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Is oil equity stakes in politically volatile regions a risk?

G. Srinivasan

If there is wholesale nationalisation or overnight change of control of oil blocks in these countries, where does that leave the Indian equity stake?

New Delhi , Feb. 7

WITH ONGC's overseas arm, ONGC Videsh Ltd (OVL) and Reliance Industries Ltd, which has emerged as a producer after it struck gas in the Krishna-Godavri basin, going on an overdrive in taking oil equity abroad, the country's concern for energy security has seldom been brought to the fore as it has today.

There is an accelerated activity in the acquisition of oil acreage abroad and in exotic places where the form of governments no longer sways the commercial consideration of the Indian oil companies.

The ebullient former Minister of Petroleum and Natural Gas, Mr Manishankar Aiyar, used his charm by way of oil diplomacy to bolster oil equity stakes or pick up additional stakes in Venezuela, Kazakhstan, Chad, Cuba, Sierra Leone, Ecuador, Russia, Vietnam, Angola and Nigeria for the national oil company. RIL, which has ventured into Yemen, Oman, is now eyeing blocs in Colombia. It is small wonder that the Krishnamurthy Committee on `Synergy in Energy' has been goaded by concern to suggest a parallel OVL entity for Oil India Ltd (OIL). As intense competition in overseas bidding had to be averted, the Krishnamurthy panel was for fixing up a limit on the production capacity of more than 2 million tonnes (mt) of oil equivalent for OVL, below which the other new entity would be permitted to bid.

But taking a small equity stake is one thing and taking outright oil blocks another thing, which might be tantamount to laying siege to the national pride. This was conclusively demonstrated when buckling under pressure exerted by the US Congress, the Hong Kong-based CNOOC Ltd, a subsidiary of state-owned China National Offshore Oil Company, had to withdraw its $18.5-billion bid for Unocal, paving the way for Chevron to acquire the company for $17.7 billion. Even as Unocal was only a small player in the US energy market with no technology that might pose a real threat to US security, congressional pressures prompted CNOOC to wilt, according to Mr James A. Dorn, a China specialist at the Cato Institute, an independent think tank on policy based in Washington.

More recently, the world's largest steel company baron Mr Lakshmi Mittal's bid for the world's second largest steel company, Arcelor, has raised hackles as politicians of this merged entity (in 2002) from France, Spain and Luxembourg cried foul, steeped deep as they are in economic nationalism to keep in tact their European character.

Even as the recent experience of taking oil equity by Indian oil companies abroad has not left any such unpleasant backlash or manifestation of national pride in such places, the fact that the bids of Indian oil companies invariably supervened in countries, which are not models of democratic governance, do raise concerns about the durability of the covenants being forged there. If there is wholesale nationalisation or overnight change of control of oil blocks in these countries, where does that leave the Indian equity stake?

Without raising alarms, the recent draft report of the Integrated Energy Policy Committee contends that obtaining equity oil, coal and gas abroad does not represent adequate strategies for enhancing energy security beyond the fact that it helps diversify supply sources. Dr Kirit S. Parikh, Chairman, IEP Committee, told Business Line here that there are two kinds of risks — price risk and supply risk. When prices of crude go up globally, Dr Parikh said, "There is nothing you can do but bear the cost. If it is a transient short-term bubble, you can take some defensive action like building buffer stocks and strategic reserves. For that matter one can have dollar reserves, but you have to compare, which costs me less?"

Even as the country is cruising on the crest of hefty foreign exchange reserves, which can be used for purchase of imported crude, taking up oil equity is only to help diversify supply sources. Hence the legitimate fear among level-headed energy experts that oil equities invested in politically volatile places risk being wantonly imprudent, even if New Delhi thinks its economic relations with the non-aligned fraternity continues to be cordial in the days of economic liberalisation when each country shapes its policies to the best of its own advantage.

Dr Parikh is of the view that in contrast to taking up oil equity, pipelines for importing gas enhance security of supply if the supplying country makes a major investment in the pipeline.

Eventually, energy security planks should consist of time-tested measures to increase efficiency in use, reduce requirements or conservation and augment the domestic energy resource base as wisely put by the IEP Committee.

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