ONGC enters modern Great Game
By Joe Leahy
Published: September 1 2008 17:44 | Last updated: September 1 2008 17:44
When India’s Oil and Natural Gas Corporation pulled off its most successful overseas deal last week, the takeover of UK-listed Imperial Energy, Economic Times business daily wrote light-heartedly that it was a return to the “Great Game”. Explaining the allusion to the 19th century power play between London and Moscow over Central Asia and British-ruled India, the newspaper said that an Indian group was buying a UK-listed company whose assets were mainly in Russia. The analogy was appropriate but for one crucial omission – this time the Great Game is between India and China over Russia’s energy resources, and the £1.4bn Imperial deal shows that New Delhi might be gaining the upper hand. RS Butola, managing director of ONGC Videsh, the group’s overseas arm, was quick to highlight the significance of his victory. “This is an important opportunity to expand on the continuing co-operation between Russia and India in the energy sector,” Mr Butola said. Under the deal, ONGC, a publicly listed, state-controlled national oil company with a market capitalisation of about Rs2,100bn ($47.5bn), will pay £12.50 a share for Imperial Energy, an entrepreneurial exploration and production firm with assets mainly in the Tomsk region of Siberia. The price represented a premium of nearly 62 per cent to Imperial’s share price prior to the takeover bid. But at about $2.77 per barrel of proved and probable reserves, this is in the ballpark of the valuations for other Russian companies, according to Reuters estimates. The operational benefits of the deal for ONGC will take several years to realise. Imperial had proven reserves of just 174.6m barrels of crude oil and gas as of December 2007, a fraction of ONGC’s proved reserves of 7bn barrels of oil equivalent. Imperial’s oil sales last year were $20m with an operating loss of $40m while ONGC in the three months ended June alone reported sales of Rs200.5bn, up 46.5 per cent year on year and a net profit of Rs66.3bn, up 43.9 per cent. Imperial’s promise is its potential growth. It has probable and possible reserves of 3.4bn barrels of oil equivalent and is planning to increase production to 80,000 barrels per day by 2011. This equates to 4m tonnes a year, a significant volume given that ONGC’s total production last quarter was 6.41m tonnes. The Imperial deal will help ONGC “increase production as well as mitigate concerns over the mature state of its domestic reserves”, says Ivan Palacios, Moody’s lead analyst for ONGC. The importance of the deal for ONGC and India, however, goes beyond what specific benefits Imperial might bring. India is desperate to find more oil and gas domestically or to secure its own resources offshore to curb its dependence on the global market. The country imports more than 70 per cent of its oil and this figure is only going to grow with the economy expanding at about 8 per cent a year. ONGC has 75 per cent of India’s proved oil and gas reserves but its record on new discoveries domestically has been poor. To counter this, it has begun looking offshore, albeit with patchy results.
While it has picked up a large number of smaller operations in countries ranging from Colombia to Sudan, it has struggled to pull off a significant takeover of a foreign company, in spite of having a cash balance of $4.3bn and little debt. One reason for this has been China, whose oil majors have trumped ONGC Videsh in countries ranging from Ecuador to Kazakhstan and Angola. While China’s state-run companies can confidently bid based on a strategic mandate from a strong state, ONGC is caught between its status as a listed company – with public shareholders – and its role as a state-controlled entity. “Given the conservatism in India, ONGC has done a commendable job overseas,” said one banker in Mumbai. “It’s a competitive market out there. China is playing a geopolitical game while ONGC is a commercial organisation.” This is one reason why Russia could prove a fruitful hunting ground for future deals for ONGC. Analysts say that Moscow views New Delhi more warmly than Beijing and if Russia does prove to be more amenable to its advances, ONGC is likely to waste no time in pursuing the opportunity.