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India: Incoherent policy guides oil hunt

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More than one oil company bidding for same overseas assets.

Egypt: Prize Petroleum, the exploration arm of Hindustan Petroleum Corporation Ltd, the country's third largest refiner, is planning to bid for US-based Devon Energy's oil assets in the country. So is Oil India, the country's second largest exploration company.

Nigeria: IOC, the country's largest state-owned refiner, is interested in a stake in the refinery at Port Harcourt. HPCL-Mittal Investments has bid for the same refinery.

Russia: ONGC Videsh Ltd (OVL), the overseas exploration arm of ONGC Ltd, will soon bid for a stake in Sakhalin-III. Oil India is also considering a bid.

The lack of a cohesive strategy on part of the owner of these oil companies - the government - is creating huge hurdles in fuel-hungry India's quest for overseas oil assets. As a result, these companies end up competing with each other instead of collaborating and drive up prices.

While countries like China have designated companies for every stream of the oil business, the Indian government does not discourage more than one oil company from bidding for the same asset on the ground of healthy competition, according to a petroleum ministry source.

Says a sector consultant, "The fact is that there is no real policy for the upstream or the downstream sector."

India imports about 78 per cent of its annual crude oil requirements. Last year, it imported 99.4 million tonnes, which was 6.1 per cent more than the import of 95.9 million tonnes in 2004-05.

The dependence on crude oil imports is projected to increase 86.3 per cent by 2012, making overseas assets increasingly critical for the country. Competition for these acreages is already stiff from other fast-growing economies like China.

Further, the build-up of refining capacity in India makes it imperative to secure oil to feed refineries. India's annual refining capacity stands at 150 million tonnes and is estimated to increase to 240 million tonnes by 2012.

Most of it is expected to feed the export market, since domestic demand for petroleum in the year is estimated at 132 million tonnes.

To address this anomaly in the oil policy and carve out competency areas for companies, the government set up an advisory committee under former National Advisory Council member V Krishnamurthy two years ago.

The committee had broadly recommended that OVL should bid for blocks where the investment required was over Rs 2,000 crore and Oil India where it was below that figure. However, nothing came of the report.

Industry observers attribute the failure to work out a solution to the clout of the cash-rich national oil companies.

"Every oil company is running after its own interest, rather than the country's," one said, predicting that a policy change was unlikely in the near future.

Analysts also point out that the government's stand varies from asking the oil companies to stick to their core competency to wanting them to diversify.

"Oil is all about politics," a sector consultant said, adding, "Where there is politics there is bound to be distortion in policy-making. But a policy is required to keep the economics in control."

© Business Standard

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