Is this a reflection of India’s poor oil play?
When a top Indian firm invests overseas, there are two ways of looking at it, as the first step in the creation of an Indian MNC—like the Tatas did with Corus and JLR—or as an indication of the hostile investment environment in the country. Which category does the Reliance Industries MoU with Mexico’s PEMEX come under? It is difficult to say, and certainly Reliance has so much invested in India, there is no danger of the Mexican MoU supplanting the India investments. Indeed, according to the press statement put out by Reliance on its MoU, this could result in a lot more business for Reliance’s Indian refinery as Mexico looks to get more value-add from its exports of crude oil. Indeed, with 60% of
Reliance’s Indian turnover coming from exports, continuous investment in the refinery and the petrochem business is a given.
That said, it has to be a big setback to India’s exploration plans if the country’s most prolific investor is going to find itself preoccupied with finding oil in Mexico’s deep waters instead of India’s. While India is still not considered to be a great country in terms of finding oil/gas—though Reliance’s and Cairn’s success has blunted that a bit—around 270 locations with more than 2,300 exploration opportunities have been identified in deepwater Mexico. According to one estimate, Mexico’s deep water reserves have the potential to unlock 29 billion barrels of oil. Given how, in India, Reliance’s $11 billion investment in the KG Basin is in all manner of trouble, and there is no saying when the arbitration will get over—the one on cost-recovery has begun, but the gas price one is nowhere near beginning—it is not surprising the company is looking for some quicker returns. In the US, where Reliance has shale operations, the turnover has overtaken those of the Indian operations. Even by Q4 FY13, the Indian revenues were much larger at R1,597 crore versus R1,063 crore for the US. By Q4 FY14, however, the wheels had turned and the Indian revenues were R1,417 crore versus R1,646 crore in the US. In terms of ebitda, the US operations have been more profitable for several quarters—in Q4 FY14, US ebitda was R1,231 crore versus R847 crore for the Indian exploration and production piece.
But all of this will change, many assume, once the government comes out with Phase 2 of its gas price hike—that is, when there is a premium given for wells in the deep and ultra-deep waters over the $5.6 per mmBtu price for all other gas. While that may have been the government’s intention, certainly the gas pricing guidelines issued don’t reflect this. What the guidelines talk of is a premium for deep and ultra-deep waters, but only for ‘all discoveries after the issuance of these guidelines’. That is, unless there is some quick correction in the guidelines, all the deep water discoveries made already—but which have not yet been developed—may not get the higher premium. It is in this context that Reliance’s PEMEX MoU has to be viewed.