Petroleum minister Murli Deora is in Russia this week to meet Prime Minister Vladimir Putin about India’s interests in Russian oil and gas fields. Unlike the previous visits of Indian dignitaries to Russia since 2001 to discuss oil that have been in vain, this one may just have a foregone conclusion— “success”. Deora’s mission aims at seeking Putin’s green signal for the acquisition of Imperial Energy by ONGC Videsh Ltd (OVL) valued at $2.6 billion.
Does the deal make sense, given the recent slide in oil prices?
Consider the facts: Global oil prices were effervescent, in healthy three digits, when the deal was made; today, they’ve dived to about $60 a barrel. While the commercial viability of the $2.6 billion acquisition is based on a long-term average price, that slide can’t be ignored.
Has the government considered reviewing the deal, since it involves significant outflow of taxpayers’ money?
Evidently, it is contingent on obtaining Russia’s approval for OVL to engage in the exploration and production side of Imperial’s business. The devil, then, would lie in the details of the conditions contingent on which the deal can be consummated. Should India not bargain hard here, given that there are likely to be few takers today for Imperial at the price that OVL has agreed to?
Or, still better, won’t these conditions offer India an excuse to exit the deal, with minimum damage?
Second, will Deora be able to ensure fiscal stability for the investment, assuming the deal is cleared? Russia, which is increasingly becoming nationalistic about resources, frowns upon production sharing contracts, which secure a stable tax regime for the investor. So if, as is being said now in justification of the deal, most of the oil can be brought to India, what stops Russia from arbitrarily raising taxes?
OVL’s parent company was to raise $1.6 billion, with a bridge loan of $1 billion; in the wake of the financial turmoil, the chances of that loan coming through may be low. ONGC has since said it can fund the entire deal. So, the larger question, in the context of empowering public sector enterprises, is of accountability. The decision was largely based on consultants’ valuations and the access to ample funds—going forward, we need a process that ensures transparency.
Let’s not forget that energy security is not just about securing supplies, but doing so at the right price.
How does the slide in oil prices affect the deal? Tell us at email@example.com