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Rediff.com  » Business » Energy security: India's future is in the private sector

Energy security: India's future is in the private sector

By T N Ninan
January 28, 2006 14:23 IST
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On Thursday morning (Republic Day), the readers of many newspapers saw a large advertisement in the middle of the front page, with the picture of a pipeline leading out from that visual to other pages inside the newspaper.

The imaginative ad belonged to the Oil and Natural Gas Corporation, India's energy superstar and the country's most profitable company - with net profits last year that were twice that of the No. 2.

As a "national champion", ONGC is entitled to burnish its public image on a national day, but the truth is that India's future consumption of oil and gas depends more on new private-sector companies, not so much on ONGC. Trends in oil and gas discovery make clear why.

In the last five years, ONGC has drilled over 650 wells, spending Rs 10,800 crore (Rs 108 billion). Yet, its oil reserves (net of production) have shown virtually no increase. So it is no surprise that ONGC has forecast a substantial drop in production when making projections for the future. This giant seems to be running out of steam.

That would be understandable if India had little fresh oil or gas to discover - as has sometimes been argued. But that story comes unstuck once you look at the performance of the new private firms, who are babes in the woods compared to ONGC.

These firms have drilled barely 150 wells in the past five years (less than a quarter of ONGC's total), and spent Rs 5,000 crore (Rs 50 billion) - less than half of what ONGC has spent.

But in doing so, they have got fresh oil and gas reserves that are much more than what ONGC has done in the same period. Indeed, in a short period of time since setting up shop, these private firms have accumulated reserves that total up to half of what ONGC has done after half a century.

And, these private firms account for almost all the increase in India's net reserves during these five years.

That last statement is unfair to ONGC because it is producing oil and gas (which draws down its reserves) while the private firms are still to start production.

However, the picture gets worse for ONGC if you look at its performance in what are called the new exploration blocks that were offered to the highest bidders, Indian and foreign, private and state-owned.

Here, despite bidding for substantial acreage, ONGC has discovered precisely nothing, while the private firms have struck gold and seen their share prices soar.

No matter which way you look at it, it is hard to resist arguing that ONGC has been bested by private players like Reliance and Cairn.

The conclusion is tempting: what has happened in aviation, telecom and other fields (like insurance) that have been opened up to the private sector, will happen in oil and gas. The erstwhile public sector monopoly will lose ground, and one or two new private players will eventually become the kings of the show.

This has already happened in oil refining, where Reliance is marching ahead of Indian Oil, which is decades older in the game.

Once Reliance rolls out its marketing network, its integrated operations from exploration to production, refining and marketing will beat every segmented public sector rival in terms of competitiveness.

At that stage, the fierce debate about privatising these public sector stars will lose its sharpness, just as privatising Bharat Sanchar Nigam has ceased to be a matter of importance for the telecom industry.

I can understand the petroleum minister's frustration with ONGC, and his public spat with ONGC's chairman, the redoubtable Subir Raha. The minister believes passionately in the public sector, but on his own turf it is the private sector that shows superior performance.

Mr Raha, even by the minister's account, is an able manager who has tried to set things right at ONGC, and he must have lost count of the awards that have been showered on him as a result.

But what of the future? The answer, it would seem, is that it is the private sector that will provide India its energy security.
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T N Ninan
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