In the coming week, the government is slated to approve BP Plc’s $7.2 billion investment in Reliance Industries Ltd’s (RIL) 23 oil and gas fields in the country. Coming on the heels of an approval granted to another giant deal, Cairn Energy’s proposed sale of a majority stake in its Indian assets to Vedanta Resources, comparison is inevitable—one that offers interesting insights.
One marks the exit of an explorer (if the deal finally takes place), little known till a decade ago, with a knack for striking oil and gas reserves. Cairn found oil where Shell, a giant in the exploration business, failed. The Scottish company is now cashing out on this upside to pursue in other parts of the world what it does best—exploration. And the buyer, Vedanta, in a sense, shares Cairn’s pedigree even though it is a novice in the oil exploration business. Vedanta has an immense appetite for risk, evident from the scores of battles it is embroiled in on the environment front, as it pursues leases for new mines.
The other deal involving BP and Reliance offers a contrast: for a good part, it is seeded by the limitations posed by technology and expertise available off the shelf in the exploration business. Ironic, for the company that hit this wall powered its growth by aggressively chasing technology and expertise ever since it entered the manufacturing business in the late 1960s.
The challenge in exploring in the deep waters is not just about striking reserves, but tapping them out. RIL is stricken with this problem in a gas field off the coast of Andhra Pradesh where volumes are half those originally projected by it. Expertise in the tricky deep water exploration business is the preserve of a few global majors such as BP that will part with it only if profits are shared. The two deals have lessons for the government.
A similar story has panned out elsewhere in the sector, but with one crucial difference from the RIL tale. In the last 10 years that it has held nine rounds of auctions of oil and gas acreages, state-owned ONGC Ltd has won the maximum number of blocks. This is by virtue of out-bidding others on the number of wells it promises to drill (which raises the prospects of finding oil and gas) and what it is willing to share if it strikes reserves. The results are poor—ONGC has not made any large find since the mid-1980s. The government can ill-afford to allow ONGC such an extravagance at the cost of the exchequer—its spending is as much as several thousand crores of rupees every year. Any risk-embracing explorer would have been asking the management pointed questions. The government should take the second example to heart and farm out ONGC’s fields.
What lessons has the government learnt so far? Tell us at email@example.com