Tuesday, April 01, 2008

India Beckons

This article appears in the April 2008 issue of Oilweek; image from this site.
By Peter McKenzie-Brown

With the head of an elephant and the body of a man, Ganesh is one of the most revered deities in the Hindu pantheon, and certainly the most easily recognizable. Ganesh is the patron of arts and sciences; the god of intellect and wisdom; the remover of obstacles; the propitiator of business.

On one of the coldest days of winter, Ganesh seemed to arrive in Calgary, offering to remove obstacles for companies prepared to help unlock India’s petroleum wealth. The occasion was a travelling road show hosted by the government of India and advertised under the bureaucratic name NELP VII.

For the E&P sector, the prizes on offer are huge: 57 blocks of land in highly prospective but poorly explored sedimentary basins. As the presenters quickly made clear, the financial rewards can be high, and the geological and geopolitical risks are low. There are also excellent opportunities for the service sector.

NELP stands for New Exploration Licensing Policy, and it reflects the reform and liberalization of the country’s economy – a process which began in the early 1990s and has gathered steam ever since. Under the policy, which went into effect in early 1999, the government has held six rounds of bids, awarding 162 production sharing contracts. As a result, the country’s petroleum industry has grown from two companies producing from three basins in 1990 to 49 companies producing from ten basins today. There are 26 basins in the country in total, only 15 of which have been explored. India’s sedimentary basins (more than half of them offshore) total more than 3 million square kilometres in area.

The seventh round of NELP will likely be the most successful yet. On April 11, companies from around the world will submit bids on 57 exploration blocks – 19 in deep water, nine in shallow water and 29 onshore. Whether from government or industry and whether Indian or foreign, all of the road show’s speakers agreed that the bids will be evaluated through a transparent, competitive process with single-window clearance.

According to Les Kondratoff, whose Canoro Resources was successful in the last round of bidding, “going to India today is like coming to Alberta was in the 1940s” (because of the low drilling density). “Why wouldn’t you go there?” he asks. “The risk is lowest.” He points to his company’s Amguri field on a 53-square-kilometre exploration block. He believes it may be a 70 million barrel field. “In Canada, we’d be popping Champagne with that big a field. In India, big discoveries are not too uncommon.”

Indeed, according to information provided by the irrepressible V.K. Sibal, director general of India’s Directorate of Hydrocarbons, Indian gas reserves are growing more quickly – 6 per cent a year during the last seven years – than in any other part of the world. Because of the huge market in India, he stresses the potential for monetizing gas discoveries within India. “Our vision is that we can take gas from everywhere (in India) to anywhere, from anywhere to everywhere.”

Calgary-based NIKO Resources has been the greatest Canadian success story in India. Since the company was awarded exploration blocks in 1999, its stock has risen from $3 per share to a peak above $100, and one of its biggest Indian successes is yet to come on stream. The company and its partner, Reliance Industries, plan to bring a deepwater gas field on stream this coming June; production is expected to peak at 80 million cubic metres (2.8 billion cubic feet) per day.

You have to be a bit cautious when looking at the numbers which the Hydrocarbon Directorate’s Sibal uses in his presentations. The country’s “prognosticated resources” in the 15 basins explored to date, he says, are 205 billion barrels of oil and equivalent. Of those, 66 billion barrels have been identified as “in place reserves,” including 15 billion barrels discovered in the last seven years. However, pending further evaluation and appraisals, so far his directorate has only assigned 4.73 billion barrels of in-place reserves to this century’s 49 Indian discoveries.

Sibal offers compelling exploration numbers. During the first nine months of the 2007-2008 reporting year (it ends in March), the industry drilled 35 exploration wells in poorly explored basins and came up with 17 discoveries. In the previous three years, the success rate for discovery was an excellent though less eye-popping 18 per cent.

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Speaker after speaker at the NELP conference raved about the opportunities India presents. However, in addition to the obvious opportunity offered to the E&P sector, there was an undercurrent of opportunity for the service sector. Although there are already many service providers in India – international companies like Weatherford International and domestic ones like Jindal Drilling – opportunities for the service sector are clearly outstanding.

Getting the equipment and services needed to explore and develop are slowing down the country’s exploration effort. According to Jindal Drilling’s Naresh Khumar, “There is a huge demand for all kinds of services. Companies are asking for drilling holidays because they cannot get rigs to drill.” From cementing to wireline to workover services, from marine logistics to jack-up rigs, the situation in India is dire.

Frankly, this explains India’s highly attractive NELP energy policy. The country expects demand for both oil and gas to more than double by 2025, leaving huge gaps between consumption and domestic supply despite large anticipated increases in production. National security and trade balances make this problem paramount. The country is anxious to develop a world-class petroleum industry, with much greater capacity in the areas of service and supply.

Weatherford Tools’ David Reed – his company (a US-based international oilfield service provider) is growing rapidly in India – is impressed with the “ease of entry, access and equity” which players encounter there. It is “at the top of the scale” as a country to work in, yet “standards for service providers are very high. There are no compromises in India.” He is also smitten with the people. “There is a tremendous skill-set in India, and you would be crazy not to leverage that for your business.”

The skill-set Reed is referring to represents one of India’s many paradoxes. While 40 per cent of Indians are illiterate, the country has the world’s second-largest pool of trained scientists and engineers. Those skilled masses enable India to develop more computer software than any other nation in the world – worth $22 billion last year in export income.

Doing Business in India: The story barely begins with the skilled workforce. Now firing on all cylinders, at 9.4% last year India’s economic growth rivals that of China. Since 1991, when the country began its program of economic reform, annual growth has averaged 8%.

India speaks 23 major languages and 22,000 distinct dialects but, stresses Canoro’s Les Kondratoff, “the language of business is English.” India boasts the 12th largest economy in the world – $1 trillion last year, with net exports of $127 billion. The country has large and diversified infrastructure, including 15 international airports and 449 domestic ones.

Indians practice many religions. Hindu is the most important, but the country also has the world’s second largest Muslim population. Despite inevitable tensions, the great diversity of Indian people is held together by the largest and noisiest democracy on the planet.

India’s use of British-style common law means contracts signed in India are honoured. According to the Hydrocarbon Directorate’s Sibal, “production sharing contracts are sacrosanct to us.” He cites “attractive, competitive and transparent bidding terms,” a positive climate for investment, efficient infrastructure, expanding domestic oil and gas markets, higher returns and lower risk than in other developing countries. He then throws out a challenge: “Compare us to the world’s best. We come out on top.”

One India hand is Don Whelan, who went there in 1996 with the late Bill Olsen, the founder of NIKO Resources.

A real fan of the small company in India, Whelan is now creating a Mumbai-based petroleum service company called Today’s Petrotech. “Little companies, as NIKO was when we went there, are more adaptable,” he says. “The first two years were a real learning curve. After we got over that hump, it became easier and easier. Now it seems like second nature.” He warns, though, that the Indian demand for paperwork sometimes seems endless.

Having married since moving to India, Whelan has no intentions of returning to Canada. For him, the expat life in Mumbai is just fine. “Our maid, our driver, our gardener – their wages are about $100 per month each.” He worries, though, that Mumbai’s infrastructure isn’t keeping up with changing times. The streets are increasingly gridlocked, and that is going to get worse in the fall when Indian automaker Tata Motors begins selling its long-awaited People’s Car, with a sticker price of about $2,500.

Amarjeet Singh, a KPMG partner, is headquartered near New Delhi. He says the comparisons between investing in India versus investing in China favour India every time. “If you just look at the experience of all big multinationals going to China, most of them will vouch that they are still struggling to make money. In India there are many roadblocks, but if you are doing your business properly, if you understand the market, if you adapt yourself to Indian conditions and frame of mind you will make as much money as a domestic player.” But he cautions that “you have to have a long-term view. If you have a long-term view you will always make money.”

Singh recommends that entry-level players in India “outsource all of the functions – accounting, administration, all of those things. Those are not your core business.” Singh admits that taxation in India is complex, but says “it’s complex in Canada, too. If you plan well, if you handle it well, taxation is not a roadblock to doing business in India.”

According to Singh, “The fiscal regime which is applicable to exploration in India is at least as aggressive as in any other part of the world. There are tax holidays, you are permitted to set off losses in one block against income in another, you can aggregate all your expenses against aggregated production and so on. The government has carved off benefits for the E&P industry that are far above those in other countries and other industries in India. And once you have a production sharing contract, you can operate any way you want.”

Canoro’s Les Kondratoff echoes those sentiments. “Projects aren’t ring-fenced and there’s a seven-year tax holiday from the time you begin commercial production. Royalties are low and you are entitled to full-cost recovery.” He adds that there is enormous demand for bottled propane, and refineries want ever more crude. There are opportunities all around to monetize petroleum assets.

His company had a devastating experience in Russia. Canoro’s Russian partners, he says, abrogated contracts. Canoro had no viable recourse before Russian courts, so Kondratoff particularly appreciates India’s long experience with common law. India, he says, “has all the ingredients for success.”

Ganesh-like, NELP seems to be removing obstacles to that success. The next step is the bidding, and the journey is to unlock India’s considerable petroleum wealth. For those who miss out on NELP VII there will be other rounds, and India will remain an investment destination.
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