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Interview

with Ajay Arora, Partner & National Oil & Gas Leader, Ernst & Young India

21.03.2011 / Energyboardroom

Are the Indian oil & gas companies still looking at acquiring overseas assets? If yes, then what category of assets are they considering?

There has been significant rise in the intensity of outbound acquisitions from India. Typically, the Indian players are eyeing production / development assets in diverse geographies like Africa, Latin America, and the CIS region. Indian players – NOCs and independents – are also evaluating unconventional oil and gas resources like shale gas and oil sands evidenced by Reliance Industries Limited’s (RIL) shale gas acquisitions in the US.

What would you describe as the main challenges that the Indian market is facing right now?

The biggest challenge has been that this sector is evolving with every passing year. Five years ago, one of the biggest demands of the industry was having a level playing field: the need for a regulatory policy and framework. Over the last few years we have seen an active role being played by the Government of India, and the issues have been addressed to a large extent.

The second challenge is capital. Many companies today are looking for capital to meet the investment requirements for achieving these goals, in terms of expansion of current businesses in oil and gas, setting up new pipelines and refineries, and looking at acquisitions overseas.

The move from NELP to OALP was supposed to happen this year, but eventually it got pushed back and now it looks like it will probably happen in 2012. When this legislation does go through, how do you expect it to impact the market here?

The transition from New Exploration Licensing Policy (NELP) to an Open Acreage Licensing Policy (OALP) has been talked about for the last couple of years. One of the key benefits of the proposed system is that if you want to look at a group of potential assets, you can tap into a central database and examine your options, which does not happen at the present time due to having to meet bidding deadlines. It is an ongoing process, but we expect that this new policy will increase the current levels of interest in the country from both the international majors and E&P independents.

The key to this is setting up a world-class database of information. The quality of data is critical to driving successful interest in the E&P space. As long as we can put that together and have a successful transfer process, we are sure this move will benefit the E&P sector going forward.

Ernst & Young India has gone to considerable lengths to highlight to the industry the importance of gas as a key growth opportunity: your latest paper predicts that demand in India for gas will grow threefold in the next decade. What will be the biggest hurdles standing in the way of achieving a successful gas industry here?

The most critical factor is the pricing of gas. Transmission and infrastructure will follow. Since most of the development that will happen will be in deepwater offshore areas, which requires high investments and funding; clarity on the basis of pricing will boost investor confidence and facilitate channelization of capital.

Globally, we have seen that as long as there is availability of supply and demand from consumers, which is the case in India, infrastructure will inevitably improve to meet the industry’s demands.

Do you think there is a drive and consensus of public opinion in India that the move needs to be made from oil to gas

Consumption of oil and gas in India is expected to more than double from 192 million tons of oil equivalent (MTOE) in FY09 to 677 MTOE in FY31. Out of this, share of natural gas is expected to triple, while that of crude oil is expected to double. The incremental demand for natural gas will have to be met through a source mix of liquefied natural gas (LNG) and production from domestic blocks.

Moreover, natural gas is cleaner source of energy, which also helps address the concerns of environmental impact. Due these factors, the Government has been promoting development of natural gas transmission and city gas distribution infrastructure in the country. This is expected to contribute towards augmenting demand for natural gas in the country.

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