If the government is thinking of deploying cheaper money—through a sovereign investment fund—in the hands of Indian companies to acquire energy assets abroad, it will need to think hard. Will such money be used judiciously? Specifically, the record of public sector companies in the oil and gas exploration business in deriving value from overseas assets has been dismal compared with competitors from other countries, notably China.
Of course, success in the race for acquisition of good quality assets here depends on how aggressively supportive the country’s foreign policy—both in building economic and political relationships—is.
But, before deciding to go all out to invest in these assets, a company needs to be able to guage how much oil or gas can be possibly taken out and the price at which it can be taken to the market. These companies have shown lack of the required technical expertise, especially on the former front. It is common knowledge that they have often dug dry wells and have been unable to produce much from most of their overseas assets. As a consequence, their rate of successful drilling has been well below that of other international players.
Moreover, success stories such as Sakhalin-1 in Russia (one of India’s single largest such investments) and one producing oil field in Sudan happened thanks to the crude price factor. Prices were in the range of $20-30 per barrel at the time of investing. At current price levels, the risks are that much higher, as is the need to read the market well enough to gain a competitive edge in bidding.
But even back home, private companies have struck gold compared with the strikes made by state-owned firms. If performance is poor in such lower-risk exploration, or new, fields, can it be far better when it comes to costlier blocks discovered abroad? These call for the ability to see more oil or more value in higher prices than others and bidding accordingly.
The key problem is inadequate initiative in recruiting and retaining the best talent—both managerial and technical. State-owned competitors from China, meanwhile, have even recruited foreign talent for this purpose.
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