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with PMS Prasad, Executive Director, Reliance Industries Limited

11.05.2011 / Energyboardroom

Clearly, Reliance’s operations in the KG basin have been widely recognized as one of the most important offshore projects in the world. After such great success, what are your plans for growth of the company’s E&P business in India?

KG D6 is significant asset not only in the Reliance E&P portfolio but also in our country’s E&P portfolio. We are indeed proud of our success in the KG basin, since it is a testimony to the commitment of our team to deliver the project in record time despite its scale and magnitude of its complexity. We are happy that we have delivered KG D6 project mainly because of the value it has created for our country. We at Reliance are strong believers in the Indian growth story and hydrocarbon prospectivity within our country and we shall continue to look at similar opportunities in the future, not only to grow our E&P business but also to create value for the country by transforming the landscape of India’s hydrocarbon.

Reliance is now working in partnership with BP, and also with Chevron after its recent acquisition of Atlas. It seems as if the company, having built up its reputation in India, is now entering the next league and becoming a player that has more international aspirations than ever before. How would you assess this view of the company?

There are lots of opportunities in India in many sectors, and we are extremely committed to India: we like to say that “what is good for India is good for Reliance”. We are doing a lot of work here in exploration, and hoping that the retail petroleum and product markets will soon be truly liberalised. However, what is limiting our involvement in the downstream sector in India is price controls as far as the pump prices are concerned: you cannot buy crude at $120 USD and then sell products at the equivalent of $75 USD. But in every country there are issues, and by and large we are committed to the country, but this factor does mean that we have to look elsewhere in order to satisfy our expectations for growth.

Reliance wants to match its commitment to the country with the growth aspirations of its stakeholders. In particular spaces we already play a key role; Reliance currently refines 1.4 million barrels per day in India. The Indian market already has surplus refining capacity, which means there is currently not much room for expansion in this segment, except by continuing to maintain our edge in refining and ability to process the world’s crude and produce very clean products. The next step for us is to look beyond India’s borders in the oil and gas sphere.

Through our domestic activities, we have acquired certain skills and through a lot of hard work, we have started an upstream business and grown it organically. We had to start from scratch, so having created an organisation, trained a lot of people and acquired some competencies and infrastructure, we are now looking at opportunities outside India. We have an excellent track record from our Indian upstream operations. We have drilled 125 deepwater wells and our drilling partner Transocean says that our operations at a water depth of 10194 feet are the deepest that have ever been done. We have a very good safety, exploration, development and project management record, and now we are looking to capitalize on these competencies outside the country.

There is more to be done in India, such as converting other discoveries into production, but we believe that in India, demand is always going to outstrip supply. That being the case, there is room in India for importing gas, whether it is through cross-country or transnational pipelines, such as the TAPI from Turkmenistan or the Iran-India pipeline. But these pipelines are long-term projects, and the shorter-term projects include building LNG terminals and pipelines within the country to reach new customers. Right now as part of Reliance’s collaboration with BP, we are looking at how we can meet this growing demand for gas in India, besides the organic method of exploration, development and production.

Why have you chosen to internationalize through upstream operations rather than through your more established downstream capabilities?

It was a matter of assessing the different levels of financial risk. Building a refinery in a new country means putting in place the supply chain, marketing and distribution necessary to make it a profitable exercise. The upstream sector allowed Reliance to use its expertise and internationalize in a way that exposed it to less risk.

We are now also looking at the unconventional space. There are many opportunities in shale gas, which we studied for about 8 months before eventually deciding to make a play. In terms of the transparency and the market, US shale gas assets offers a good business proposition. This attracted us to the US in the unconventional space.

There is always the Indian piece of the puzzle to consider. We thought that we might be able to bring back the acquired skills, competencies, technology and experience back to India to look at shale gas here in the future, when the Indian government will open up shale gas assets to the market. We also thought about the opportunity to bring more gas into India. If the US has a gas surplus, then ultimately demand could be created through exports, which can bring a better balance between supply and demand. When there is no outlet, prices are always depressed. The moment there is an outlet through exports, it means competition grows between export markets and local markets, so prices start improving to healthy levels.

Because demand has been fluctuating, the costs of working in the gas business in the US are unpredictable. We should be working to create a steady demand so that the service industry also can look at a balanced and steady workload, which will lead to more predictable project costs.

It must be fairly surreal for you with so much experience in the industry to even imagine exporting a product from the US.

It is surreal. In fact, when we were thinking about this concept, we really looked closely at the viability of the market. The industry is supporting it, and now a couple of opportunities have presented themselves, with people saying that some onshore gas should now be converted into LNG and companies should be able to export it.

This step is very necessary. It is not sustainable to have such a huge differential between the NBP and the Henry Hub. And of course, Europe is also putting a lot of pressure on its suppliers in order to reduce the gas price there. We have to bring in some kind of parity. We can supply India if the US government allows it and we hope they will support the companies asking for it, and if they allow exports then US shale gas, as LNG, could become competitive to India, compared to Qatar, Yemen and Oman LNG.

Recently Reliance signed a transformational deal with BP. Can you shed some light on your views on the deal and its implications for the upstream oil and gas industry in India?

RIL and BP announced a historic partnership earlier this year. The deal comprises BP taking a 30% stake in 23 oil and gas production sharing contracts that Reliance operates in India, including the KG-D6 block, and the formation of a 50:50 joint venture for sourcing and marketing gas in India. The venture will also endeavor to accelerate the creation of infrastructure for receiving, transporting and marketing natural gas in India. The partnership will combine BP’s world-class deepwater exploration and development capabilities with Reliance’s project management and operations expertise.

This deal marks a significant milestone in India’s E&P history as it ushers in the participation of a global oil and gas major for the first time ever with a material stake in Indian oil and gas blocks. There are significant synergies between both the partners given BP’s deepwater capabilities worldwide and RIL’s demonstrated project execution capabilities. We believe it is a potent combination to find more the hydrocarbons to meet India’s energy needs.

If there is one thing that the BP deal shows, it is that it is possible for IOCS to now look at India. In your opinion, is the most interesting aspect of India for IOCs the potential to work with companies like Reliance, or the potential of the Indian market itself?

There are a number of reasons. A good partner is an essential thing for a lot of people, but when you go to a new country, you look for a lot of things. First is the prospectivity out there in the Indian basins, which is still something that needs to be tested because the Indian basins have not been explored enough yet, particularly in ultra deepwater areas.

Whether it is Reliance, ONGC or other public or private partners, IOCs prefer to work with someone who shares the same ideology and principles and believes in the same business principles and ethics. This makes doing business together easier, because you still have profit making and entrepreneurship as motives, which is not always true for the other companies.

The third factor is market. India is a growing market with a huge hunger for energy. With the population continually increasing, the need for energy is growing in double digits. Because India is not a mature market, to achieve 1% GDP growth we probably need close to 1% in terms of energy growth. So 9% could easily translate to an 8% increase in energy from a very low base.

As an example, gasoline consumption in India is going up in double digits because we may have no roads, but we can still make cars! Today their affordability is increasing. The Indian government is helping the cause by controlling gasoline prices. Income levels are increasing, and gasoline prices are controlled, so there is an incentive. I use this as an example, but generally speaking, whether it is crude oil or gas, that is what happens. If there is demand, a good partner and the prospectivity, then the last piece of the puzzle is a regulatory environment and legal framework. India has a strong regulatory and legal system and the rule of law prevails here.

So, India is a good destination. It is not only Reliance that makes it good, but the unexplored Indian basins and the transparent regulatory and legal systems, as well as the huge market.

Over the last few years, Reliance has grown in so many different directions at a tremendous speed, achieving record-breaking projects that people all over the world are watching. With moves into shale gas and LNG being considered, the company is in constant evolution. What do you believe are the permanent qualities at Reliance that will stay with the company throughout these transformations?

Every company has certain core qualities and I personally do not believe that we have any core competencies restricted to just one business segment. When I joined the company, Reliance was only involved in the textile industry. When I left Schlumberger to come and join a textile company, people thought I was mad, but this competency in textiles soon developed into fibres, petrochemicals, plastics and refining.

The core strengths of Reliance are the following: we execute anything we put our mind to very well, and we are conservative in our financial projections, but at the same time our risk taking ability is very strong – we take risks but they are well calculated. For outsiders, our moves may seem to be a huge risk, but when we look at the business opportunities and the ability to assume that risk and deal with it, we strike a good balance and go for it.

When there is an opportunity in the market place, being nimble-footed enough to capture that opportunity is key, which means at that point in time you might not have the competencies in that business, but you are confident that you can build them.

What use is that confidence? The ability to take risks, mitigate, and make good on the opportunity, mixed with the underlying foundation that we can execute anything well has meant that whether it is building a telecoms network or a retail network, building upstream capability, deepwater development or building a huge refinery, Reliance has succeeded.

Ultimately, the company is built not just by its assets but also by its people, who are the real assets of the company. Therefore, our ability to continue to attract good talent and train them is key. Today, the biggest ongoing project in the company is business transformation; making sure that the old generation can hand the business on to the next, and making sure that it is done in a way where growth doesn’t suffer, and all the values we brought to this company are imbibed, so that for generations this company can continue to grow at the same pace. That is the big challenge today for us. It is not growing in upstream, refining or petrochemicals. Today the company can invest $20 billion USD in any business and deal with the risk, but the biggest risk is the challenge of continuing this growth and making sure it is sustainable.



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