India discreet, China bold in oil
hunt By Indrajit Basu
KOLKATA - India's recent withdrawal from
the race for acquiring Canadian oil firm Encana
Corp's Ecuador assets, allowing a Chinese
consortium to win the bid for US$1.42 billion,
prompted Indian Petroleum Minister Mani Shankar
Iyer to say, "If we allow failures to set us back,
we will never find successes." But India's failure
to grab the 75,000 barrels per day of
oil-producing properties and a pipeline is yet
another instance of how the country is being
consistently outwitted by the aggression of
Chinese oil majors. When pitted against the
Chinese, the Indians are not finding any success
anyway.
Two weeks ago, India's largest oil
company ONGC's subsidiary, ONGC Videsh Ltd (OVL),
and Andes Petroleum Corporation, a joint venture
of Chinese petroleum companies, were bidding for
the Ecuador assets when OVL suddenly withdrew from
the race, alleging that Encana was refusing to
give it a guarantee against
any
trouble with the Ecuador government over one
particularly problematic oil block in the deal.
This allowed Andes to walk away with 5 blocks of
oil property with proven reserves of 143 million
barrels at a price rumored to be $20 million
cheaper than what Andes Petroleum had initially
bid for.
But the Encana bid was not the
only one that Chinese oil companies have won
against India lately. With China's oil fields
failing to meet the nation's explosive demand -
which at 6.75 million barrels per day has doubled
in the past decade to fuel its current 9.5%
economic growth - China has been scouring the
world to secure its energy supply with a steely
determination. Moving smartly at times and
aggressively at others, the Chinese oil companies
have been consistently outmaneuvering India in
just about every oil property the two countries
have been shooting for over the past 12 months.
Consider these examples. About a month
before the Encana deal - early August - China
National Petroleum Corp (CNPC) agreed to buy
PetroKazakhstan, a Canada-based oil company that
is the third-largest oil producer in Kazakhstan, a
former Soviet state. CNPC grabbed this deal for
$4.18 billion, topping the Indian consortium's
(ONGC-Mittal) bid at the last moment. Earlier in
the year, while experts termed the National
Iranian Oil Co (NIOC) commitment in mid-January to
allow OVL a 20% share in the development of Iran's
biggest onshore oilfield, Yadavaran, as a big step
in India's oil diplomacy, what went ignored was
the fact that Chinese state oil company Sinopec
retained a huge 50% share in the deal (Iran
retained the other 30%).
Last October,
despite an agreement between Shell and OVL that
entailed offloading of Shell's 50% stake in Angola
Block 18 for $620 million to OVL, India was
stymied because Sonangol, Angola's national oil
company, which is the sole concessionaire for
exploration and production of oil in Angola,
wanted the property to go to Chinese oil
companies.
So, why is it that India has
been losing out in every deal that both the
countries have been eyeing? Is it being too
cautious and China too dynamic? Indian oil
experts, including those at ONGC, feel the Chinese
oil companies have been overbidding to the point
of economic absurdity. For instance, says an ONGC
spokesperson, "Even if the $1.42 billion that
Andes Petroleum Corporation paid for the Ecuador
properties appears reasonable, it carries an
immense amount of risk which if left uncovered
changes the whole cost-benefit equation."
According to ONGC, Encana had purchased 40% equity
in Block-15 from US oil company Occidental, but
the deal had no prior approval of the Ecuador
government, which had also threatened to cancel
the license. OVL wanted a guarantee from Encana
that the license would not be canceled, which the
Canadian firm refused; this in turn forced OVL to
withdraw from the race. "If the Ecuador government
indeed cancels the license, the Chinese may have
to end up paying a much heavier price for it,"
said an ONGC source.
In the
PetroKazakhstan deal, though ONGC has declared
that it may reconsider its bid in an effort to
grab it away from CNPC, oil analysts wonder if a
re-bid would be prudent because the deal was
overvalued from the very beginning. Initially, the
ONGC-Mittal combine had bid $3.8 billion for
PetroKazakhstan, which was higher than CNPC's $3.6
billion. However, in a sudden aggressive move,
CNPC hiked its offer overnight to $4.18 billion,
clinching the deal in its favor. India couldn't
offer an immediate counterbid because, says ONGC,
"We were still waiting for PetroKazakhstan to
provide additional data required for making the
counteroffer."
Nevertheless, according to
TNR Rao, a former petroleum secretary, India as a
country has also been overcautious while China
dynamic and aggressive. "In issues of energy
security, along with commercial considerations, it
is equally important to factor in non-commercial
and geopolitical considerations and any comparison
with values purely arrived at on a textbook basis
makes no sense," says Rao. "When China bids, for
instance, it [regards] issues [in terms of]
national interest, whereas in India, where
post-mortem of any large financial transaction is
the rule, it is always necessary to have some
benchmarks that can stand scrutiny."
Undoubtedly, even if India feels that
China is being aggressive, it can't deny that
China is also far more successful in terms of
securing its energy supply. And this is evident in
not only the PetroKazakhstan or the Encana deal,
but also in other deals where the country was
pitted against India. Experts say that for Chinese
leaders, buying foreign oil and gas fields for
energy security has become a central mission and
the Chinese government has allowed its oil majors
unprecedented freedom to achieve that goal. China
has realized that its energy interests lie in
geopolitical relations and has thus decided to
focus on the same much more intently to address
its security needs, says a security expert at
Beijing University. And in that pursuit, Chinese
oil companies have used all sorts of government
aid, including non-oil commitments, transfer of
missile technologies, the veto of UN sanctions
against countries where China has oil interests,
and even education aid, to clinch deals.
Take for instance the Angola Block 18
case. According to reports, although the Indian
government also promised a $200 million rail line
in Angola (over the $620 million for the oil
blocks), CNPC managed to snatch it away because
the Chinese government offered a composite $2
billion aid "for a variety of projects in Angola".
Similarly, China managed to retain its 50% stake
in Yadavaran, Iran, because there was reportedly
an informal arrangement for the transfer of
missile technology to Iran. Reports also suggest
that China has been buying goodwill in African
countries such as Sudan, Nigeria, and Chad with
development aid.
Still, experts feel India
shouldn't be too aggressive. For one, India's oil
needs are still much lower than China's, so India
can afford to be more "cost conscious". The
International Energy Agency says China relies on
overseas producers for just about one-third of
supplies but accounts for about 7% of world oil
demand. In contrast, India, despite importing 70%
of its oil needs, consumes a little more than 2
million barrels (3% of world oil demand) a day -
compared to China's 6.75 million barrels a day.
A government paper predicts that the
country will take 20 years to reach China's
current daily consumption level. By then, China's
demand will more than double from its existing
level. Says Subrata Barman, principal consultant
of PricewaterhouseCoopers, "energy security is not
just about securing properties abroad; energy
security can also be achieved by other means, like
diversifying supply sources without necessarily
taking equity stakes in all the projects, and
stepping up the domestic output of oil and gas".
Indeed, in the last few years, India has
discovered significant hydrocarbon resources in
different parts of the country that can
considerably reduce dependence on imported oil and
gas. The Directorate of Hydrocarbons now estimates
that the country's hydrocarbon resource base has
reached a level of about 28 billion tons,
including 7 billion tons from deep offshore.
Following the setbacks, India has now
started pinning its hopes on past tie-ups with
Russia and neighboring Asian countries. Last
December, India and Russia signed a pact for joint
exploration and distribution of natural gas in the
Caspian Basin, as well as for building underground
gas storage facilities in India. Recently, India
has also announced that it is keen to dig into two
major and largely unexplored areas in eastern
Siberia and the Russian continental shelf (RCS).
Besides, Indian minister Aiyer says that in his
ensuing visit to Russia he intends to hold
discussions with the Russian authorities for
participation in Indian oil and gas companies in
giant oilfields like Shtokman and Prirazlomneye.
Discussions will also cover the possibility of OVL
acquiring a stake in Sibneft, Russia's
fifth-biggest oil producer. And dropping its
reservations on the military junta, the Indian
government is working on diplomatic ties with
Myanmar as well as Bangladesh to bring Myanmar's
natural gas into India via Bangladesh.
Indrajit Basu is a Kolkata-based
equity-analyst-turned-journalist with more than 12
years of experience in business/finance and
technology journalism. Besides writing for Asia
Times Online, he also writes for US-based
publications, as well as IT companies.
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