• Jaitley’s Plans For Oil And Gas Require Caution And Review

    Finance Minister Arun Jaitley has revived through his budget speech a proposal first made in the mid-90s, and then in the early 2000s, that our public sector undertakings in the oil and gas sector be merged into one giant oil behemoth whose market value would top $100 billion, close to that of Exxon. In arguing for “an integrated public sector oil major to match the performance of international and domestic private sector oil and gas companies”, Jaitley succinctly summed up his reasons for such a move: “It will give them the capacity to bear higher risks, avail economies of scale, take higher investment decisions and create market value for shareholders”.

    Those who opposed the proposal in its earlier avatars are in the forefront of again raising a resounding “No”. They say competition will be stifled; monopolistic tendencies will be reinforced in marketing practices; inefficiencies will increase because Indians cannot effectively manage mega-enterprises, especially in the public sector; that funds can be found in partnerships rather than mergers; that mergers will lead to lay-offs; and that ripe old chestnut – that the “culture” of nationalized companies is radically different to that of the companies born in the womb of the public sector.

    A word by way of background is, I think, necessary to appreciate the argument on both sides of the divide. The oil sector essentially comprises two segments: upstream and downstream. “Upstream” refers to exploration and exploitation of crude oil and gas; “downstream” to refining, transportation, marketing and imports-exports.

    As for “upstream”, oil was discovered at Digboiin upper Assam in the 1860s, second only to the first discovery at Pennsylvania in 1859. Then, over the next 100 years or so, no world oil major found any crude anywhere else in the country. By independence, therefore, the conventional wisdom was that India was hydrocarbons-deficient and there was nothing anyone could do about that except import whatever was required. One man disagreed: K D Malaviya, a junior minister for Mines in the Nehru government. Determined to prove that an indigenous Indian effort could succeed where foreign endeavours had failed, he persuaded the cabinet to let him set up the Oil and Natural Gas Commission (ONGC) in Patiala House, Dehradun. ONGC struck gas in Ankleshwar, Gujarat, and began its saga towards emerging as India’s own giant, the discovery of Bombay High off-shore, operationalized in the early ’70s, being its single most important find.

    The principal reason behind ONGC succeeding where others had failed was the primacy given to intensive innovative research by the ONG Commission. But once ONGC was converted from a Commission into a Corporation, its eye got firmly fixed on the financial bottom-line. And after it got a guaranteed rentier income by being allowed under the reforms of the ’90s to sell its crude oil in the domestic market at international prices, it has grown enormously wealthy because crude prices have gone through the roof – but without a single path-breaking oil discovery to its credit. Instead of technological breakthroughs, ONGC has moved its huge unearned income downstream into oil refining at Mangalore and miscellaneous other projects. R&D and “knowledge networking” with technology innovators the world over have been given the go-by. Worse, ONGC have set the example for each oil PSU to seek upstream-downstream integration, leading to a wide dispersal of national resources, instead of concentrating these scarce and precious resources in one mega-entity.

    Downstream, when war broke out with Pakistan in 1965, the Western powers directed their private oil multinationals operating in India to stop making any oil available to the government of India with a view to starving our armed forces of the fuel essential to the prosecution of the war. An infuriated Indira Gandhi decided to nationalize these companies as a measure of crucial national security. And so were born a plethora of smaller oil PSUs (Bharat Petroleum, Hindustan Petroleum, etc) to join the Indian Oil Corporation, by far the biggest corporation of the lot, in the downstream public sector. The division of work was clear: ONGC and a few smaller PSUs upstream; IOC and its smaller sisters downstream; and the Gas Authority of India Ltd (GAIL), with one or two others, to look after the natural gas segment, both upstream and downstream.

    The well-intentioned economic reforms of the ’90s found their reflection in the petroleum sector. The New Exploration Licensing Policy (NELP) was the key reform measure. It threw open upstream exploration to multinationals and Indian private sector companies. It also enabled the extant oil sector PSUs to start encroaching on each other’s territory, upstream entities going downstream, and downstream entities sailing upstream. Liberalization also meant Indian companies being encouraged to acquire, explore and exploit foreign properties to give a new dimension to India’s search for energy security.

    NELP’s specific policy innovation was that upstream crude discovered in India would be marketed in India at international prices, while the domestic price of petroleum products (like petrol) and gas would be market-determined. It worked beautifully for a while. Foreign majors started taking an interest in both upstream and downstream investment, as did Indian private sector enterprises like Reliance and state-owned start-ups like the Gujarat State Petroleum Corporation (GSPC). For upstream India, 2003 was the golden year. On-shore, Cairn struck oil in Barmer (where both ONGC and Shell hadfailed) and, off-shore, Reliance and GSPC announced such huge finds off-shore the Krishna-Godavari basin that informed observers began asking whether India was not likely to become self-sufficient in its energy requirements. Abroad, our participation in the oil and gas find in Sakhalin, at the eastern outreach of the Russian Federation, threw us in the company of the Big Boys. We were now in competition with China and would beat the problem of “peak oil” by throwing Indian multinationals, public and private, into the international arena.

    At the stage when these reforms were being undertaken, the late ’90s, oil was selling internationally at $10 a barrel. Price controls on petrol and other products could be relaxed or even abolished. As prices rose, the experiment had to be effectively suspended as price volatility showed the political impossibility of leaving matters to the market when it came to sensitive products of mass consumption in as poverty-stricken and unequal an economy as India’s. By 2003, oil prices began their inexorable rise.

    When I was sworn in as Petroleum Minister in May 2004, alarm bells were ringing as oil touched $30. I took my first press conference with the Saudi ambassador at my side. He told our correspondents that his country would want prices to stabilize at around $27 for fear that if they went higher, technology would switch energy demand to other channels, leaving oil-producing countries like his in the lurch. In the event, oil soon crossed $100 in the belief that the world was running out of oil (“peak oil”). Exactly as the Saudi ambassador had foreseen, at these sky-rocketing prices, the alternative technology of “fracking” became commercially viable, and shale oil and gas came into their own, particularly in North America. The alternative technology has led to the US, the world’s biggest importer of oil and gas, especially post-World War II, becoming a net exporter of oil, and potentially of gas. The world of oil has moved from being a suppliers’ market to a buyers’ market.

    It is in these changed circumstances that the revival of a two-decades old proposal for the merger of our oil PSUs into one mega-PSU needs to be re-evaluated.

    First, is India indeed hydrocarbons-deficient? Going by the failure to find anything significant on-shore after Barmer 2003, and the flop show by Reliance and GSPC off-shore Krishna-Godavari, it might be legitimate to conclude that Ankleshwar and Bombay High were flashes in the pan and our best bet would be to reconcile ourselves to indefinitely importing most of our oil and much of our gas. The other way would be to note that geologically speaking, vast reserves of oil and gas are located in what is called the Deccan Trap, but way below huge deposits of volcanic rock and lava, virtually unparalleled in geographical scope and technological complexity anywhere else in the world. While something similar has been tackled in Colorado, the technological challenge in India is unique to our country. If our R&D is able to unlock this buried treasure trove, we could ensure our energy security even as our energy requirements rise exponentially with accelerating growth rates.

    Off-shore, we face similar technological challenges uniquely our own. Where North Sea oil and gas are found at depths of 150 metres, in the deep waters surrounding our sub-continent, we have to drill at up to 10,000 metres. Such depths have been approached in the Gulf of Mexico, but the Arabian Sea and the Bay of Bengal remain technologically unique. Similarly, the Bay of Bengal is a huge lake of gas hydrates. If only we could evolve the technology required to commercialize this resource, gas hydrates could become to the Indian economy what shale oil and gas have become to the US economy through commercial fracking. However, with ONG Corporation sacrificing R&D to the commercial bottom-line, the quest for new oil technology and fresh flights of imagination has taken a back-seat. An integrated oil behemoth would not only find the massive financial resources needed to put into innovative technology, it could also foster a global knowledge network to find cooperative (and highly remunerative) international solutions to uniquely Indian technological problems. As we cannot reverse ONGC’s corporate status to take it back to its original purpose of being the driving force of daring new technology, we could entrust this higher national purpose to a mega-petroleum entity. After all, the world’s oil majors do exactly that. Ours do not because they are fractionated and in no sense “majors”.

    Second, while we are yet to find our own oil, we happen to have in our immediate proximate neighbourhood the planet’s largest holdings of oil and gas, stretching in an arc from Saudi Arabia and the Gulf to Iraq and Iran and beyond to the Central Asian republics clustered around the Caspian Sea. To our east and south-east lie the oil and gas wealth of Myanmar, Malaysia, Indonesia and, farther afield, Australia. To tap into these resources would be to reinforce our energy security. This requires massive investment in competition with many others, perhaps most importantly China. All our entities, including ONGC Videsh Ltd, are Lilliputians compared to the Chinese Gulliver. Because we do not have deep enough pockets, we keep losing out to the Chinese and other majors, and are left making do with uncertain plots in highly unstable countries like South Sudan, Syria and Venezuela. Also, rivalry with China makes our bids unnecessarily high, the seller laughing all the way to the bank as we and the Chinese outbid one another. If we are to take advantage of our geography, a mega-entity of Exxon proportions would clearly have the advantage over our present congeries of smaller entities undercutting each other.

    Third, in so geo-politically competitive a sector as oil, where strategic considerations play a role at least as important as commercial considerations, we need vigorous government-to-government oil diplomacy to enhance the competitiveness of our bids, backed by a giant entity that carries far more commercial clout than any of our entities has at present. At the international level, I had tried to fire up political imaginations by mooting an Asian Gas Grid and, in the long term, even an Asian Oil and Gas Community. For the first time ever, Asian consuming and producing countries were brought together at ministerial level in New Delhi to see how we might get together in our mutual interest. We thus imparted a larger dimension, a larger canvas, to commercial dealings as befits so vital a sector as petroleum to national security and development. If such oil diplomacy were to deploy an oil behemoth, as the Chinese have been repeatedly doing, we could become a far more significant world player in the global energy market than we are at present.

    I think it is larger considerations such as these that should enter the discussion, for without an overarching, holistic strategic design in view, the argument loses its way in minor details. At the same time, there is no denying that the objections of the Nay-sayers will have to be met. Therefore, instead of rushing in where angels fear to tread (as Modi did – without Jaitley’s participation – in regard to demonetization), perhaps Jaitley should put up these larger issues for frank discussion at national and expert level.

    Otherwise, the argument is in danger of getting bogged down in trivia like the “cultural differences” between native-born ONGC chairmen wearing safari suits and the nationalized descendants of box-wallahs and the sahib log stake their claim to independence on the expensive shirts they wear tailored by Turnbull & Asser and silk ties fashioned by Salvatore Ferragamo! Darcy Tucker Authentic Jersey

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