Dhirubhai Ambani, the late founder of the $20 billion Mumbai-based Reliance Industries, always felt that India had been shortchanged in the distribution of the region’s hydrocarbon reserves. P. M. S. Prasad, CEO of Reliance’s petroleum business, which now accounts for half the company’s revenue and profits, recalls the senior Ambani saying, “To the west of India you have lots of oil in the Middle East, and to the east of India you have known hydrocarbon reserves in Indonesia, Thailand, Malaysia and Myanmar. Why is it that only India is devoid of hydrocarbons? May be we haven’t looked hard enough.”
Reliance entered the exploration and production (E&P) business in the mid-1990s by acquiring stakes in already-producing oil fields off Mumbai’s coast. Bigger fortunes awaited Reliance. Two months after Ambani’s death in August 2002, Reliance struck the biggest gas find of the year in the Krishna Godavari (KG) basin off India’s eastern coast. That also broke an 28-year hiatus after the blockbuster 1974 Bombay High oil finds by the public sector Oil & Natural Gas Corp. (ONGC).
Three weeks ago, Reliance doubled its earlier estimates of gas availability from its KG field to 80 mmscmd (million standard cubic meters a day) when it starts producing there in 2008. That number represents India’s entire current gas availability. Reliance’s revised KG promise is the latest in a series of significant hydrocarbon discoveries over the past four years reported by a half-dozen E&P players, including the Cairn Energy of the U.K., India’s Gujarat State Petroleum Corp. and ONGC. In at least the next five years, domestic gas production is set to more than double from the current 80 mmscmd to between 160 and 200 mmscmd.
Reining in Economic Security
India’s new gas bounties have suddenly set the stage for a dramatic transformation towards, not just greater energy security, but also economic security. Oil imports last year formed a staggering 85% of India’s $39 billion trade deficit. Now within sight is more energy to fuel the country’s aggressive growth, and the distinct possibility that many industrial users of liquid fuels will switch over to gas. India has also moved up the pecking order of global oil majors for hydrocarbon prospecting. A new pipeline policy regime is on the way as well as a petroleum regulator. In addition, India holds what many observers say is a stellar record in the use of renewable energy sources, including biomass. India Knowledge at Wharton spoke with senior executives at Reliance Industries and consulting houses, along with Wharton faculty, about these developments.
According to Prasad, for India to sustain a GDP growth rate of between 8% and 10%, “the energy elasticity (the ratio of energy consumption to the desired growth rate) would be very close to 1.” Given that, an 8% growth rate would warrant at least a 6% increase in energy consumption, most of which must come from fossil fuels, like hydrocarbons and coal — but especially hydrocarbons since clean coal technology is not yet widely used, he says.
Even as the gas finds will help India contain its oil import bill, it has another big ace up its energy sleeve that many other countries don’t. That, suggests Wharton emeritus professor of management science Paul Kleindorfer, is its large-scale use of renewable biofuels. He points to a September 2006 report of the International Energy Agency titled, “Renewables in Global Energy Supply,” which places India fourth among the world’s nations in the volume of renewables at 573 million tons of oil equivalent in 2004, after the U.S. (2,326 Mtoe); China (1,609 Mtoe) and Russia (642 Mtoe). The IEA defines renewables as combustible biomass and waste, hydroelectric, wind, tide, solar and geothermal energy sources. What’s more remarkable is that among the top 4, India ranks first in the use of such renewables as part of its total primary energy supply, at nearly 39%.
The Hidden Treasures in Waste
“If India did not have the recycling of agricultural produce and the biofuels that go with it, you would be in much worse shape than you are in terms of the energy balance of the country,” says Kleindorfer. He was first struck by the widespread use of agricultural biomass, such as seeds, roots and stalks. “In India, people are conscious about recycling, and it’s not just in energy but in many other areas as well. Nothing goes to waste; everything has a use.” Kleindorfer sees this “cultural attribute” as a fundamental characteristic of the South Asian subcontinent: “It is something to be built on, treasured and taken forward.”
While India’s oil production shortfall is obviously met with imports, gas (which is not easily transported) constrains consumption, says Prasad. India currently consumes about 110 million tons of oil, of which more than 70% is imported because domestic production is just about 32 million tons. In the case of gas, imports (essentially liquefied natural gas) account for about 35% of the total need, while the rest is met by domestic gas production of about 80 mmscmd (million metric standard cubic meters a day), about 32.2 billion cubic meters annually. “Our gas consumption could easily be double what it is today,” he says, adding that this is where Reliance KG basin finds would have a ready market.
Ajay Arora, partner, transaction advisory services, at consulting firm Ernst & Young, estimates that gas demand in the country will be about 300 mmscmd by 2011-12. Of that, he estimates domestic supply — including that from the new fields of Reliance, GSPC and others — at between 160 and 200 mmscmd. The rest will have come by way of mostly LNG imports.
Without discovery of the new gas finds, Arora says, “we would have to import 80%-90% of our oil, with our current rate of economic growth and the maturing of the domestic oil fields. [The importance of] these discoveries is not that today’s [oil import] level will change significantly, but that today’s level at least becomes more maintainable.”
More gas, More and Newer Users
A large part of the emerging gas demand in the country would come, not just from currently unsatisfied users, but also from existing users scaling up their capacity utilization with new availability, says Vikas Kaushal, a principal in the energy practice at consulting firm A. T. Kearney. “If gas is available at a price that electricity users can absorb, that sector can easily consume more gas,” he says. “If more electricity is available, it will be easily consumed in India because we have shortages.”
Also, many industrial facilities that currently use oil or other petroleum products, like naphtha, would be tempted to switch over to gas. “There is easily 20%-30% of the current [liquid fuel] consumption available for immediate conversion to gas, if it is available at an attractive price,” says Kaushal. Prasad expects gas prices to be in the range of $5-$6 per btu (billion thermal units) in the coming years, and oil prices to settle at about $40-$45 a barrel.
Keeping the Wealth at Home
What excites Prasad in all this is the prospect of retaining wealth within the country. “It’s absolutely essential that we stop the transfer of wealth from a developing country like India to an already rich nation, say, in the Middle East,” he says. He shows how his gas production arithmetic works to achieve that. “My exploration cost is $1 a barrel [of oil-equivalent gas], and my development cost, even in this high-cost regime, may be $7 or $8,” he says, rounding it off at $10 a barrel. Instead of paying $60 a barrel for imports, he adds, the country gets to retain $50 apiece, which may be shared by the operator that takes the risk (20%-25%) and the government by way of profit-sharing, royalties and taxes.
It was clearly this logic that prompted the government in the mid-1990s to free up E&P activities under its New Exploration Licensing Policy (NELP), with six rounds of bidding completed. The results of NELP-VI are expected by year-end; on offer were 55 oil and gas blocks. Going forward, the government is expected to adopt an “open access” policy where hydrocarbon blocks are on offer year-round for potential bidders.
So are the world’s oil majors thronging the NELP rounds? Not yet, says Arora. “The super players are reading it all positively, but they are still not so over-excited by the India opportunity that they will go and bid for anything [at any price], just to be in India.” Much of that has to do with more attractive opportunities elsewhere. Arora says the oil majors are tempted by more promising fields in Nigeria, Angola, Algeria, the CIS countries such as Kazakhstan, Azerbaijan, Turkmenistan and Uzbekistan, and of course, the Middle East.
Big Oil Finds India Persuasive
Even so, the oil majors are doing more in India than kicking tires. British Gas is the largest foreign investor in the Indian opportunity, with stakes in the Mumbai offshore and the Gujarat fields, and also in the downstream distribution business. Others with winning blocks in the NELP rounds include Cairn Energy, E&I of Italy and Niko Resources. Among the majors looking seriously at India are Shell, British Petroleum, Chevron, CFP-Total, Anadarco and Petrobras, says Arora. Those watching the moves of ExxonMobil, the 500-pound gorilla in the pack, say it was very serious about bidding in the latest NELP round, but ended up not doing so.
Those with existing big stakes have ambitious goals. Cairn, which has reserves of 3.4 billion barrels of oil-equivalent in India’s Rajasthan state, has announced plans to float a $1.8 billion public equity offer to finance its development plans. Reliance intends to invest $5.2 billion for its KG basin production, besides another $700-$800 million annually in the next 4 to 5 years on further exploration efforts.
Oil majors, such as British Petroleum and Shell, are already investing heavily in developing technologies for renewable fuels. “If the price of a barrel of oil goes above $60 and stays there, then many biofuel crops become very viable energy sources for power plants,” says Kleindorfer. If that begins to occur on a large enough scale, he sees increasing competition for agricultural land to grow oils- and fats-based products. “I would call that ‘the trend of competition’ between energy and agriculture,” says Kleindorfer. “You see a lot of this happening in Turkey, Africa, even in the U.S. in the ethanol producing areas.” He says he can “smell that’s coming” because many big users of oils and fats (such as Nestle, Kraft and Unilever) are “very worried” about securing their raw material requirements for their food products.
Ahead of the Energy Curve
In fact, India and its neighbors may well be ahead of a very likely change in the world energy fuel curve. Kleindorfer points to an increasing demand these days in Europe, U.S. and South America for renewable energy in the form of biomass, biofuels, biodiesel and ethanol, among others. Within the European Union, some of the increased use of renewables is being mandated by law, in phases. Kleindorfer notes that Germany is cranking up to require 10% of all the energy burnt in power plants to be based on renewables by 2010. “So a country like India that already has this strong culture of recycling could build on its first generation renewable energy from agricultural produce,” he says. The biggest problem is the collection part of it. But when people are already doing it, then that’s a huge step-up on most other places on the planet.”
Securing continued investments from the existing players and attracting new players would necessarily require a policy regime that instills confidence, Kleindorfer notes, adding that for a petroleum regulatory authority to be successful, two things must be ensured: “One, [that] it is transparent and independent, free of government control. And secondly, [that] its principles are truly market oriented and transparent.”
So what keeps India’s oil chieftains like Prasad up at night? “If you are able to sleep, then you say what keeps you up at night,” he laughs. “In this busy world, lots of things can go wrong. Your geologists may not have built the right geological model, but that’s an exploration risk I’m willing to take. This industry is terribly short of human resources — middle management and at all levels. So that is a big challenge. You have to attract people, retain them and continuously update them. Then the technology is changing and you should always be at the forefront of technology. Third, to build these big projects, all the vendors and contractors are very, very busy. So the day you place an order on somebody or give a contract, your problems don’t end. Your problems start that day, to make sure that they perform not only in time, but also to high quality and reliability.” Finding the money to fund his projects, he says, is the least of his problems.