By R. Sasankan

India’s economic policy wonks and energy experts realised a long time ago that the sedimentary basins in the country were not laden with sufficient reserves to be able to meet the gargantuan hydrocarbon requirements of a nation that had ambitions to become a middle-income economy. The obvious option was to scout for oil and gas assets overseas to be able to feed the refineries that the country was building.

The tragedy, however, was that they did not come up with a clearly-focused strategy. As a result of some pretty woolly thinking, state-owned Indian oil companies started to invest in oil and gas assets overseas. The foray began with ONGC Videsh Ltd (OVL), the fully-owned overseas arm of ONGC. Later, all the other major PSUs in the upstream, mid-stream and downstream sectors joined the bandwagon and snapped up overseas oil and gas assets. Energy security was the buzzword back then and became the raison d’etre for the investments. The trouble was that some of these assets were in geographically unsafe places, imperilling the security of these investments.

Today, the Indian PSUs in the E&P sector have invested over $ 40 billion in more than 30 countries. Together, they produced 24.5 MMTOE in FY 2019-20. India imports 85 per cent of the crude requirement of its refineries – and these oil and gas assets provide only a sliver of the country’s energy needs.

A close look at the assets acquired by the Indian PSUs presents an appalling picture. Though ONGC Videsh started investing in oil assets overseas 55 years ago, it is not categorised as an operator in any of the producing assets anywhere. Oil India’s entry much later did not make any difference. Basically, Indian companies are happy to continue as portfolio investors in most of the projects without playing any actual role in exploration and subsequent production. In one sense, this demeans the position of these Indian PSUs.

The fundamental flaw in the oil and gas assets acquisition strategy lies in the fact that the Government of India has failed to float a single E&P National Company. ONGC Videsh, which was floated in 1965, was ONGC’s overseas subsidiary and others began to partner it only in recent years. The strategy should have been to pool the financial resources of all the PSUs under a company that would have just one objective: grab oil assets overseas. This strategy can still be pursued. However, the petroleum ministry favours the idea of listing ONGC Videsh as a separate company on domestic bourses.

A National E&P company will have greater credibility and have more financial clout. Even if the oil PSUs want to play a passive role as portfolio investors, a single entity will have more heft in negotiations. It will also help them avert fiascos like the one over Imperial Energy’s Russian asset acquisition -- a situation that would not have happened if the officials from IOC and BPCL had also been involved in the due diligence process.

As an E&P company, it will have to be headed either by ONGC or Oil India but the stakes can be shared equally by all promoters: a format similar to Petronet LNG Ltd (PLL) but without repeating the colossal blunder of keeping the entity outside the purview of enforcement agencies like the Vigilance Commission and the Central Bureau of Investigation. PLL’s structure was the brainchild of Dr Vijay Kelkar: his intentions were noble but the objectives were undermined by the propensity for kickbacks that resides in the corridors of power. As a result, PLL turned into one of the most corrupt companies in the country. This is not to suggest that deals like the one with Imperial Energy will not happen in the future. But the standards of accountability and the fear of oversight under a vigilance mechanism can act as a deterrent – just as it has curbed the tendency towards indiscriminate lending in public sector banks.

Most importantly, the proposed National E&P Company should be able to raise a significant part of the funds invested through overseas commercial sources without parent guarantees. Together, they have enough operating assets overseas to achieve global funding, at least in part. This is best mechanism for scrutiny that one can impose. If a commercial investor is willing to take the risk on an E&P investment, even in part, the project will get an independent review that current investments lack. These commercial investors can be other E&P companies.

The existence of such a National E&P Company would have made a lot of difference in the present scenario when oil and gas assets are available at heavily discounted price. The PSUs will fall in line once a decision is taken at the political level. The initiative will have to be taken by the Ministry of Petroleum and Natural Gas as the current situation makes no sense at all.

Just take a look at the stakes that each PSU holds in overseas assets: it is just a sliver and is an insult to the image of a country that ranks as the third largest oil importer in the world behind China and the US.

Except for the investment in Vankor project in Russia where the Indian PSUs together hold a 49 per cent stake and Area-I in Mozambique gas block where the three state-owned companies collectively hold 30 per cent, the Indian companies are not recognized as big investors in any of the other projects.

It is difficult to predict when Indian companies will become an operator in any of the producing E&P projects overseas. That should have been the objective to start with. And to achieve that, the country needs a proper National Company exclusively for that purpose. The government’s priority ought not to be list ONGC Videsh as a separate company on the Indian bourses. This will yield nothing and certainly will not expand India’s pool of oil and gas assets overseas.