IIC14 – A Changing Global Energy Landscape – Implications for India

Speaker: Dr. Fereidun Fesharaki, Chairman, FGE

Moderator: Namit Arora, CFA, Vice President & Director IAIP and Director Standard Chartered Private Equity

Written by: Chetan Shah, CFA, Director IAIP and Senior Portfolio Manager, Religare Invesco AMC

Dr. Fesharaki mesmerized the participants with his sharp & frank insights on the oil & gas sector around the globe and India in particular. These included his views on oil & gas prices, incremental sources of demand & supply, India’s antiquated oil policy, NELP (New Exploration Licencing Policy), shale gas revolution, refineries and so on. Both on lighter and serious note he pointed at the key factors determining crude oil prices – God, Saudi and Oil market in that order with the last having lowest denominator. FGE has 20 year forecasts of crude oil price (Brent) within the band of $80 to $120 per barrel initially falling to lower end by 2016-18. The market forces are allowed to play between this range; broadly agreed by the big forces viz. Saudis and the US. If the oil prices go above $120 bad things happen such as consumer backlash, fall in demand etc. If it goes below $80 it will result into closure of non-conventional sources of energy, fall in budget for oil producing governments etc. It seems there is a general consensus between consumers & producing governments that Brent prices of $100-$110 per barrel are okay. Else why would the oil price remain the same over the last 2-3 years despite serious changes like Libya going out initially and coming back in the market, and ban imposed on Iran oil (1.0mn barrels per day). Saudi has successfully played a significant balancing role by increasing or decreasing production by a million barrels and containing the same within the range of 8mn to 10mn barrels per day.

India’s 10^th NELP has failed to attract interests from international players as nobody bids except for ONGC because of the antiquated oil policy wherein the subsidy burden is borne by the upstream companies resulting into net payment of only $43-45 per barrel on nominated fields by the state. Multinational companies are not interested in India’s oil. There are many other countries, which are more inviting & attractive than India. However, there have been few attempts & announcements to correct the policies including subsidy sharing burden but whether the government will do this before its term remains to be seen. Likewise gas price formula has been agreed upon which will double the gas price to $8.0-$8.5 per mnBTU w.e.f. from April 1^st 2014 based on current estimates. ONGC will be the biggest beneficiary of this increase. GSPC has been asking for the price of $16 per mnBTU. It is a misconception that LNG from the US is cheap. The cost of liquefaction, transportation, setting up of infrastructure is very high. Besides, there is excessive taxation in India resulting into higher prices for industrial consumers. Nearly 20GW of gas based power plant are not running due to non-availability of gas, which in turn is due to wrong gas pricing policy.

Currently, the private sector refineries export most of their refined products with Reliance Industries forming 90% of the exports and Essar Oil 10%. The domestic prices are not remunerative due to subsidies on diesel. However, if crude prices fall to levels of $80/bbl then the subsidies go to zero and marketing products in the domestic market may become lucrative for the private refiners.

The chairman of public sector oil marketing companies in India having the term of 3 years and they have the tendency to announce and set up new refineries as a “claim to fame”. India doesn’t need additional refining capacity and fortunately its appetite for building new ones has dropped.

Coal is making a comeback in Europe, Australia and Japan. India will have to compete with other countries for the same. Though it has huge reserves the same has not been unlocked efficiently.

Answering to question on China versus India, Fereidun said that the state oil companies in China get full support from their government. Oil companies retain profits and are allowed to take their own investment decisions like acquisitions of oil fields with substantially higher limits ($50bn) with little questions from government or press. The Indian oil companies have to get government approval beyond $900mn (as in case of OVL) and by the time they get it Chinese companies would have already bought the asset.

It is not that shale gas is only available in the USA. China has highest reserves in the world but there are challenges in extracting the same. The gas is dry. There is lack of enough water for fracking in these areas leading to logistic issues of bringing water. It requires investment in pipelines which pass through farmlands. There are small earth tremors on account of fracking resulting into disturbance in the surrounding areas affecting the sensitive animals and birds (like hen not laying eggs). All these translate into cost of production which is much higher than importing. In the USA shale gas has been a revolution as it is in areas with little habitation, it has well developed markets (including paper/forward markets) and infrastructure is in place to support. These fields were owned by number of independent players. Multinational companies like Exxon have bought them later and might have 10% of the assets.

–        C G S

PS: The video presentation could be seen at http://new.livestream.com/livecfa/Fesharaki

Each of speaker sessions and the panel discussion has been covered separately under IIC14. These include:

• The End of Quantitative Easing, the Outlook for Emerging Markets and the Rupee by Prof. Avinash Persaud
• Corruption of Capitalism: Challenges to Sustainable Growth & Asset Allocations by Richard Duncan
• Future of Finance: Key Issues Facing the Finance Industry by Frederic Lebel, CFA
• Executive Panel Discussion – India Investment Outlook
• The Inaugural Session by Paul Smith,CFA, Jayesh Gandhi, CFA and Dr.Vikram Kuriyan, CFA
• A comprehensive list of photographs could be viewed in the slide show in the note titled: IIC14 – The Road Ahead for India & Emerging Economies