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India Loses to China in Africa-to-Kazakhstan-to-Venezuela Oil

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Photographer: Pankaj Nangia/Bloomberg

Murli Deora, India's oil minister, after attending a meeting in New Delhi earlier this month.

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Photographer: Pankaj Nangia/Bloomberg

Murli Deora, India's oil minister, after attending a meeting in New Delhi earlier this month. Close

Murli Deora, India's oil minister, after attending a meeting in New Delhi earlier this month.

Source: ONGC Videsh Ltd. via Bloomberg

A drilling rig at an ONGC field in Colombia. Close

A drilling rig at an ONGC field in Colombia.

Source: ONGC Videsh Ltd. via Bloomberg

ONGC's crude oil pipeline in Sudan. Close

ONGC's crude oil pipeline in Sudan.

Source: ONGC Videsh Ltd. via Bloomberg

An offshore platform in the Lan Tay field in Vietnam, owned partly by BP Plc, ONGC Videsh Ltd. and Vietnamese government-owned Petro-Vietnam. Close

An offshore platform in the Lan Tay field in Vietnam, owned partly by BP Plc, ONGC Videsh Ltd. and Vietnamese... Read More

Indian Oil Minister Murli Deora traveled to Nigeria, Angola, Uganda, Sudan, Saudi Arabia and Venezuela this year, leading a record number of delegations to gain oil for the world’s third-fastest-growing major economy.

The flurry of visits is part of a new drive to find oil for India’s 1.2 billion people after losing out to China in at least $12.5 billion of contracts in the past year. India proposed a sovereign wealth fund to bid for reserves, told state-controlled Oil & Natural Gas Corp. and Oil India Ltd. to make a major acquisition each this year, and raised the amount they can spend without government approval to 50 billion rupees ($1.1 billion).

“There is a new push,” said N.M. Borah, chairman of state-owned exploration company Oil India. “Going abroad is part of the government’s policy -- diplomatic support is very, very crucial as we search for assets overseas.”

India’s energy use may more than double by 2030 to the equivalent of 833 million metric tons of oil from 2007, while China’s demand may rise 87 percent to 2.4 billion tons, the Paris-based International Energy Agency said.

India faces an uneven contest to close the gap with China, which is dipping into $2.4 trillion of foreign currency reserves to buy stakes in oil and natural gas fields from Iraq to Uganda, compared with India’s $250 billion in foreign exchange reserves. State-run Chinese companies spent a record $32 billion last year acquiring energy and resources assets overseas versus India’s single $2.1 billion investment by ONGC. China’s June 19 decision to allow the yuan to appreciate will further strengthen the hand of Chinese companies buying overseas.

India’s oil import bill climbed six-fold in the past decade to $85.47 billion for the year ended March, equivalent to about 7 percent of gross domestic product.

‘Political Game’

“India’s search for energy has to become a more intense political game, rather than one based entirely on economics,” said Abheek Barua, an economist at the Mumbai-based HDFC Bank Ltd. “China has virtually already taken over Africa.”

China has promised billions of dollars in aid, investment and loans to Africa, producer of one-eighth of the world’s crude oil, in exchange for energy supplies.

“We buy assets based on commercial decisions even though there is a mandate for securing energy for the country,” R.S. Sharma, chairman and managing director of ONGC said in April. “The Chinese are different with their big cash. We can’t invest just for the sake of it.”

Stronger Yuan

China National Petroleum Corp. beat India by agreeing to pay $4.18 billion in August 2005 for PetroKazakhstan Inc., then China’s biggest overseas oil deal. At that time, oil minister Mani Shankar Aiyar said India’s bid for PetroKazakhstan was thwarted as the “goalposts were changed after the game began.” A month later China National Petroleum again outbid ONGC in buying assets of EnCana Corp. in Ecuador for $1.42 billion.

A stronger yuan would also make purchases cheaper for the Chinese. The People’s Bank of China said on June 19 it may allow the yuan to move higher, abandoning the 6.83 yuan peg to the dollar adopted during the global financial crisis to shield exporters. The yuan climbed 0.4 percent to 6.7976 per dollar in the first trading day after the announcement.

India has had some success. ONGC agreed in 2005 to spend as much as $6 billion on roads, ports, railway lines and power plants in Nigeria in exchange for 600,000 barrels a day of oil for 25 years. In April, Reliance Industries Ltd., operator of the country’s largest gas field, agreed to buy a $1.7 billion stake in natural-gas properties from Atlas Energy Inc. On June 24 it announced a $1.3 billion acquisition of shale gas assets in the U.S. from Pioneer Natural Resources Co.

More Freedom

ONGC, Indian Oil and Oil India were part of a group in March that agreed to develop reserves in Venezuela’s Carabobo blocks during a visit by Deora. In February, the minister persuaded Saudi Arabia, the world’s biggest oil exporter, to almost double crude shipments to India, to about 800,000 barrels a day, according to the ministry. State-run Saudi Aramco ships about 1 million barrels a day to China, more than to the U.S., Chief Executive Officer Khalid al-Falih said Jan 28.

India increased the amount ONGC and some other state-run companies can spend to acquire assets and set up joint ventures, allowing them greater freedom to expand and become globally competitive, the government said in December.

“One of the advantages the big Chinese oil companies have is government support, it’s an open secret,” said Gideon Lo, an energy analyst at DBS Vickers Hong Kong Ltd. “The government establishes high-level contacts with oil-producing countries. Once this is done, the oil companies can come in and negotiate.”

Oil Opportunities

PetroChina Co., which vies with Exxon Mobil Corp. as the world’s biggest company by market value, wants half its oil to come from overseas by 2020, Chairman Jiang Jiemin said in March. Less than a tenth comes from abroad now.

“We will take advantage of opportunities in developing oil, gas and energy sources in all areas of the world,” Jiang said in an interview in March.

Cnooc Ltd., the listed arm of China’s biggest offshore oil producer, is in discussions to buy a one-third stake in three blocks in Uganda’s Lake Albert region from Tullow Oil Plc. ONGC had jointly bid with Indian Oil Corp. and Oil India for the stake and lost out to the higher Chinese bid, a person familiar with the negotiations said, declining to be identified because the talks were private.

China has spent at least $21 billion on overseas resources in the past year, including state-controlled China Petrochemical Corp.’s $4.65 billion purchase in April of a stake in an oil- sands project in Canada. ONGC was interested in the asset and didn’t bid, a person familiar with ONGC’s plans said, declining to be identified since the plans were not public.

‘Financial Firepower’

ONGC plans to borrow $10 billion over the next decade for purchasing assets overseas. In September, China National Petroleum Corp., PetroChina’s state-owned parent, received a $30 billion loan from China Development Bank at a discounted interest rate to buy energy resources, according to a Sept. 9 statement from parent China National Petroleum Corp.

“The financial firepower that the Chinese companies have is a factor,” Tom Deegan, Hong Kong-based head of energy and infrastructure at lawyers Simmons & Simmons, said. “They have access to capital and finance through Chinese banks which have the liquidity, which perhaps Indian companies don’t.” Deegan has been advising on M&A deals in Asia for 13 years.

Adding India to the competition may push prices higher for hydrocarbon assets, boosting drilling costs that are already facing an increase in the U.S. after an explosion in April at a BP Plc-leased drilling rig in the Gulf of Mexico released oil that polluted about 140 miles (225 kilometers) of coastline.

Chinese Premium

“Chinese companies always have to pay a slight premium to win oil and gas deals overseas to fend off the competition,” said Gordon Kwan, analyst at Mirae Asset Securities in Hong Kong. “This is just the tip of the iceberg. With talk of the yuan appreciating this will increase China’s purchasing power.”

China Petrochemical, known as Sinopec Group, agreed to buy a 9 percent stake in Syncrude Canada Ltd. for $4.65 billion, or $650 million more than the high end of an estimate by Macquarie Securities.

“There’s a market consensus that perhaps Sinopec overpaid for its stake in oil sands project in Canada, but this is made on the assumption that oil prices” were around $80 a barrel at the time, DBS Vickers’s Lo said. “The company may be assuming that oil prices will rise to over $100 a barrel and this purchase may turn out to be a bargain.”

Replace Reserves

Oil in New York has risen 0.3 percent in the past year to $75.62 a barrel. Prices may average $84.50 a barrel in the fourth quarter of this year, according to the median estimate of 30 analysts surveyed by Bloomberg. Oil has tripled in the past 10 years.

Sinopec bought Addax Petroleum Corp. last year for C$8.3 billion ($7.9 billion), gaining licenses in Nigeria, Gabon and Cameroon. Chinese oil companies also have African assets in Kenya, Niger, Algeria, Equatorial Guinea, Mauritania, Libya, Tunisia, Sudan and Chad.

Oil companies aim to at least replace used reserves each year by finding new fields. Royal Dutch Shell Plc’s shares fell 1.3 percent after the company announced last year that its reserve replacement ration dropped to 95 percent from 124 percent a year earlier.

“Chinese and Indian companies are getting into a competitive field and that is driving up asset prices,” Neil Beveridge, an analyst at Sanford C. Bernstein Ltd. in Hong Kong, who rates PetroChina and Cnooc Ltd. “outperform” and ONGC and Reliance “market perform”. “That is why a lot of the companies try and do government-to-government deals. We saw that in the Indian companies getting a deal in Venezuela this year.”

To contact the reporters on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net; John Duce in Hong Kong at Jduce1@bloomberg.net.

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net.

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