NEW DELHI: Foreign direct investment (FDI) into the country — one that is rich in resources but remains deeply impoverished — has grown over 100 times in the past few years. In 2010-11 alone, it soared to $20 billion from a much smaller $300 million during the previous year, according to IHS, a global information firm. However, much of this is still led by the Chinese.
Over 70 per cent of total FDI inflows came from Chinese companies in the hydrocarbon sector, IHS data indicate. Three large Chinese projects, including one that involves constructing two pipelines for transporting Myanmarese and West Asian gas intoChina, were worth $8.27 billion. Hong Kong entities accounted for another $5.8 billion of investments in 2010-11, followed byThailand,South Korea,Singapore,MalaysiaandJapanas other major investors.
India, on the other hand, is only the 13th largest investor, with an investment of around $189 million in five projects.
Unsurprisingly then, a renewed international interest in Myanmar, triggered by the much-awaited political reforms in a closed, frontier economy, has only evinced cautious optimism from India Inc. This is despite a smattering of large Indian firms, including ONGC, GAIL, Essar and Tata Motors, inMyanmar.
ONGC Videsh (OVL), a wholly owned subsidiary of state-run energy firm ONGC, and natural gas major GAIL have minority stakes in two offshore gas assets on Myanmar’s north-western coast, which were picked up in the last decade.
“The initial interest was in getting the gas back toIndia, but now most of it is being transported toChina,” a GAIL spokesperson explains, adding the company also has a small stake in a gas pipeline venture inMyanmar. But, GAIL isn’t currently looking at any further opportunity, the spokesperson clarifies, as “ideally the gas (from existing assets) should have been brought toIndia”, which wasn’t the case. Automotive major Mahindra & Mahindra, with a significant farm equipment division that has, in the past, supplied toMyanmarthrough government lines of credit, admits there is business to be done across theBay of Bengal, but is limited by the presence of a government-promoted market.
“There is a business opportunity.Myanmaris an extension of the Indian market, especially in the farm equipment sector. But, the instability is a concern. It is not a civilian market,” says Pravin Shah, chief executive of Mahindra’s automotive division and former head of international operations in the automotive and farm equipment sectors.
Punj Lloyd, one of the engineering, procurement and construction (EPC) contractors for the Myanmar-China oil and gas pipeline, sees good business opportunities in Myanmar “with many favourable economic reforms having taken place”. But, P K Gupta, director at the Gurgaon-headquartered firm, says, “To realise this huge potential for further business, it is important for all sanctions to be lifted.” The country’s resource sector, however, remains attractive.Myanmar’s proven oil reserves stand at about 216 mmbbl (million barrels) of crude oil and 16,154.65 BSCF (billion standard cubic feet) of natural gas, according to government data, with much of its assets understood to be yet unexplored. Unsurprisingly, the resource sector has emerged as one of the key reasons for much enthusiasm about the rapprochement between the country’s authorities and other western governments. So far, western sanctions had ensured that few non-Asian oil majors could enterMyanmarfor exploration and production.
“Apart from the oil and gas sector, there are huge opportunities in agriculture, infrastructure and tourism sectors. Tourist arrivals, for instance, have gone up by 30 per cent in the last year, but are less than one million annually. We believe this could double in five years. So, I think there is great potential inMyanmar,” says Rajiv Biswas, chiefAsiaeconomist at IHS Global Insight.
With a large population, comprising a workforce of about 32.5 million, abundant resources, newfound investor interest and a strategic location, ensconced between China, India and the Association of Southeast Asian Nations (Asean), Myanmar is likely to see GDP growth in excess of six per cent until 2020, feels Biswas.
“But whether fully free and fair elections will happen in 2015 remains a big ‘if’. There are still a lot of risks involved, although the mood at the moment is very positive,” he adds.
For Tata Motors, the entry intoMyanmarwas on the back of a line of credit extended by the Indian government to set up a truck assembly facility, with an annual capacity of 1,000 trucks, which became operational last year. Although the car maker is not currently planning an expansion, it does not rule out playing a greater role in the market. “It is a country that will require automobiles and Tata Motors has a full range of offerings. There are opportunities (inMyanmar) and we will consider them at the right time,” a company spokesman says.
Not only are there risks from arbitrary executive decisions, according to IHS analyst Jan Zalewski, because of continuing opacity in the decision-making process, ethnic conflicts in certain border regions that pose a threat to supply routes passing into neighbouring countries such as China, Thailand or India. At the same time, the ongoing political transition and economic liberalisation carry their own set of risks with regard to how social movements are controlled.
Shyamal Banerjee, director at Lookeast Business Consultants, which helps Indian investors enterMyanmar, thinks Indian firms are being “over cautious”.
“Indian companies need to show toMyanmar’s authorities that they are interested in making long-term investments, but they also need more support from the Indian government. Chinese companies are being able to do so well because they obtain the tacit government support. Indian firms don’t do this, and instead expect a red carpet welcome,” he says. “When inRome, do as Romans do.”
IOC MAY HIKE FUEL PRICES IN UP IF STATE DOESN’T SCRAP ENTRY TAX
NEW DELHI: State-run Indian Oil Corporation has told Uttar Pradesh chief minister Akhilesh Yadav that it will be forced to raise fuel price in the state unless the entry tax, which has put a burden of 8,600 crore on the cash-strapped firm, is withdrawn.
IOC is planning to raise petrol and diesel prices by more than 2 a litre, kerosene by 0.92 a litre and cooking gas by 19.49 per cylinder in the state. The increase is partly to pass on the entry tax to customers and partly to recover dues accumulated in the last five years, company executives said.
Prices of petroleum products sold to neighbouring states fromMathurarefinery could also be raised, executives said.
In 2007, the UP government imposed 5% tax on transporting crude oil to IOC’s Mathura refinery but the tax was not passed on to customers because of a stay order from the Allahabad high court, company executives said. In January 2012, an interim order of the Supreme Court directed the company to pay the tax and deposit 50% of the past dues with interest, pending a final verdict.
IOC would ideally want the state government to withdraw the tax, which would cost it 1,650 crore annually, executives said. “The fuel market is highly price sensitive. If IOC raises fuel price, customers’ loyalty would shift to the petrol pumps, where fuel would be cheaper,” one executive said requesting anonymity. Private firms, such as Essar and Reliance Industries, also have pumps in the state.
IOC director-finance PK Goyal said the tax incidence would be about $6 per barrel on theMathurarefinery, where gross refinery margin is about $3.3 per barrel. “Unless we raise prices of refined products, this levy would turn theMathurarefinery unviable with a negative margin of about $4.7/barrel,” Goyal said.
The company could not pass on the tax to consumers until January this year because the matter was pending in theAllahabadhigh court, which later upheld the levy. IOC filed an appeal in the apex court, which on January 17 stayed the high court’s order but asked IOC to deposit 50% of the arrears since 2007 and furnish bank guarantee for the balance amount pending its final verdict, IOC executives said.
IOC could not raise fuel prices after the apex court verdict, as it needed informal approval of the oil ministry for raising prices in the politically sensitive state. But oil ministry officials said IOC should take decision in its commercial interests. “If the UP government wants to save its consumers from an imminent price hike, it should withdraw the entry tax,” a ministry official said requesting anonymity.
“The company is armed with legal opinion of the Solicitor General of India in this matter and it is well within its rights in recovering increased cost of petroleum products, retrospectively,” the oil ministry official said.
GAIL, OIL EYE STAKE IN MUKESH AMBANI’S RGTIL
NEW DELHI: At least 11 companies, including state-owned GAIL (India) and Oil India, have expressed interest to buy stake in billionaire Mukesh Ambani’s privately owned firm Reliance Gas Transportation Infrastructure (RGTIL).
“There are five Indian and six foreign companies which have submitted expression of interest (EoI) for buying stake in the gas transportation company (RGTIL),” a source privy to the development said.
Gas utility GAIL and oil explorer OIL have submitted separate EoIs for the stake buy, which is being managed by JPMorgan, Citi and SBI Caps.
Other firms which have put in EoI may include NYSE-listed energy major Enbridge.
The source said the companies putting in EoI would visit dataroom of RGTIL and do a complete due diligence before making any financial bid.
RGTIL was originally a subsidiary of Reliance Industries (RIL) and was incorporated in March, 2003 to transport natural gas from eastern offshore gas fields to consumption centres. Two years later, it was transferred to Mukesh Ambani, chairman of RIL.
It was said at that time that Ambani may sell stake in the company through an initial public offering (IPO) once RIL’s eastern offshore KG-D6 field hit peak volumes of 80 mmscmd.
But with KG-D6 output plummeting to less than 34 mmscmd, he wants to sell the gas pipeline business. Industry sources said RGTIL earlier this month held a meeting of its shareholders inJamnagar, where its registered office is located, to seek approval for the stake sale. The stake sale was approved at the meeting.
RGTIL operates a 1,396-km East-West gas pipeline. The 80 million standard cubic meters per day capacity, 48-inch pipeline fromKakinadain Andhra Pradesh to Bharuch inGujaratferries natural gas from KG-D6 fields.
OIL RETAILERS PUSH GOVT TO ALLOW PETROL PRICE HIKE OF RS 8 A LITRE
NEW DELHI: Petrol could get dearer by almost Rs 8 a litre in the next couple of days, if public sector oil retailers have their way.
The retail sale price (RSP) of petrol inDelhihas been Rs 65.64 since December 1, last year . The under recovery on petrol is Rs 7.17 a litre. Sources said the industry view was that the rates should be increased so that it will serve to offset the losses incurred over the previous months.
The political implications of any such move had stopped oil marketers from taking a decision for over four months. But, with the Finance Bill expected to get the Rajya Sabha’s nod in a couple of days and the Parliament session slated to get over by May 22, the companies are hoping to raise prices.
An industry observer said varied views were emerging on the timing of the hike. The options being considered are, whether to raise prices once the Finance Bill is passed in the Rajya Sabha or wait for this Session to get over.
There are stronger chances of this happening in a day or so, as there is no threat of the Government being toppled now.
Though petrol is a deregulated product, there is an artificial Government control over its pricing.
The Minister of State for Petroleum and Natural Gas, Mr R.P.N. Singh, had recently informed the Rajya Sabha that the public sector oil marketing companies – Indian Oil Corporation, Bharat Petroleum Corporation, and Hindustan Petroleum Corporation – have not revised petrol price since December 1 despite a sharp increase in international prices of petroleum products.
In fact, to mitigate losses on petrol sale, the oil retailers have suggested to the Government that it either declare petrol as a ‘regulated’ product temporarily and provide 100 per cent cash compensation or reduce the excise duty from Rs 14.78 a litre by an amount equivalent to the under-recovery on the product.
The Petroleum Ministry has taken up the matter with the Finance Ministry.
On other regulated petroleum products, the companies continue to incur losses. The under-recoveries on diesel is about Rs 14 a litre, kerosene Rs 31.49 a litre and domestic LPG, close to Rs 500 a cylinder. The Petroleum Ministry has also been requesting the State Governments to reduce local taxes and levies on petroleum products — auto and cooking fuels, which would result in lower retail price.
During 2010-11, the contribution of the petroleum sector to the Central exchequer through taxes/duties on crude oil and petroleum products, dividend to the Government and income tax etc, was Rs 1,36,497 crore. It is Rs 84,404 (provisional) crore in the April–December period of 2011-12 fiscal.
The contribution to the State exchequer through value added tax, royalty, octroi, entry tax, and dividend income etc was Rs 88,997 crore in 2010-11 and Rs 78,427 (provisional) crore in the 2011-12 (April–December) fiscal, respectively.
INDRAPRASTHA GAS Q4 NET UP 17% ON HIGHER SALES
NEW DELHI: Indraprastha Gas Ltd on Monday reported 16.7 per cent growth in net profit during fourth quarter of 2011-12 on selling higher gas volumes.
The supplier of Compressed Natural Gas (CNG) and Piped Natural Gas (PNG) in National Capital and its neighbouring region recorded Rs 80.76 crore net profit during January-March 2012 against Rs 69.16 crore in same period previous year. The turnover for Q4 of FY12 was Rs. 798 crore against Rs 566 crore in the corresponding quarter in 2010-11. Earnings per share was Rs Rs 5.77, against Rs 4.94 in Q4 of FY11.
IGL said there has been an overall sales growth of 18 per cent in fourth quarter of 2011-12. “Product wise, CNG recorded sales volume growth of 15 per cent, while PNG recorded sales volume growth of 33 per cent in the quarter as compared to last year,” IGL said.
At the same time, IGL has said that it has not calculated financial implications of the recent Petroleum and Natural Gas Regulatory board (PNGRB) order to cut tariff on gas transportation. According to PNGRB order, IGL can charge Rs 38.58/mmBtu for transmission of gas against Rs 104.05/mmBtu that it charges. Also, CNG compression tariff was ordered to be Rs 2.75 a kg when IGL charges Rs 6.66. These rates are to be retrospectively applicable from April 1, 2008.
IGL has approached Delhi High Court contesting PNGRB order.
INDRAJIT BOSE TO HEAD IOC WEST BENGAL
KOLKATA: Mr Indrajit Bose took charge as the new head of IndianOil Corporation (IOC)West Bengal. He will be the Executive Director responsible for controlling and supervising the company’s operations here. A Chemical Engineer fromJadavpurUniversity, Mr Bose has served IOC since 1981. He joined as an officer in the Human Resource department. Mr Bose, has previously served IOC in Retails Sales, Technical Services, Human Resources and Engineering Services among other departments.
GAS SALE PACTS WITH NEW BUYERS SUBJECT TO CONDITIONS, SAYS RELIANCE
NEW DELHI: Reliance Industries Ltd (RIL) is no mood to swallow any more bitter pills from the Government.
The company has told the Petroleum Ministry that it will sign additional gas sale and purchase agreements (GSPAs) only if the Government informs the existing customers that they might face D6 gas supply cuts.
Sources said the company does not want to face any legal glitches from its existing customers due to supply cut. As it is, with the drop in D6 output, the customers have faced supply cuts. If new customers are added, the existing ones will face further cut.
In March, RIL was asked by the Petroleum Ministry to sign agreements with city gas distribution and power sector companies for pending allocations amounting to 4.045 million standard cubic meter a day (mscmd).
To this, the company responded that the quantity of gas under GSPAs already signed was higher than the availability, leading to shortfall in supplies.
Reliance has come in for severe criticism for not being able to check the falling output from the producing fields in D6 block since it hit a peak of 60 mscmd in end 2009.
The output is expected to further drop to 27.60 mscmd in 2012-13 (D1 and D3 fields to produce 20.20 mscmd and MA fields 7.40 mscmd).
In a letter dated April 30, RIL informed the Petroleum Ministry that due to reduced gas availability, supplies were currently being made in line with the order of sectoral priority specified by the Government.
This has resulted in cessation of supplies of petrochemical, sponge iron and refineries, in spite of the GSPAs signed based on allocations made by the Empowered Group of Ministers (EGoM).
From mid-September 2011, supplies to the city gas distribution sector customer, with whom GSPAs had been signed, have also had to cease. “Based on current availability, supplies to power sector customers have also been reduced on pro-rata basis. They are currently supplied only to the extent of around 56 per cent of the contracted quantities under the GSPA,” the company said.
RIL also said that the signing of GSPAs will not result in commencement of any supply to the customers in the city gas distribution sector. Only when the Ministry confirms that it has intimated to the existing customers, as was done while deciding the sectoral priorities, will the company go ahead and sign GSPAs with power sector customers, it said
But this will be on the basis that the contractor (RIL) will stand indemnified from and against claims, if any, made by the existing customers, which may arise because of implementing this directive, a source said.
RIL further said that this has nothing to do with its contentions on gas pricing.
MOODY’S SAYS RIL REVISING RESERVE ESTIMATES IN KG D6 IS CREDIT NEGATIVE
MUMBAI: Global credit rating agency Moody’s says Reliance Industries (RIL) revising its assessment of its proved natural gas reserves in KG D6 by 6.7% and its proved developed reserves by 36.2% is credit negative for the company as it confirms the technical difficulties that it faces in its exploration and production (E&P) business from declining production and consequently lower cash flows.
The agency said the 12.8 billion cubic meter reduction in proved reserves will reduce total cash flows from the project by approximately $1.7 billion, based on an existing gas price of $4.2 per million British thermal units ( BTU). The even greater decline of 38.8 billion cubic meters in proved developed reserves will require the company to make further investments, although at this stage we cannot estimate the amount of those additional investments.
The revisions follow nearly two years of declining production at its largest gas field, KG-D6, a deep-sea gas field in the Krishna-Godavari (KG) basin on the east coast ofIndia. Since reaching its peak of just over 60 million standard cubic meters per day (mmscmd) in March 2010, the production rate has declined to 35.7 mmscmd for the quarter ending March 2012, versus a target production level of 80 mmscmd, owing to greater than expected reservoir complexities and water ingress into the wells.
The revision has not yet prompted a write-down of the value of the exploration assets, which stood at approximately $5.4 billion as of March 2012, because RIL records the assets at cost less accumulated depletion, and the estimated fair market value of remaining proved reserves exceeds the current book value.
The revision of reserves has resulted in RIL’s reserve life declining significantly, especially for proved developed reserves (see exhibit below), based on last year’s rate of production. However, we expect the rate of production to decline further, which would help lengthen reserve life. We also expect RIL to get technical support from BP Plc (A2 stable), which in February 2011 acquired a 30% stake in the block and RIL’s other upstream assets inIndiafor $7.2 billion. However, given the extent of the decline, we do not expect the company to reach the target level of production in the next 12-18 months.
In addition, the declining gas production has prompted regulatory action against the company. On 6 May, the government ofIndiadisallowed the recovery of $1.24 billion in joint venture spending for shortfalls in gas production through March 2012. RIL maintains that disallowance of recovery contravenes its Production Sharing Contract (PSC) and has filed for arbitration. We expect arbitration to be a long process but not to have any meaningful impact on company’s cash flows for the next 12-18 months. However, the regulatory pressure on the company will continue to increase as long as the production levels continue to decline.
IRAN OIL AND THE INSURANCE FACTOR
Two recent developments seem to have given a glimmer of hope and relief to Indian tanker owners, who were worried over the European Union ban on providing insurance to Iranian oil cargo. One, reports about theUKpersuading EU to postpone by six months the insurance ban that is expected to take effect from July 1. Two, the public sector insurers’ consensus to provide a $50-million cover to Indian tankers carrying Iranian crude.
While the first development gives relief to Indian shipowners in terms of more time to work out alternative insurance cover, the second brightens their chances of getting government support. The EU sanction againstIranover its nuclear programme will prevent Europe-based Protection and Indemnity (P&I) Clubs from providing cover to ships carrying Iranian cargo from July 1. P&I Clubs provide insurance cover for third-party liabilities, which include a carrier’s liability to the owner of a cargo for its damage, the liability of a ship after a collision and environmental pollution.
Thirteen international Groups of P&I Clubs provide either insurance or reinsurance to about 90 per cent of the world’s fleet, including that ofIndia. Tankers cannot operate without third-party insurance as claims arising out of any accident or oil spill could be huge. Ever since EU announced its sanctions againstIranin January, (which will come into effect from July 1), the Asian countries importing oil fromIranhave been trying to work out alternative sources of insurance.Japanis considering a new law to insure its tankers. Chinese P&I Club or the government is expected to back its tankers.Iranhas its own insurance company.
Till recently,Iranhas beenIndia’s second largest supplier of crude afterSaudi Arabia, meeting about 11 per cent of its crude oil requirements. Following theUSand the EU sanctions, public sector oil companies have begun cutting their off-take fromIranand increasing their buys fromIraqand other suppliers. However, for reasons, commercial and strategic,Iranwill continue to be a major source for crude supplies toIndia, and this is why domestic shipping lines have sought government support to get insurance for their tankers carrying Iranian cargo.
Initially, Indian tanker owners asked for a sovereign guarantee for the safety of their vessel carrying Iranian crude. As this was not acceptable to the government, they approached public sector insurance companies. Indian National Ship-owners Association sought a limited cover of $50million for each tanker. Reports indicate that the insurers have agreed to this in principle. “We understand that the insurers have agreed to consider our request but we have yet to get any official communication,” said Mr S. Hajara, President of the Association, who is also the Chairman and Managing Director of Shipping Corporation ofIndia.
The General Insurance Corporation ofIndiaand its four subsidiaries are reportedly working out the marine cover, which needs the approval of the Insurance Development and Regulatory Authority. However, the trouble is that Indian insurers may find it difficult to get reinsurance, which means they will have to take the entire risk on their books. In other words, if there is a claim, Indian insurers have to pay from their pocket. In the case of International P&I Clubs, which offer cover up to $1 billion, claims in excess of $8 million are shared by the members of the pool.
Meanwhile, according to reports, some Indian companies are also looking for cover from P&I Clubs inAsia. A report by Platt, an energy industry publication, said an Indian company had approached the Iranian insurer — Kish Protection and Indemnity Club.
TheUK’s move to persuade other members in the EU to delay the sanction againstIran, apparently stems from concern over its impact on the oil price.Britain, according to diplomatic sources, fears that likely disruption in the flow of oil after the sanctions come into force will lead to spike in oil prices. True, oil prices could go up and it could further weaken the European economy already reeling under the economic crisis. Is that allUKis worried about?
A more serious impact of the EU sanction, which could be felt inLondonin the long run, will be on its marine insurance business.Londonis the birthplace of marine insurance. Of the 13 international groups of P&I Clubs, more than half are inLondon. In fact, except for the Japanese Club, most others are in the West. This is despite the fact that a large number of their clients are based outside ofEurope. Over the years, the pattern of global trade has changed. So has shipping.
Asiahas emerged as a hub of maritime activity. Of the top ten container ports in the world, eight are in Asia, of which five are inChina. Europe is virtually out of commercial shipbuilding, whileChina,JapanandSouth Koreacontrol it. There are many other examples.Iranexports a large part of its crude output to Asian countries.China,India,JapanandSouth Koreaare the major buyers. All these counties also have their own shipping fleet. AndIranhas started settling oil bills with Asian buyers partly in local currency.
Following the EU ban on insurance to Iranian cargo, there have been talks on the need for an Asian group of P&I Clubs.Chinahas its own P&I Club. There is aCeylonP&I Club.Iranhas its own insurer.Japanis already part of the 13-member global group. Emergence of an Asian group of P&I Clubs will wean away the large premiums thatUKand European players have so far been earning. This will not be a comfortable situation for theUK.
ForIndia, it is perhaps cheaper to source crude fromIranthan from other sources. So, it is in the country’s best interests to source it economically. If insurance is the stumbling block, the government should take a cue fromJapanorChinaand step in.
OIL LOWER IN ASIAN TRADE ON EUROZONE WORRIES
SINGAPORE: Oil extended losses in Asian trade Tuesday, as the continued political stalemate inGreeceas well as banking problems inItalyandSpaindrove new fears about the strength of the eurozone.
New York’s main contract, West Texas Intermediate (WTI) crude for delivery in June was down 47 cents to $94.31 per barrel while Brent North Sea crude for June shed 57 cents to $111.00 in morning trade.
On Monday, WTI crude hit its lowest intra-day level since December 19 at $93.65, while Brent crude also hit a four-month low of $110.04 before both contracts rebounded.
“The new twist in the eurozone crisis has pushed down the commodity markets with oil among the biggest casualties,” said Justin Harper, market strategist at IG Markets Singapore.
“There’s plenty more downside risk from the fears of contagion for other weak eurozone economies, namelySpainandItaly,” he said in a commentary.
New elections inGreecenow look inevitable as the country’s political parties on Monday again failed to form a government that would implement the painful European Union-International Monetary Fund bailout terms.
The country has been in a political deadlock since May 6 elections when an anti-austerity backlash stripped the parliamentary majority of parties that backed the bailout programme and its debt-cutting measures.
Investor worries about the financial future of the eurozone was also exacerbated by an overnight rise in Spanish bond yields as well as a credit rating downgrade of 26 Italian banks by rating agency Moody’s.
Crude prices are also under pressure after major producerSaudi Arabiaindicated that global crude stocks were likely to increase ahead of an anticipated seasonal rebound in demand starting from July.
“With supplies more than ample and negative cues in the global economy sapping demand, prices look set to remain under pressure,” said Simon Denham, the chief executive of Capital Spreads.