India’s Election Results Boost Oil Industry

25 May 2009 (Last Updated May 25th, 2009 18:30)

With the Congress Party victory in the Indian elections came a rocket in the value of oil companies in the region. Natalie Coomber looks at the initial reactions to the political position in the days following the results.

India’s Election Results Boost Oil Industry

Cairn Energy's management sat down with shareholders at its annual general meeting on 19 May, the day after India's elections. The Congress Party's decisive victory sent investors rushing to cash in on the company, which is set to benefit substantially from Congress's rule, sending its shares rocketing to an eight-month high.

Meanwhile in India, trading on the Mumbai Stock Exchange had to be suspended for two hours on 18 May as stocks rose an average 17% with hopes raised for a government that has pledged to nurture foreign investors and focus on economic growth. High-spirits also lifted depository receipts of India-based companies in New York and the country suddenly found itself pivotal in global economic sentiment.

Crucially for Cairn it was the leading party in the coalition government that gained a majority in the May elections allowing negotiations between Scotland's largest independent oil company and the government to continue without the disruption of a change of power. Moreover, the petroleum minister integral to negotiations, Murli Deora, also retained his seat.

"India's hydrocarbon and offshore industries sit on the brink of explosion."

In a note to clients that was quoted in The Guardian Goldman Sachs said that the result was 'almost a best-case scenario' for the market. It continued: "there was a fear that an unstable government would ensue with a motley coalition, or that the eventual government would include the market-unfriendly Left parties."

India's hydrocarbon and offshore industries sit on the brink of explosion – with the power to take the national economy on upward spiral – and either of these outcomes could have had disastrous consequences. But with strong competition likely from other nations when India completes its next licensing round in August, any hesitation by investors towards the ruling party would have sent firms fleeing towards the dozen other countries issuing exploration blocks this year.

Signalling success

In an interim management statement released ahead of its AGM, Cairn unveiled its India-focused plans that included a number of projects due for completion and production starts before the end of 2009. Most notably, the company said it is ready to start production with initial evacuation by trucking in mid-2009 from the Rajasthan fields. "The facilities to handle a capacity of 30,000bpd of crude through the first train have been completed at both the MPT in Rajasthan and at the port of Kandla in Gujarat," the statement reads.

"The expertise and knowledge the company has acquired in developing oil fields in the Rajasthan desert is potentially transferable and applicable to developing fields in Iraq," it adds. In addition, its phased Mangala, Bhagyam and Aishwariya development projects continue to make good progress and crude oil sales negotiations are ongoing.

Meanwhile, following the election announcements, Indian oil major Essar Oil pledged $70m for exploration and production in 2009, if a long-awaited production sharing contract with the government for the Ratna and R-Series fields is tied-up soon. A consortium led by Essar but also including India's Oil and Natural Gas Corporation (ONGC) and Premier Oil originally secured the Ratna and R-Series fields in 1996 but is still waiting for the government to sign a product sharing contract and debate is still ongoing over royalties of the blocks.

Essar is not the only company pledging its allegiance to domestic business as dust settles around the election results. On 21 May, ONGC announced it would spend $4.2bn in the fiscal year 2009/2010 for domestic activities. During the year, ONGC plans to have 284.81 million tons of oil equivalent in place – the highest reserves accreted for 18 years.

"Indian oil major Essar Oil pledged $70m for exploration and production in 2009."

In what some could see as a clever public relations move the government also announced on 20 May that the Indian Oil Corporation, Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation were to receive bonds worth Rs103bn ($2.17bn) in compensation for the government during the 2008 and 2009 period. This is to reimburse the companies for losses that occurred from the sale of fuel at low government-determined prices during the economic downturn.

India's government controls the pump prices of four petroleum products including petrol, diesel and kerosene sold via the three firms. It is thought that HPCL may get more aid in the form of upstream discounts to close the fiscal year in profit.

Indian auction

These moves by the industry – and the additional funds by the government – point towards a sector committed to working in harmony and showing the outside world that it is ready for international investment. India's Ministry of Petroleum and Natural Gas has launched the eighth year of its New Exploration Licensing Policy with bids closing in August. Included in the auction are 70 exploration blocks offshore the western, eastern and Andaman updates.

With oil prices hovering around $60 and signs of the US recession abating, it seems after the initial troubles in early 2009 the future really could be bright for the oil and gas industry. And with a commercial minded government, India's energy sector could shine brightest of all.