with Kenneth Pereira, Managing Director, Interlink Petroleum
You have been Managing Director of Interlink for the past two years. What was your mission when you arrived, and in what direction did you want to take the company?
Firstly, there was a financial mission, because the Interlink shareholders had been neglected for a very long time by the previous management of the Company. The performance of the company was not what the shareholders would have desired; however, they remained very loyal and had stuck with the company for a long time. The first priority was to give them some kind of renewed hope in the company in terms of financial performance and for them to see that something was happening: to put in place a management team that had some credibility, and had a track record of performance.
From a general business objective, Interlink provided a great platform to build a company: it was already a public company , and it had assets which were awarded pre-NELP, so the terms were a little bit more favourable than you can get these days. We could not ask for more: a financial platform, an asset base, so it was just a matter of leveraging these to create something that would be value-enhancing for everybody.
So you put together a new management team when you arrived?
Our Director, Vijay Misra and myself worked from an early stage to develop this opportunity. After meeting the previous shareholders, we put our heads together and fdecided on a new management team. We knew Gopal Srinivasan from a previous project and Vijay and Gopal were old friends who had very positive experiences together so together with the agreement of our new major shareholders, Jit Sun Investments of Singapore, Gopal came on board as our CFO.
As a small company at the tim Interlink’s balance sheet was nothing to write home about, so to attract people of this level of talent and experience, we had to rely on a level of trust in each other; that we were not going to let each other down. We had to bring in a few people such as Gopal and Dr. Ambrose G Corray (COO) an old friend of mine from Schlumberger. We needed to bring on board people who would not look at the balance sheet and evaluate whether this company would pay the salaries: they had had to look at something a bit more detailed than that.
Finally, Vijay used to work for Mr. BC Bora, ex-chairman of ONGC, who became a very critical component of the whole plan. Mr. Bora was used to managing companies of a certain scale, so for him to agree to become our chairman was also a huge coup.Vijay played a big role in making that happen.
And so we got the core team together. Our shareholders are ultimately from Jit Sun Investments of Singapore who also run Ezra Holdings, S a reputable global service provider, and they backed Interlink financially.
The key beginnings of the company were all relationship based at the start: what we saw in Interlink was an unpolished jewel. We think it was a great day when we closed the deal..
What kind of development timeframe did you give yourself initially?
Five years, with a very simple objective of doubling the market cap of the company every year. It was very simple so everybody could remember it! We started our management of the company with Interlink’s market cap at $6 million USD.
Interlink has two fields in Gujarat. Location is important, especially in a country as large as India. How would you say Gujarat is as a base for the operational side of the business?
About the assets themselves: firstly, it was very important when we looked at the whole opportunity from a macro perspective that these were onshore assets, because to raise capital to fund an offshore development would have been a little more challenging.
The infrastructure in Gujarat is nothing short of excellent, providing the necessary tools to get things done. There is a huge base of service providers in the state, as well as a very comfortable working i environment. Doing the work there has been the easiest part of the whole task. The environment is nice: you stay in a great hotel and you drive 40km to the oil field every day: you cannot really complain.
And you had a discovery recently as well, back in October 2010. It was an oil discovery but in a region where you were expecting to find gas. How did that affect your business strategy?
I would not say it was a shock for us. The previous year we had cut 3D seismic right across both our fields, Baola and Modhera, and our internal analysis was that we should expect to find some oil. It was heavy oil, as expected, so the only inconsistency was that it differed from the original classification of the field because when the original drilling was done in the early 1980s, they reported gas. One of these fields actually produced gas for Interlink for three years from 2001-2004, so gas was always known to exist..
What kind of production horizon are you looking at in order to make sure the shareholders are content with the company, as well as for your own satisfaction?
We are awaiting some approvals from the DGH, to do an extended well test on the field, to check the deliverability of the oil: what exactly we will be getting and for how long. That will start in this financial year. The planning is ongoing, and once we get the results from the extended well test, we will confirm all the reservoir parameters and then see what we need in terms of facilities to optimize production.
We are starting in April 2011 and we know what to expect from the samples from the original well test, so we are set up for that.
These assets also came with the gas sales and oil sales agreements in place. Most critical components were set up for us: someone just needed to put in place a reasonable work programme for these assets and then implement the project properly.
Your company has quite an international scope, from its shareholder base to the fact that you are based in Kuala Lumpur. Does that have any implications for the company in terms of its development?
The immediate objectives are to make sure that we harvest the potential of what we already have in India. That is not to say that if there is an appropriate opportunity we will not participate, and of course we are always on the lookout for such opportunities. They could come from abroad or from India. With the board members that we have there will always be international opportunities knocking on the door, so we will consider both, but right now the important thing is to give some return on the capital that was spent on Baola, for example, and on the money that is about to be spent on Modhera.
Interlink has a very lean team: we have less than 10 people in the organisation, and we like to keep it that way. Our strategy is all about outsourcing and multi-tasking, working with a small core team that we trust implicitly, The smallness of the company allows communication channels to be simple and straightforward so location of the team members is not critical. We know our limitations and we remember our objectives. We are simply unable to look at fifteen different opportunities at the same time. We have ve to make sure Modhera and Baola are well done, and squeeze every bit of juice out of them. We have to make sure they are delivered as final saleable products. Focus is very important when you are a small company.
I am interested in your perspective on the Indian market as an independent player. We understand that there is a move towards open acreage in the pipeline, we are not sure when it is going to happen, but do you think that this will be a positive step for companies like Interlink?
Open acreage is advantageous because it will allow companies to set their own work programme, rather than have it dictated to them by the market. As it currently stands, the NELP bidding process leads to unrealistic work programmes, and this is one of the reasons we feel that the major players internationally have not been present in India as aggressively as they might have been.
As well as addressing this issue, the government also needs to consider the current tax regime and its impact on smaller players. Today there is no incentive for an Indian company to go and buy acreage outside the country from a tax perspective. As a result, companies that want to bid on acreage in India but have an international perspective are far more likely to list in Singapore than in Mumbai.
The intentions of the government have always been good. With the first round of NELP bidding, their aim was to bring private players in. Such initiatives allowed i Interlink to be formed: it was one of the original companies given fields. The companies that are major independent players in India today are in their position because they were given blocks that allowed them to start their business with a decent cash flow.
However, somewhere along the way, the bidding parameters that have been set have left the industry feeling incredibly disillusioned. Today, only large players can feasibly be part of the bidding process.
The bidding process does not incentivize you to be smart. You do two wells, if they are dry, then you are forced to pay for two wells that you have committed to drill. That does not make sense and is a tremendous waste of resources, particularly for a small company. The way the formulations are done is that companies are penalised for the work that they do not do. So within a bided work program all kind of methods are used to minimize exposure.
Interlink won a block in the NELP VII round. We did not finally sign the PSC. We were the only company out of about 20 companies: 19 signed and only the government owned and very large players have started the work from NELP VII. We are now onto the ninth NELP round, and NELP VII smaller private companies are still looking at different ways to start partnerships and get people to share the risk.
There is a mismatch – small blocks are supposed to be for small companies, but then you have the bigger players bidding on the small blocks because they are trying to get operating experience. They come with their inflated budgets, and the small players get squeezed out, unless they try to match it dollar for dollar.
Where does Interlink fit into this?
We will demonstrate that we can get our current fields going and then we will look for new opportunities. it will not be a slow ramp up in value but a step change in terms of opportunity. Once these fields are producing, particularly the first one, then I think the shareholders will be comfortable with a step change in the direction of the company.
If we came back to see you in ten years time, what would you like to have achieved?
It would be nice if Interlink has got a name that makes the people who have backed it feel proud. That is the only thing I would like to say. You have a certain obligation to do things right and do things well, and I hope we do things that make our shareholders feel good about the company. If you work honestly and deliver on your promises, you can walk into a room and not be afraid to face anyone.