: Few Realise The Serious Value That Exists In Indian SOEs

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Bharat Petroleum-Going Global
With US Anadarko and Videocon as partners, BPCL has hit pay dirt in offshore Brazil and Mozambique.
 
September 15, 2008, was hardly the day that one could talk business with a straight face or raise money for projects. Lehman Brothers had just turned into vapor, Merrill Lynch had lost its independence a day earlier and a full-fledged financial crisis had taken strong hold.
 
The global financial order seemed to have ground to a halt. But Ashok Sinha, chairman and managing director of Bharat Petroleum Corporation (BPCL), had the audacity to tap the London financial markets to raise $100 million for an acquisition in Brazil. It was almost as if he had not seen the TV.
 
But Sinha and his teams in Mumbai and Brazil had every reason to feel the urgency. They had plodded on for nearly a year cutting through a thick Brazilian bureaucracy and a million other uncertainties to tie up a buyout of EnCana Brasil which owned ten promising deep-water blocks. It would be a major leap for the Indian refiner in its ambition to become a global oil and gas exploration company.
 
But there was one problem. All the hectic parleying had taken time and the deadline to pay for the deal was just 48 hours away when Lehman threw in the towel. It was doubtless the worst financial crisis in living memory but Sinha & co. weren't going to give up after having come so close to the victory post.
 
They got the money; and EnCana Brasil.
 
Sinha's vision to mould Bharat Petroleum, a noted refiner but not even the largest in India, into a global exploration company sounded as incongruous then as it does today. The government considers this public sector company to be one of its 'gems' (navratnas) and guards it accordingly.
 
BPCL has little latitude to chart its own course despite having a turnover of Rs. 1.35 lakh crore ($28 billion). Pump prices of the fuel it produces are strictly controlled by the government keeping the company on the fringes of loss making for the past decade.
 
Despite recent pronouncements to free petrol prices, the government is far from yielding control of fuel pricing. BPCL, like other Indian oil giants, will continue to sell its products at often un-remunerative prices.
 
Companies globalize for a myriad reasons and BPCL decided to do so in order to break free. When Ashok Sinha, an electrical engineer from IIT Kanpur, took charge as chairman in 2005, hardening crude prices and falling margins on sales hemmed in BPCL. The government had just gone back on its decision to deregulate the oil market.
 
He had been finance director and knew the numbers. It was somewhat ironic that in an organization wide exercise called 'Project Destiny', the 14,000 BPCL employees had decided that their aim was to double sales volumes and quadruple profits by March 2011.
 
It was obvious to Sinha that this destiny would never be fulfilled unless the company developed revenue streams independent of government control.
 
Sinha sought to achieve this through a twin strategy. One, at home, he speeded up the implementation of a joint venture refinery at Bina in Madhya Pradesh to produce 120,000 barrels per day. Being a project with 26% participation from Oman Oil, the Bina refinery is not under the direct control of the government.
 
Next, Sinha drew up a more ambitious plan toward backward integration: A global presence in oil and gas exploration to be achieved over the next decade.
 
The Wahoo Breakthrough

The scramble for funds in London in the middle of the financial crisis was part of the second plan. En- Cana Corp, one of North America's largest natural gas companies, wanted to focus on gas and had decided to sell off its noncore assets.
 
BPCL (through its fully owned unit Bharat Petro Resources or BPRL) had joined hands with Indian conglomerate Videocon and won the bid. The deal was unusual because of adroit negotiations that resulted in the Indians bidding for nine of the blocks, and getting the tenth free--well, almost. They paid a notional price of $1 for it. But more of this later.
 
They had a year to get the regulatory approvals, pay and seal the deal. As months passed, Brazilian bureaucracy proved to be tougher to cut than the infamous one back home. A strike at the regulator's office delayed matters further.
 
Worse, the rules of the oil-game in the region suddenly changed. Brazil discovered huge 'pre-salt' petroleum reserves (so called because oil and gas deposits are buried several kilometers beneath the ocean floor under a layer of salt). This spurred the government to consider laws to virtually shut the door on foreign oil companies. (This would eventually lead to a law in 2009 that said state-run Petrobras must be the operator and own 30% in new fields.) While the situation was not as bad as the 'resource nationalism' seen in Russia or Venezuela, it was something that required a change of strategy by foreign companies.
 
As BPRL-Videocon combine struggled to get their papers in order, pressure began mounting. Some people at EnCana Brazil started questioning the wisdom of giving up the blocks up for a song. "It seemed like the deal would slip away," says RajKumar, managing director of BPRL.
 
Determined to do all they could to save what they were now sure were prime blocks in a very prospective area, the BPCL folks tried the diplomatic gambit. They approached the Indian Prime Minister's Office to help open doors in Brazil. "The Indian ambassador took up the case with the Brazilian government, and the clearances finally came through just at the deadline," recalls Sinha. They managed to negotiate for 48 hours more with EnCana to raise the money. This was when Lehman happened.
 
But then, BPCL is no minnow in the global money markets given its active treasury and big-bang crude oil purchases made through the year. "We not only raised the money, but also got at the finest rates possible," asserts Chief Financial Officer S.K. Joshi.
 
The deal was struck and IBV Petroleas (the BPRL-Videocon joint venture) acquired the ten blocks that was earlier owned by EnCana for about $283 million. Just three weeks later, Anadarko Corp., the operator and lead stakeholder in the concession that IBV had got for a dollar, hit pay dirt. It struck oil in a field named Wahoo after a tropical fish. Reserves are today estimated to be at least 350 million barrels and the exploration is still in progress.
 
An Uncertain Game

Notwithstanding Reliance Industries' much-acclaimed gas find in the Krishna Godavari basin, prospecting for oil has not given much joy to most Indian companies. This is not for the lack of trying. The entire pantheon of public companies as well as private companies operators Essar Oil and RIL have been acquiring blocks in India and around the world for about a decade now. Most have written off huge amounts of money.
 
In particular, the Indian blocks have given much grief to them. "Government companies bid aggressively in the early NELP rounds (New Exploration and Licensing policy), often egged on by pressure from the petroleum ministry who wanted to ensure that the rounds were successful," says a former oil company chairman, who did not wish to be quoted.
 
BPCL's sister oil-PSU in Mumbai, Hindustan Petroleum, bid and won 15 blocks in NELP 6, of which 11 were in deep waters. It has yet to make a commercial find.
 
Offshore exploration and drilling require huge resources. Drilling a single well in very deep waters, as ONGC and HPCL recently found in a well they drilled together off the Western Indian coast, can cost up to Rs. 700 crore. Though technology to look below the earth has improved, oil exploration is still more an art than a science. Dry wells are common and can sap resources.
 
BPCL too started with duds. A particular failure happened at Cacher in Assam, A.H. Kalro, an academic who was till recently an independent director on BPCL's board, says. Expectation was high in Cacher because there was gas all around, some of it even visibly seeping through. But the one well that BPCL and its partners sank Rs. 220 crore to drill was dry as dust. The field was later relinquished. BPCL later had a similar experience in the blocks in Oman as well.
 
That is what got Sinha thinking. He realized BPCL would have to go to the wider world seeking exploration opportunities. "The lack of success that we had with NELP blocks, made us realize that we had to cast our net wider. The challenge was how to do this successfully with our thin resources," says S.K. Joshi, finance director. One option was to go with ONGC Videsh (OVL), the biggest government company prospecting for oil abroad.
 
This was ruled out because OVL was making very large investments, much of it in producing fields in Russia. Even if OVL agreed to take it along, BPRL couldn't afford it. "With our money, we could only get in at the exploration phase. But it was very critical to go only to selected places and not spread ourselves too thin," he says.
 
The risks associated with such a strategy were not lost on the BPCL board. "We did not want risks that would make us regret later," Kalro says. The company formed a committee of senior officials to challenge and vet each proposal. "For any investment proposal of above Rs. 100 crore, it became our job to ask why," says Joshi. "If someone was selling an oil asset, why did they want to get out?"
 
With a plan to eventually invest up to Rs. 7,500 crore in international bets, the company had a lot of ground to cover. Senior officials spent hours learning exploration terminology and roped in industry experts for advice. "If we still had doubts, the final step often was to get outside consultants, who also brought in market intelligence about competition," says Kalro.
 
(Much earlier, BPCL had already found a willing partner in consumer products giant Videocon. It so happened that Videocon, which has had a financial interest in an upstream oil project for 15 years, was also looking for partners. The two had joined hands and over the years, have discovered that they can work together very well. They had also begun hunting in pair.)
 
Right from day one, Sinha took an active role in the planning to ensure BPCL made the right moves. One key call he took was to develop a relationship with Anadarko Petroleum, a large Texas- based oil and gas company. It is the serial entrepreneur of the oil business, constantly looking for new areas to explore and produce hydrocarbons.
 
Drilling Deeper

The BPCL group has so far bagged participation interest in 17 projects abroad but is still to make the transformation to being an operator of a field. Dilip Khanna, partner, transaction advisory services at Ernst and Young in Mumbai, points out that it has several discoveries despite not being operators. One reason is the great relationship it has developed with a large, global player with deepwater expertise like Anadarko Corp, he says. BPCL critics put it a bit differently; and say the Indian company has piggybacked on the U.S. major.
 
Whatever the nature of the relationship, the fact is that it is helping BPCL make rapid strides. After the Wahoo success in Brazil, Anadarko approached BPCL to ask if it would like to join in a wildcat search for gas off the Mozambique coast. This direct invitation was a major boost for the plans of the BPCL-Videocon combine because it obviated the need for going through a tender process. Obviously, Sinha's plans to build long-term relationships had begun to work.
 
Gas in Mozambique-the discovery could be bigger than RIL D6
 
The U.S. company wanted to offload a part of risk in the block where it owned 40%. Both BPCL and Videocon took 10% each. "Our experts said the formation in Mozambique seemed remarkably similar to India's KG basin and looked prospective," says Sinha. The investment was not very big but the area was strategically important and BPCL went in.
Success was quick.
 
Early this year, Anadarko announced a big gas find in offshore Mozambique. With only two wells drilled, there are no estimates of the recoverable reserves. Data from the two wells drilled suggest 4-5 trillion cubic feet (tcf) of gas. If other areas are equally prolific, it can be as large as RIL's D6 off Eastern India where 14 tcf of gas has been found.
 
The stock market has rewarded BPCL for its two successes. Bhaskar Chakraborty, an analyst with IIFL Capital, says the oil exploration story is now a part of BPCL's appeal to investors, even though it is still early days. "The two discoveries are a good beginning and once the oil and gas start flowing, it will make a substantial difference to the company's valuation," he says.
 
The call to join Anadarko in Mozambique was an act of faith, according to Kalro. But it was an important turning point for Bharat Petroleum. It took the pre-dominantly oil company into the gas business. BPCL is currently building up a case with its partners in Mozambique (Mitsui, Anadarko, Cove energy etc.) to take charge of gas marketing.
 
The plan is to liquefy it and ship it to India as LNG. The Indian company has been hungry for gas for a long time and is part owner of Petronet LNG. It has seen large numbers of its customers switch over from petrol, diesel and naphtha to gas. Its future as a leading energy player in India will not be secure unless it has a presence in the gas business. It is a future that the incoming chairman R.K. Singh will have to secure.
 
With a confidence that arises from the two discoveries, the company is not thinking small any longer. "Our ambition on the gas is clear," says Rajkumar. "We want to be India's second largest gas company after RIL." The opportunity is immense. Globally, 24% of energy consumption is through gas; in India, it is 9%.
 
The share of gas in the energy mix is expected to rise to 23% in the next two decades. BPCL is preparing for this explosion in demand that gas from India alone cannot meet. It is already looking for other sources abroad. In fact, BPRL is right now evaluating shale gas prospects in Australia. An acquisition there will give it not only the gas but also the right technology to prepare for the day when India's opens its own shale basins.
 
R.K. Singh and Rajkumar were in Japan in early August to negotiate with Mitsui for the Mozambique gas. They are aware that the ground realities in India are tough. LNG is a much costlier option compared especially after the government-set price for RIL gas, at $4.2 per unit, has become the new benchmark.
 
Competition from GAIL, Shell and others who have built up a huge presence over the years, will be stiff. Yet with Indian cities making plans to move to CNG, the market is just opening up. With BPCL's marketing acumen, access to gas and lucky streak, the future may just start looking different.

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
 
Nothing in this article is, or should be construed as, investment advice.