Mumbai – The US and Canada are countries rich in petroleum, are politically and economically stable and allow foreign ownership of minerals. The oil industry in both countries is currently in financial distress due to the fall in prices.
Enter India. It can buy petroleum reserves, lock-in a low long term price, and preserve North American jobs. And unlike China’s state-owned companies which have faced restrictions in acquiring such assets, India is not a geopolitical or commercial rival to the US. Instead, it is a more familiar and welcome investor in those parts.
What are on offer are the world’s largest producer of petroleum – the US – and the fourth-largest producer, i.e. Canada. A large part of the US production comes from oil shale, while Canada’s production is from oil sands. Both these resources are expensive compared to extraction from conventional oil reserves.
Since mid-2014, when oil prices began to drop – now 70% below peak – companies producing oil from these reserves have been hit hard. More than 50 US companies have filed for bankruptcy since early 2015 because of falling cash flows and high debt. Canadian oil firms are also feeling the heat, and bankruptcy filings are starting there too. Stock prices are down over 75% from 2014 levels – making them prime acquisition targets for India to consider.
What’s available is high value at low cost. Canada’s Penn West Petroleum, with 300 million barrels of petroleum reserves and an annual production of ~4 million tons of oil, is neck-deep in debt – $1.63 billion even after asset sales. But its market value is attractive at $450 million – just 15% of its 2014 value.
The US-based Chesapeake Energy, a pioneer in shale gas extraction, is similarly alluring. It has a high debt of $9.5 billion and a market value of $2.45 billion – just 15% of its 2014 value. But Chesapeake’s production of ~ 34 million tons of oil and gas during 2015 is 20% of India’s annual oil needs (190 million tonnes) on which Delhi has been spending $12 billion a month to import.
Many of the failing US and Canadian companies can be financially viable if their debt level can be reduced by a capital infusion, for example by issuing new shares to an investor for cash. And if India’s public sector invests in them, it will result in secure long-term supplies, and also protect North American jobs which are highly paid and highly technical – skills and knowledge that Indian companies can use.
In theory, it can be done. Indian PSUs have over the past 15 years acquired more than 40 assets abroad. But these are largely in developing countries, and some of these are in places affected by civil war or economic crisis. Their experience with acquisitions in developed countries is limited. Any acquisition will require a deep study of those countries’ multiple and complex regulatory systems of environment, tax and securities.
There is also the US and Canadian issue of acquisitions by public sector firms – particularly Chinese firms. This became a crisis when in 2005, China’s state owned CNOOC made an unsolicited bid for oil explorer Unocal. It ran into strong opposition from the US Congress, which saw it as a national security and fair trade issue, and the sale was stopped. CNOOC subsequently bid for Nexen, an oil company operating in Canada’s oil sands. The Canadian government permitted the acquisition but also revised takeover guidelines, setting stringent conditions for foreign state owned entities acquiring a Canadian asset.
Both the countries now have additional guidelines in place to deal with takeovers of companies or assets by foreign government-owned companies. The Investment Canada Act, 1985 governs such transactions in Canada while in the US, the Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons govern these transactions. Both the laws define “control” as “ownership of a majority voting interest.” Such transactions are subject to a review, assessing whether the purchase benefits the country, whether it is free from political influence and whether it is a national security risk.
Indian companies will be less likely to face the same resistance as their Chinese counterparts. Instead, they will be welcome, helping to deepen the India-US bilateral, and to tie up Indian public sector into the US corporate interest – especially as Delhi has plans to dilute its stakes in its public sector corporations. With access to New Delhi through its public sector, the US will see this as a way to learn its ways from the inside and thereby enhance the bilateral, which is currently stuck in the tortuous negotiations over the India-US nuclear deal.
Indian companies already have been operating in the US for a while now. Reliance, which is privately held, is a part of two shale gas-producing joint ventures. Indian Oil, Oil India and Gail, which are all state- owned, have 10%-20% stakes in two very small shale oil ventures.
To avoid the new excess scrutiny and the possibility of amplified missteps, India should consider buying into such North American companies, but in small, digestible bites. A stake of less than 50% will not be seen as controlling, nor will it come in for additional examination. It will enable Indian companies to learn about developed country systems, politics, laws and negotiations. US Environmental laws are stringent: the experience of BP in the Gulf of Mexico and of Volkswagen in case of its emissions scandal shows that a regulatory lapse in the US can be disastrously expensive. Therefore, the stake should be bought as an investor, not an operator, keeping risk to zero while providing a hedge against a future rise in oil prices.
India has traditionally relied on West Asia for over 65% of its oil imports, a region increasingly vulnerable to political unrest. It now has a chance to diversify its supply. This opportunity to de-risk India’s energy imports must be seriously considered.
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