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Interview

with Vikram Mehta, Chairman, Shell India

14.11.2010 / Energyboardroom

Shell is one of the largest and most diversified foreign companies active in the Indian energy industry, having invested more than one billion dollars in the country thus far. However, you are not as present in the Indian upstream sector as you are in the rest of the value chain. Do you plan on becoming more involved in upstream, especially given the upcoming 9th round of the NELP?

Shell’s E&P strategy in India can be summarized in three parts. First, we have a positive view of the hydrocarbon potential in India. Second, we evaluate this potential against the opportunities that are available to Shell elsewhere in the world. Third, if we take the decision not to invest in Indian exploration, it is not a reflection of a purposeful strategic decision not to invest in India—it is simply a decision based on the relative geological attractiveness of the various opportunities that are available to us, at any particular point in time, throughout the world.

So that’s really our strategy; as I said, the strategy is a positive one, and it does not dictate that we will not invest in upstream here. It’s simply a decision that we take based on all the other opportunities that are available globally. If you look at the earlier rounds of the NELP, we did not invest, because at the time, we had invested our financial resources in other areas, such as Russia. Now that the 9th round is approaching, we will certainly evaluate the blocks that are being offered—and we will consider the data with an open mind, in the hope that we will actually identify prospective opportunities. And if those opportunities rank highly against other opportunities, then we will offer our bid.

If you look at the top ten major O&G companies in the world, we see that none of them—including Shell—are investing in India’s upstream sector, whereas many juniors are investing. You have said that India’s low recovery rate is a product of institutional uncertainties; it is a product of the relationship between companies and the government; and it is a product of the companies’ own governance. Can you elaborate on this statement?

Regarding the question of why the large majors have not invested here: I cannot speak for the other companies, but for Shell, the reason we have not invested is the reason I have just given—Shell has many opportunities the world over, and in recent times other investments have appeared more lucrative. Perhaps, the reason why a small independent company invests in India is because their opportunities are much more limited; they do not have the financial or the human resources to make, say, a multi-billion dollar investment in Sakhalin, or in deep water in the Gulf of Mexico. So there is a limit to the opportunities that are feasible for a smaller company, whereas those limits are much wider for a larger company. It’s quite possible that this explanation is applicable to the restricted Indian investment of the other majors, as well.

To consider the second question: we ask, are we as India—we as the Indian petroleum sector, not referring to Shell individually, or the international companies, but the industry in its entirety—are we harnessing fully the domestic hydrocarbon resources available in this country? Those resources are dependent, in effect, on three factors: first, the geology, and the probability that the geology contains hydrocarbons; second, the question of whether the industry players, public or private, will be able to locate those hydrocarbons; and the third factor is, once we’ve located those hydrocarbons, whether we can bring them to the surface and develop them in a commercially beneficial manner—whether we can we fully realize the potential of the hydrocarbons that we have located. Put together, these factors determine the hydrocarbon potential of any country.

So, the point that I am making, in the statement that you have referenced, is that India has hydrocarbons, and we have located them, but are we bringing them to the surface? Are we developing them in the most efficient way possible? If the recovery rate of hydrocarbons discovered in the country is only 28%, as opposed to, perhaps, 35-40% in other regions, then the difference between the average recovery rate in other countries and the recovery rate in India represents the gap between potential and actual. And that gap is what we need to narrow.

While you are not particularly active in upstream, Shell nonetheless has a diverse portfolio in India: you are active in retail, lubricants, LNG regasification, you have a unique technological center in Bangalore, and etc. What have been Shell’s main growth drivers in this country, and how have you managed to integrate the various areas of your business?

There are several ways to answer this question. One has to do with the organizational structure of Shell. Another is the sequence of our investments. Taking the latter notion first: the investments that we have made in India have happened over the last 15 years. It isn’t as if we invested in all of our five or six different businesses at once—our pattern of investment has been in response to changes in the government’s reform process over time. As the government liberalized different segments of the petroleum industry, we invested in response to that change.
The very first set of changes that the government made was in 1994; those focused only on the specialized petroleum products sector. So lubricants, for example, were liberalized—and that’s when Shell set up our first company, and I was the first employee of Shell in India. I had worked for Shell elsewhere, but I came here to set up our Indian lubricants company in 1994. Then the government liberalized LPG, so we set up an LPG company. And so on—as the liberalization of the petroleum sector broadened and deepened, Shell responded to each and every change that the government made. The latest liberalization was that of main fuels, petroleum and diesel. And the government imposed a condition on the grant of a license: they said that only those companies that have invested half a billion dollars in specific sectors—upstream, refining, LNG, or pipelines—will be granted a license to market petrol and diesel. There are several locals who meet those standards, but the only international company that has an interest in marketing, and also meets this condition, is Shell. Shell now has the license, and we have a marketing network in the South; not a very large network, but it is growing. So, once again, our investments here happened in stages, over the course of our 15 years of activity in India. And in between, we had an upstream presence—but we sold the upstream presence.

The challenge has always been the question of how to keep our businesses integrated. One way that we have successfully managed to do it is that I have actually been there from the very first year, and I have personally had a critical role in creating all of these companies. I’ve seen it through from the beginning, and I am the chairman of all of our branches. Shell has an organizational structure where we have chief executives or general managers for each division, but I am there as a single person who keeps it all together.

What were the main challenges that you faced in establishing these companies from scratch?

There was a multitude of challenges. The first is not so much a challenge as it a requirement: you need to be able to anticipate the change. You need to be able to have enough understanding of the dynamics of the government’s decision-making and the government’s policy, to anticipate the direction of policy. And once you’ve anticipated the direction of policy, you need to have enough of a relationship with your own internal bureaucracy and internal corporate leadership to be able to position the company to respond to the change as and when it happens. You can’t react to a change—you should anticipate the change, you should position yourself ahead of the change, you should get your resources aligned (whether they be human resources or money), you should get all your internal approvals secured, so that when the change happens, you are able to move faster than the competition. This, again, is not a challenge—it’s a requirement. Otherwise you will not be successful.

The second point—and this is a challenge—is that in India, you are dealing with many different layers of government: you are not only dealing with the central government, you dealing with the state government, and the local municipal government. And these governmental levels are not always aligned. The central government—comprised of Secretary of Petroleum & Natural Gas Sunderashan, Minister of Petroleum and Natural Gas Murli Deora, and others—determines the executive policy. But some aspects of petroleum are handled not only by the central government, but also by the state government. Consider the LNG terminal that Shell built in Hazira, Gujarat: the policy to allow a foreign direct investment into LNG is a policy set by the central government. But the decision to allow Shell to invest in Hazira is a state government decision—and if you don’t get their clearance, you cannot go ahead. The decision to allow Shell to use the pipeline network of Gujarat is a decision taken by the Gujarat Petroleum Company, a local state company. The decision to award a license for setting up a petrol pump happens centrally, in Delhi—but the decision to actually allow us to construct one in Madras, or Chennai, or Bangalore, etc., is dependent not just on the state government of Andhra Pradesh, of Tamil Nadu, or what have you: it is also dependent on the local municipal authorities responsible for land allocation in the given area.

So you can see that there are these multiple layers of governance. And any company that deals with so many different layers of authority faces a significant challenge. You have to have the right resources, and relationships, to manage.

A third challenge is that you have to ensure that all your staff, at every level—the junior staff, the middle level staff, the senior staff—work as one team, in accordance with one set of principles—although they are spread over an entire sub-continent. They must understand the overall Shell goal, and the overall Shell ideology, in India. That’s a challenge, because it requires the leadership to be constantly communicating, face to face, with about 2,500-3,000 full-time employees—not to mention our array of full-time contractors, and all of the people who work for our outsourcing partners (like IBM) on the Shell account. Shell is a very diversified company, with a very diversified work force.

In our interview with Mr. Bansal, head of IOCL, he mentioned that even with all of the price liberalization reforms that the government has already implemented, there is still a long way to go, and the government is delaying further reforms that could benefit O&G players, especially retailers. How are these delays affecting a private player like Shell, and is the rate of reform in accordance with your expectations?

It affects us very strongly, and the rhythm is not in accordance with our expectations. We did not expect that liberalization would take place as one step forward, two steps backward, two steps forward, one step backward; we did not expect that deregulation, would lead to reregulation, and etc. So the basic reason why our main fuels business is currently very small and has not been profitable, is because the playing field is not leveled. Mr. Bansal’s company still gets subsidized—they loose money, but the government subsidizes them. Private companies do not get any subsidies. Public companies set prices in accordance with the decisions of the Ministry of Petroleum and Natural Gas. Private companies have no such requirement, but because the public companies control 95% of the market, they are the price leaders. So we have a choice: we can either match the price of the public companies, and loose cash, or we can raise the price to international levels and loose volume. At one point, this led us to loose as much as 95% of our retail volume.

Regarding the LNG market: when we spoke to Mr. Mansingh, head of the Petroleum and Natural Gas Regulatory Board (PNGRB), he mentioned the fact that there is, effectively, an infinite demand for products like natural gas, and the problem is only in supply. Mr. Mansingh went on to say that Shell is a good example of how this unattended demand is attracting foreign promoters to come in and invest heavily in the Indian gas market. As you’ve mentioned, Shell has already built an LNG regasification terminal in Hazira, in a major example of a project in that line. What else is Shell doing to invest in infrastructure in response to this growing demand?

India’s energy demand is certainly growing, but I do not believe that it is infinite. It’s all related to price: people will not buy at just any price, of course. Another point that must be clarified is that you cannot produce gas without infrastructure in place to support the market—that means power plants must be constructed, fertilizer plants must be constructed, and etc. While Indians know that we need to invest more in this infrastructure, investment has not been as smooth or forthcoming as people expect. So if you were to say that there were a huge number of power companies out there that were starved of gas, then you could say that there is an infinite demand. Demand is potentially huge, but you have to facilitate the demand.

As far as supply is concerned: there is no structural reason why supply cannot meet demand. There are three sources of supply: domestic, international pipeline gas, and LNG imports. Domestic gas depends very much on exploration, and the success of exploration. We have one very major gas mine—the Reliance gas mine. It’s producing 60 million cubic meters a day, and there is talk that it will go up to 80 million cubic meters, but even that will not meet the demand that has been projected. So there is a big gap between projected demand and domestic supply. That gap will be filled by either LNG or international pipeline gas from Bangladesh or Iran, etc. There has been some talk about Bangladesh gas and Iran gas, but nothing has happened, so we can forget about that for the short term, at least.

Then there’s LNG. For LNG, there are only two terminals right now, but a third one is being constructed in Cochin, and there’s a lot of discussion about further terminal construction. So you could argue that there is a huge scope for potential LNG investments. But, everything depends on the price. The power companies must be able to afford it. Because if the power companies cannot afford it, then the consumer cannot afford it, and the government will have to subsidize the consumer—there is this chain. Investments in an LNG terminal are going to happen when you have actually secured the whole supply chain. As far is Shell is concerned, we have already secured this chain, and we will expand our terminal capacity. We will not move into another location, but we will expand operations at our existing terminal.

Why did you decide to partner on your LNG project with Total, instead of a local player?

We had made it very clear from the day we started this investment that we were looking for partners who would add value—we were not looking for partners because we were looking to dilute our shareholding for financial reasons. Total is one of the largest companies in the LNG business in the world. They have as strong a network for LNG supply as we do. So there was a clear synergy between Total and Shell, insofar as the supply end of the chain is concerned. Remember, this terminal does not have a long-term contract with one supplier. So the combination of Shell’s trading network, and Total’s trading network, has given Hazira the opportunity, and the capability, to access gas at the most competitive price possible. And that’s the key to success. As I’ve said before, you can access gas, but if you cannot access it at an affordable price, you’re not going to find the customer. At a competitive price, you will attract the customer—and that’s why Total and Shell have really established a solid relationship.

We would have been perfectly happy with an Indian company, if there was that strategic fit, if there was that value generation. For us, there was no reason to go for one or the other; we were just looking for a partner who brought the greatest merit to the Hazira operation.

India is world-renowned for its wealth of human resources. Still, considering the size of the labor force employed by Shell India, it must have been difficult to attract a large amount of quality people to work at one company, and retain them. Nonetheless, in your Bangalore technology center, you have over 800 scientists; in Chennai, you have over 1,500 accountants; and etc. How did you, as the head of operations, manage to draw a superior employee base on such a significant scale?

Shell is a known and eminent brand, so that of course helped. But the brand must be supported by substance. What are the factors? The first factor is that the opportunity that we are providing, for example, in our Bangalore technology center, is actually quite unique. It’s the first center of its kind east of Suez that has been set up by an energy company. The focus there is not only technical support to our companies around the world, but also primary R&D. We have our own labs to facilitate this R&D. We provide an opportunity to scientists and technocrats to really work in their own country, with a company that has an international reputation for technical excellence, in an international dimension. Because they’re not just working within the context of India—they’re working in an international context, for an international company. The world is their prime base. That’s quite unique. And we also give them an opportunity to go out and conduct their own research, their own primary activity. We provide the best laboratories—the highest standards of technical facilities—that are available to anyone, anywhere in the world. Obviously, we also provide a competitive salary, and assure them that they will have a good career, and etc. But the major draw is the fact that there are very few such opportunities for people of a technical leaning.

It was a challenge to convince Shell headquarters to develop this center here in India. How did we do it? First, you have to believe in the initiative yourself. I’m an Indian—I’ve worked all over the world, but I first am Indian, and I believe in the technical talent and capabilities of the Indian people. So I was very forceful in my proposal for having Shell explore the possibility, at least, of constructing this center. The first step is to have headquarters come and at least take a look, and analyze the option. Then things fall into place. Once the central company evaluated the resource base objectively, it became very clear that the talent is here. Then they analyzed the city itself, and ascertained whether it would be possible to construct a world-class facility. And the city is home to other world-class facilities from companies like IBM. Their labs are akin to going into a Silicon Valley laboratory—so the city proved convincing. And finally, Shell India was able to convince Shell headquarters that we had enough of a relationship with the government to obtain the necessary tools and clearances to build.

When you look towards the future, what role will Shell play in the Indian O&G industry, and, conversely, what role will India have in Shell’s global structure?

Shell will play a major role in India, because all of its businesses now are of a kind that contribute to the industry in a very positive way. If you look at the technology center: whatever we do in India, is going to inevitably add value to the quality of the overall Indian industry. If you work for Shell today, and go on to work for ONGC tomorrow, you will bring with you the expertise that you have acquired at Shell. If we develop a new technology, its not just going to be kept proprietary to Shell, it’s going to be shared.

If you look at our Hazira gas business: gas is the bridge fuel to moving towards a new energy system of renewables. We are amongst the leading suppliers of gas. If you look at the downstream petroleum products business: I believe that the industry will acknowledge that we introduced the modern paradigm of retailing petrol. It’s only after we set up our pumps that the entire industry changed their model of retailing. We are introducing a more competitive environment in this country, and that itself will improve the level of service to the consumer.
So we provide positively for India in terms of technology, in terms of human resource development, in terms of clean fuels, and in terms of a competitive environment. That’s how we view Shell’s contribution to India.

In terms of India’s contribution to Shell: India’s growth will not fall off anytime soon, and in fact it will only increase. India will be one of the largest economies in the world, and a company like Shell is going to grow very significantly in India, so long as it is sensible about the way that it approaches business. Having set up the foundations, we can now look forward to growing with India in a positive, profitable, and sustainable way.

Do you have a final message to the international readers of the Oil & Gas Financial Journal, and the Indian community, on behalf of Shell?

Again, India is a country that will be one of the largest economies in the world. An international company can and should be present in India. It can generate a business that is profitable and sustainable for itself, and for the Indian economy and the Indian people. So I think there is a very strong synergy between the priorities of India as a nation-state, and the objectives of a corporation like Shell. That synergy is one that we should be working to harvest and develop.

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