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Interview

with Ajay Khandelwal, CEO, Jubilant Energy

18.02.2011 / Energyboardroom

You are part of the Jubilant Bhartia Group, which is active, in India, in everything from pharmaceuticals to pizza. What is the role of Jubilant Energy within the larger Group, and how do you build synergies amongst such diversified businesses?

As you say, the Jubilant Bhartia Group is a big group; but each business within Bhartia is an independent business. Of course, there are correlations in terms of these businesses learning from each other. But in terms of financials, management, operations, etc.—there are zero correlations amongst our divisions. All of these businesses are independently governed. The only thing that is truly shared across the Group is our sense of corporate social responsibility, and our standard corporate governance practices. Also, as I mentioned, we share our experiences with each other so that each faction may learn from the others.

Why did the Group choose to invest in a sector that is so technologically and capitally intensive, when it had so many other choices?

There is a silent revolution going on in the E&P industry in India. E&P markets opened up in India only in the 90s, first through the pre-NELP programs, and then through the NELP. Even today, there is significant unexploited potential in this country. There are areas where we have not even done basic exploration activities. So, considering these facts, the Group feels that there is great opportunity in this market. We know that the sector requires high technology, and considerable investment, but the Group is prepared for that.

In many aspects, the E&P industry strongly resembles the pharmaceutical industry. In pharma, you have a very long process of drug discovery, which is akin to the exploration phase in Oil and Gas. Then, you have a process of drug testing—similar to the appraisal phase in O&G. Then, in both industries, you go into the production stage. In E&P, we work on 7 to 10 different exploration prospects/blocks and the success rate of 30-40% are likely to provide very good returns to shareholders.. Both of these businesses require a lot of industrial expertise, a wealth of research, and a technologically focused mind frame.

Jubilant Energy has invested more than $300 million since 1995; you currently have one small field producing, but more are in the “pipeline,” to borrow the pharma industry term. What are the main achievements you have enjoyed over the last 15 years, given these large investments?

The real benefits of the exploration potentials awarded by NELP are just now coming to market. It is not uncommon, in any part of the world, for there to be a time lapse—say 7, 8, 10 years—between the start of exploration and the start of production. Our company’s first NELP participation was in 2003, and production in that block is scheduled to start in2013; so it will take 10 years from acquisition to the start of production work in that case. Going forward, we intend to reduce that 10-year cycle to a shorter timeframe. Therefore, the blocks that Jubilant Energy has received in the 8th round of NELP—2 blocks—we intend to get the work done on those blocks much faster.

Jubilant Energy already owns approximately 10 blocks, including blocks in Australia. What are your expectations for the ninth round of NELP?

Our main focus is to definitely acquire further blocks. We do have blocks in Australia, but the key focus of Jubilant Energy is in India rather than the international market. The simple reason is the huge unexploited potential in this country. Our strategy for the next round of NELP is certainly to acquire more blocks. For NELP IX blocks once we complete our technical review, we will look at appropriate bidding strategy for some of those blocks.

What changes have you see happening in the Indian Oil & Gas market of late, especially considering the ninth round of NELP?

I would say that there have been some significant changes associated with the NELP IX round—changes initiated by the ministry and the DGH to really make NELP IX more investor-friendly than previous rounds. I think it is a learning process that everyone is going through, and we are just now putting truly friendly policies into place. I am really very excited about NELP IX.

Another thing that has changed in the market is that there has been lots of clarity in gas pricing and gas marketing. There used to be a bit of an ambiguity, but I think that the Ministry has really made some very clear announcements on this front.

The single biggest thing is that the production-sharing agreement between the contractors is a supreme contract. Under the agreement, the contractors are allowed to sell, or market, the gas at arm’s length market basis. So if the contractors do an arm’s-length discovery process, the only approval that you have to receive from the Ministry is once you have discovered the price on arm’s length basis.

I think these clarities from the ministry are a very, very positive sign.

Partnerships are a core aspect of this business, especially for a company that is not historically present as an operator. What assets does Jubilant bring to a partnership? How have you portrayed the company as a partner of choice for the companies that you have already partnered with?

In the E&P business, there are 3 basics skills that are required. First is regulatory expertise in the market. Second is a geological knowledge base of the sedimentary basins. Third is the technical expertise needed to undertake the work—whether it’s exploration, appraisal, development or production or devel.

Jubilant Energy does have significant regulatory expertise of Indian market as we are operating in this market for last 13 years. We have extensive geological knowledge base of Indian sedimentary basins as we are present in the four or five most prolific sedimentary basins in the country. Lastly, over time, Jubilant has structured a fairly good team here to deliver on the work program aspects. So if you look at the private sector players in India, we are among the top three or four with the full spectrum of expertise required. That’s how we have positioned ourselves for our partners.

The NELP policy has been very successful, and has thus far awarded more than 200 blocks around India. But, when we look at the players who got these blocks—even after the liberalization of the market—we see that the awards have been concentrated in the hands of just a few: usually state-owned players or the major private companies. Do you feel that the NELP policy offers the same opportunities to all participants independent of their size? And do you consider yourself to be a junior, or a major player?

With any market that undergoes a regulatory transformation, it takes time for everything to fall into its intended place. It cannot occur overnight. An industry like ours, that is highly technical and capital-intensive, is relatively slow moving compared to others. The whole idea and conception of the highly transparent mechanism of NELP is great, and very successful—but there are always limitations to any such mechanism. We have gone through multiple rounds of regulatory framework, and there has to be a transition where the market becomes even more investor-friendly, such as if the Open Acreage Licensing Policy gets enacted. So, better times to come. That’s the reason I took over this role.

As for our size: Jubilant Energy has been pretty active in NELP rounds. Yes, there are bigger players like Reliance and Cairn India. But a single field changed Cairn India’s prospects; same thing with Reliance. So we may be a junior player today, but the intention is to do the right kind of exploration work, and to make good use of our shareholder’s money, and grow.

Another trend that we have seen in the Indian O&G industry, as a result of liberalization, is the internationalization of the local market—be it through international players investing more and more in India, or Indian players such as Jubilant starting to internationalize themselves. You said that your main focus is on the Indian upstream sector, but still, you have bought assets in other countries. What are the main guidelines of your internationalization process?

Our international acquisition was purely on very opportunistic and strategic basis. Our key focus is underexploited sedimentary basins of India. We see limited benefit for us to go into International – market where we have some limitation in understanding of the regulatory framework, and I have to rely on someone else for my understanding of sedimentary basins, etc. So our objective in going to Australia was only to create that synergy. Going forward, Jubilant will only look into the international market on a very, very, opportunistic basis. We have sufficient potential here, which we would like to capitalize upon.

Another aspect of internationalization is financial. The recent listing of Jubilant Energy on the AIM market, raising 85$ million, was the third largest IPO of the year on the AIM. What was your strategy to attract such high interest from the international investor community?

There were several reasons behind investor interest in our IPO. The first was the profile of India as a country, and the opportunities a company like ours has here. There are very few nations in the world, especially from an E&P perspective, that have sufficient in-house demand for everything you explore and produce in the country. That was a very strong selling point..

The second selling point was the significant underexploitation of the Indian sedimentary basins. If you speak to the DGH, they will tell that 70-75% of the Indian sedimentary basins are underexploited.

Another very strong theme that investors were interested in was that India is just emerging as an international E&P presence.

Jubilant is one of the very few E&P plays in the private sector in India. Yes, you have many government companies that are involved in E&P, but if you look into the private sector, you have Reliance and Cairn at the top, and then there is a huge vacuum of pure, independent E&P plays. Our objective was to show Jubilant, on the London market, as a model of such plays in India. A final aspect was Jubilant’s reputation in India’s capital market. Jubilant Group has always created significant shareholder value in this market. Our objective was to replicate the same model in the London market.

So there were four or five things that we demonstrated to investors that were really important, and many investors really liked what we had to offer. I would say that, today, there are still some investors that are watching us from the sidelines, and we have to demonstrate whatever we promised at the time of the IPO, going forward. In the future, we will see more interest not only in our company, but also in other E&P plays in this part of the world.

How are you planning to invest this fresh $85 million and transform it into solid profits for your new investors?

I would like to first mention that not a single penny of this $85Mn is being taken away by promoters. The entire sum will go into the business.

There are three or four different things that we will be doing with this money. We will be conducting exploration, appraisal, and development. This money will be spread over exploration of our blocks in Northeast India, appraisal of our blocks in Northeast India and KG, and a small portion will go towards the development of KG-West.

As the company starts to internationalize, image and brand recognition becomes increasingly important—especially since you are part of a larger group, with so many different identities. How would you frame Jubilant Energy’s image and branding strategy in the energy market?

We see a huge potential in Indian E&P play today, and Jubilant Energy wants to become a partner of choice for international players, or international investors, who want to go into the Indian E&P market.

What are your expectations and ambitions for the company for the next 3-5 years?

I come from a philosophy that says that it is better to create a beautiful company than a big company. Our intention will definitely be to focus on a lot of exploration in the next 3-5 years, with a clear intention that we will make this company a self-funding exploration company within that timeframe. We want our cash flow from production to be sufficient enough to meet our exploration goals.

What’s your final message for the readers of Oil and Gas Financial Journal, some of whom may potentially become your future partners?

As I said, there are very few pure E&P plays in India today, especially in the private sector. In a country where 80% of crude is imported, in a country where the demand is just going through the ceiling—there are few opportunities for you to partner. Jubilant Group is rated amongst the best companies in India in terms of corporate governance, and corporate social responsibility. We want to offer these same benefits to potential partners and investors.

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