by Ameya Naik
My last post explored how ONGC Videsh Ltd. (OVL) was set up with a single line mandate – “acquire assets overseas for (Indian) energy security.” The first half of this command has been executed admirably, with OVL’s proven reserves now amounting to 193.38 Million Metric Tonnes of Oil Equivalent (MMTOE – oil and natural gas) and probable reserves to 392.70 MMTOE in a mere decade since starting production. Unfortunately, how this contributes to energy security is still far from clear.
Petroleum, wherever produced, is bought and sold in the global market. The market price of oil is determined, in effect, by the governments of the OPEC cartel. To this, one must add transport costs, and the “Asian Premium” allegedly cast on Eastern markets. Natural gas is not traded at a global market (or oligopoly) price, so the owner of a producing asset could theoretically negotiate for a discount. Yet, the nature of the Asian energy market makes this too difficult in practice. In other words, even when Indian-owned overseas assets produce oil or natural gas, it can still only reach us at market price plus transport costs.
Distortions aside, it is not as if India is averse to this system. The same global market lets us source from multiple suppliers, and not grow overtly reliant on any one. It is what enabled India to cut imports of oil from Iran by over 40 percent (and replace it with oil from Venezuela, amongst others) in 2013. Even OPEC can be bypassed: Russia has ridden a boom in East Siberian and Pacific Oil (ESPO) production to become the single largest oil producing nation in 2012. China recently signed a deal reportedly worth $60 billion for ESPO supplies – via a pipeline only built after they lent money for its construction. Simultaneously, the shale gas boom in the USA has companies there scrambling for permission to export to more lucrative markets, such as Japan.
Only a monopoly or monopsony has the power to influence prices in such a market. OPEC and OECD approximate these roles, but only imperfectly. Between subsidising loss-making Oil Marketing Companies (OMCs) at home and a questionable investment or two abroad, OVL is nowhere near this degree of influence. This is a point best made graphically. Based on data from the Ministry of Petroleum and Natural Gas and the International Energy Agency for 2011-12, this is where India ranks in the world oil market.
Fig. 1: Volumes of Oil & Natural Gas Produced / Consumed
Including domestic production, India consumed not even 3.5 percent of all Oil and Natural Gas produced in the world in 2011 (compared to over 21 percent for the USA alone). This metric does not account for the impact of the leading International Oil Companies (IOCs), or for the amount of resources nations have put at the disposal of their NOCs. The following data from Gateway House provides a sense of the financial standing of ONGC in comparison to the other BRIC NOCs and leading private players (also in 2011).
ONGC’s market capitalisation is a respectable 69 billion US$, but its annual turnover is nowhere near the same scale as that of either the leading private players or the other BRIC NOCs. The combined turnover of China’s three NOCs, on the other hand, outstrips any competition. The largest of these NOCs – PetroChina – actually did better than Total, ConocoPhilips or Chevron in 2011.
While the willingness of the Chinese government to support their NOCs with seemingly bottomless funding makes this an exercise in comparing unequals, it should nonetheless be evident that ONGC is a minnow compared to the big fish of the global energy market. OVL, for all its impressive growth, is vanishingly small fry.
Our original question thus remains: how do OVL’s overseas acquisitions contribute to India’s energy security? We have now ruled out (to any significant degree) the physical assurance of energy supply, the creation of financial advantage in purchasing oil or natural gas, and the assertion of a dominant position in the global oil market.
Perhaps OVL’s operations play a role in the context of India’s grand strategy, and the pay-offs are evident only when seen as an exercise in diplomacy? To answer that question, one must look into the geopolitical equation India has developed with nations where OVL invests – an endeavour which I will undertake in my next post.
Ameya Naik is a Takshashila Scholar