Tough Times for India's Oil Companies

India’s oil companies are taking the brunt of the global financial meltdown, recession and declining demand, exacerbated by a falling rupee against the US dollar, with acquisition, hiring and expansion plans all increasingly uncertain.

In particular, the situation has played havoc with a US$2.6 billion bid by the state-owned Oil & Natural Gas Corp for Imperial Energy, a UK-based exploration company active in the Russian Federation.

ONGC struck the deal for Imperial in August when crude oil was quoted at about US$120 a barrel, compared to $44.15 for Nymex crude futures Wednesday. Analysts say this means ONGC’s return on investment has plummeted from 10 percent to about 3-4 percent, given the 20 percent depreciation of the rupee against the dollar as well. ONG’s stock has fallen by 46 percent since the start of the year. On Dec. 9 Imperial Energy’s share price rose as much as 20 percent on the London Stock Exchange after losing 17 percent the Monday before on speculation that ONGC sought to delay the deadline for filing the acquisition offer.

Although Imperial had begun to look like less than a bargain, ONGC faced the unappetizing prospect that Chinese interests, in a race with India to acquire energy sources across the globe, might snap it out from under them. It was made more attractive by the fact that Imperial is Russia-focused, where India has been seeking to shore up its energy sources, especially from the Sakhalin fields, new portions of which are now open for bidding.

Latest reports suggest that ONGC could have the option of picking up 51 percent of Imperial’s equity, thus saving US$1 billion if shareholders fail to offer a minimum of 90 percent by December 30.

So far ONGC has denied reports that it is going to curtail its capital expenditure plan of Rs180 billion this fiscal year. Company officials have said that the situation remains comfortable as long as crude prices remain over US$40 a barrel.

Over the next three to four years, ONGC, which produces 30 percent of India’s oil requirements, reportedly has nine projects at US$2.4 billion under tender, 13 more at US$2.7 billion under execution and eight upcoming worth US$2.5 billion.

Given the global energy roller-coaster and the uncertain economic picture, it remains to be seen whether these plans remain intact. The same holds true for other hydrocarbon firms, including acquisitions, which today span Africa, Latin America, Middle East, Russia, Australia and Myanmar.

{mospagebreak}

Outlook Affects Refiners

Mukesh Ambani, chairman and managing director of Reliance Industries, said last month that a globally stable oil pricing regime is needed to sustain investments and economic growth in the refining sector.

Ambani’s statement comes amidst reports that US based Chevron is set to back away from a nearly one-third stake in the world's biggest new refinery, built by RIL in Jamnagar, Gujarat, as the recession diminishes prospects of margins, due to declining demand for fuel. Reliance refining products clocked negative margins in October and November, having to buy dear and sell cheap due to government-controlled fuel prices. Reliance may end the December quarter with gross refining margin much lower than the US$15.4 per barrel figure of a year ago. Refinery contributes more than 65 percent of Reliance’s revenues

In related developments, having lost 17 billion pounds in the meltdown, India-born billionaire and steel tycoon Lakshmi Mittal has put on hold investments in the US$10 billion refinery-petrochemical project planned at Visakhapatnam, Andhra Pradesh.

``They (Mittals) have informed us that they would like to go slow or rather put a pause on their investment in the proposed project,’’ Arun Balakrishnan, Chairman of Hindustan Petroleum Corp Ltd (HPCL), a promoter of the projects, said earlier this month.

Last week, Mangalore Refinery & Petrochemicals Ltd, an ONGC subsidiary, announced that its plans to expand refining capacity would be delayed by more than a year to October 2011 due to adverse market conditions and high costs. The company said cost estimates had increased by over 50 percent to US$2.6 billion. The expansion of capacity was to 15 million tonnes per annum from 9.6 million.

``We have been beleaguered by an overheated market, delay in land acquisition and the steep increase in steel and cement prices in the last 12 to 18 months,’’ Managing Director U.K. Basu said.

Other refiners too have been in the red.

IOC (Indian Oil Corporation), India’s biggest refiner, lost nearly Rs70.5 billion in the three months ended September 30. State-run rivals Bharat Petroleum Corp. and HPCL also reported losses in the quarter.

While the fall in crude prices has been a respite, IOC, BPCL and HPCL are still projected to lose around Rs1.15 trillion during the year. Before the fuel price cut earlier this month, the three companies were projected to lose around Rs 1.1 trillion. When oil prices were at their peak, the refiners were projected to lose Rs2.4 trillion from fuel sales during the year.

Petroleum minister Murli Deora has said that the cut (by Rs5 for gasoline and Rs2 for diesel) is an `interim measure” and that the government could slice more, given the tumbling global crude prices.

With national elections scheduled for next summer, that is a likely scenario. New Delhi would also like to keep inflation, directly related to fuel prices, well under check. Sources also say fuel prices may be deregulated by the government, given the steep fall in crude oil costs.

Oil marketing companies were also on the brink of bankruptcy when international crude prices soared, while government controlled retail prices did not keep pace for fears of inflation.

Private retailers owned by RIL and Essar had to close in the absence of state subsidy. Even though nearly Rs710 billion was released by the government to alleviate under-recoveries of state oil marketing companies during April-September, 2008-09, losses still amounted to nearly Rs145 billion.

Optimism On Oil

However, experts continue to be optimistic and say that oil and gas investment plans will not halt. The crude price declines could actually be a blessing in disguise as alternate energy sources such as solar, wind, bio-fuels, will need to be that much more competitive in terms of technology, costs and returns.

Analysts thus say that demand for energy commodities (oil & gas) will not shrink to zero in the foreseeable future, and there are still many oil firms and states, that see such energy as a winning long-term business strategy.

(Siddharth Srivastava is a New Delhi-based journalist. He can be reached at sidsri@yahoo.com)