. 8,126 crores).

This is the largest foreign investment ever made by a domestic corporate. The OVL's managing director grandly claims that this "would fetch us oil and gas equivalent to the prime oil property of Mumbai High".

More large investments abroad are in the pipeline. The ONGC has chalked out a massive $2.85-billion investment plan for overseas joint ventures during the 10th Plan period, to be spent on oilfield blocks in Iraq, Iran, Algeria and Venezuela. It intends to put $250 million in Algeria over the next five years; $74 million in Vietnam; $197 million in Iraq; $62 million in Iran; and $210 million in Venezuela. Another $500 million has been set aside for investment in other countries. It has earmarked $150 million each for the 2004-05 and 2005-06 fiscal years, and $200 million for 2006-07, for new projects.

It has also discovered a large natural gas field off the Vietnamese coast, which it is developing in partnership with British Petroleum, Statoil and PetroVietnam. ONGC plans to participate in upstream development in Indonesia, where it has been offered nine exploration blocks. ONGC Videsh is set to acquire producing fields in Sudan and Oman for Rs. 3,200 crores. The Sudan field is being sold by a Canadian firm after Washington identified that country as a state sponsoring terrorism.

All this investment abroad will deplete the corporation's Rs. 8,000-crore cash reserves, leaving it much less money to pursue exploration at home, especially expensive deepwater exploration.

There are disturbing reports that large kickbacks are being earned in the ONGC's foreign investment deals.

Lamentably, the least favoured option is the one which involves the hardest work and has the fewest opportunities for corruption. This is to actually explore for oil in Indian waters. Exploration blocks at depths of more than 400 metres are treated as deepwater blocks. They are covered under the New Exploration Licensing Policy (NELP). Twelve deepwater blocks were offered to private firms in 1999 with no requirement that they bring in the ONGC as a partner.

The ONGC has now become simply one more bidder for prospective oil properties, competing with various private foreign and Indian firms.

Cairn is the first private foreign participant to proceed with deepwater drilling under the NELP Scheme. It has so far drilled five wells — of which four have proved to be hydrocarbon bearing. The prospects are off the coast of Andhra Pradesh, in waters 500 metres deep. The ONGC understood the need for work in Indian waters long before any other firm; certainly long before Cairn Energy. But today its energy and organisation should be contrasted with that of Cairn Energy. The ONGC should have been at a great advantage. Yet, Cairn is far ahead of it in bringing its own Krishna, Godavari blocks — with a similar geological profile to ONGC's own adjacent blocks — to production. The irrationality of the entire exercise is shown up starkly by the fact that Cairn itself is not capable of mobilising the necessary investment to develop its fields: the Indian Government has awarded this field to a firm without the resources to develop it. So Cairn will auction this field in the global market as it did its properties in Bangladesh.

There are three possible reasons for the ONGC not developing its deepwater fields quickly. First, with money wiped out on buying the Sakhalin field and such future investments as Sudan and Oman, it might have emptied its pockets: so it is driven to joint ventures to fund deepwater exploration. Second, the ONGC management does not trust its officers, allegedly both incompetent and corrupt; so it feels that safety might lie in joint ventures. The last reason is that the other owner of deepwater blocks, Cairn Energy, has been unwilling to fund deepwater exploration on its own and has been scouting for a joint venture. But majors such as Shell and BP say these blocks are too small for them.

Were Cairn's blocks combined with those of the ONGC they would be attractive to a joint venture with a top multinational. The ONGC would then satisfy itself with a passive partnership offering its fields for a joint venture with a top multinational.

There is also speculation that Reliance intends, through lobbying the Government, to bring about an auction whereby the ONGC's deepwater blocks are sold to it at an absurdly undervalued price — as happened when it acquired the Mukta and Panna oil fields.

Forty-five years ago, the country was at the mercy of the oil majors, who declared that India's prospects were not worth developing. In a sense, that was true: it was not worth their while to develop Indian prospects when they had such excellent properties elsewhere in the world. However, it was definitely worth India's while to develop its own prospects, which it proceeded to do (with the setting up of the ONGC), resulting in massive savings to the economy. At one point in the late 1980s, the bulk of India's crude oil needs were being met by domestic production. However, the country's political leadership soon abandoned the effort to develop domestic prospects. Existing wells were over-exploited with no concern for maximising the long-term yield.

Funds of the oil companies that should have been invested in exploration were instead drained off to bridge budgetary gaps. We are left in the irrational position of auctioning off domestic blocks for exploration while draining out scarce funds for oil fields abroad.

It needs hardly a moment's contemplation to realise that India is unlikely to get a good deal on its investments in foreign oil fields. No other resource is as closely linked to military and political power as oil. India commands influence only in the subcontinent. However, it is investing in territories from Sakhalin to Sudan to Southeast Asia, where the oil majors are themselves active. The latter, and their Governments, have the clout to ensure that they get the best deal. ONGC and its parent Government must make do with filling in gaps in the majors' investments.

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