No Easy Answers To Energy Security Concerns

BMI View: India's rising oil import burden combined with competition for acreage in Africa has driven an uptick in interest in Latin America's substantial resource wealth in recent quarters. However, we caution that above-ground challenges in countries like Brazil, Venezuela and Canada could make these investments slow to pay off.

We expect India to face a rising oil import burden over the coming decade - a consequence of increasing consumer demand coupled with disappointing oil production on the back of a poor business environment. Energy security concerns are a problem common to many Asian nations, and indeed, we have previously highlighted similar dynamics playing out in multiple countries across the region, prompting a massive influx of investment into Africa. However, with Chinese firms benefitting from greater financial backing, this has seen India struggle to keep pace in the scramble for access to new resources. While this has prompted an uptick in interest among Indian companies in the Americas as of late, we note that above-ground issues in many of these countries targeted for investment are likely to ensure that these investments are slow to pay off.

Rising Import Burden

Demand Driving Ahead
India - Oil Production, Consumption & Net Imports

BMI View: India's rising oil import burden combined with competition for acreage in Africa has driven an uptick in interest in Latin America's substantial resource wealth in recent quarters. However, we caution that above-ground challenges in countries like Brazil, Venezuela and Canada could make these investments slow to pay off.

We expect India to face a rising oil import burden over the coming decade - a consequence of increasing consumer demand coupled with disappointing oil production on the back of a poor business environment. Energy security concerns are a problem common to many Asian nations, and indeed, we have previously highlighted similar dynamics playing out in multiple countries across the region, prompting a massive influx of investment into Africa. However, with Chinese firms benefitting from greater financial backing, this has seen India struggle to keep pace in the scramble for access to new resources. While this has prompted an uptick in interest among Indian companies in the Americas as of late, we note that above-ground issues in many of these countries targeted for investment are likely to ensure that these investments are slow to pay off.

Rising Import Burden

Ensuring access to sufficient hydrocarbon resources looks set to remain a major policy challenge for India over the coming decade, with our forecasts suggesting that the country will face a rapidly rising oil import burden. Indeed, it currently consumes a sizeable 3.4mn b/d of petroleum, and we anticipate this number will soar, nearly doubling over the next decade to an estimated 6.6mn b/d, on the back of the country's robust growth story.

Demand Driving Ahead
India - Oil Production, Consumption & Net Imports

Moreover, while supply is already insufficient to fulfil domestic needs, we believe that a poor operating environment will only exacerbate the problem - tempering oil production growth. Considerable red-tape and prolonged procedural delays have increasingly come to weigh on international oil players' enthusiasm for undertaking activity in India in recent years. For example, in late 2013 BHP Billiton indicated plans to relinquish nine blocks following delays receiving exploration permits. Further, Indian firm ONGC has been forced to undertake exploration of its blocks in the highly prospective Krishna Godavari basin alone, after having failed to entice majors such as Shell and ConocoPhillips into joint development schemes ( see 'ONGC Going Alone Points To Continued Unattractive Environment', November 22, 2013). This not only suggests that the resources from the deepwater acreage may come online more slowly, but given the massive resource potential of the KG basin, highlights the risks presented by the country's unappealing business environment to its oil production potential.

Finally, the note that the regulatory issues have only been exacerbated by less attractive licensing terms launched under the new NELP X round, moving the country from a production to a revenue sharing model. We believe this will reduce incentives for international oil companies by not allowing them to recuperate project costs before sharing revenues ( see 'NELP X Launched But Licensing Change To Prove Prohibitive', January 14). Indeed, we have already seen the country's oil output story disappoint in recent years, and while the country has taken steps to increase exploration efforts and boost enhanced recovery, this will not be sufficient to keep pace with the rapid growth in consumption.

Searching For Supplies, Finding The Americas

However, while these factors all underpin our view for a rising import burden, accessing sufficient reasonably-priced supplies is likely to be a considerable challenge. India has long been heavily reliant on the Middle East to meet its import needs, with between 60% and 70% of its imports coming from that region between 2007 and 2012, but events over that time period, including increasingly stringent sanctions in Iran and political unrest in the region, have highlighted the extent to which this has left India vulnerable, encouraging the country to seek alternative sources of oil.

Struggling To Wean Off Middle East Supplies
Indian Oil imports, By Country Of Origin, 2006-2012 (% Of Total)

Moreover, whereas similar dynamics have seen many Asian countries, most notably China, flood into West Africa in an attempt to secure resources in recent years ( see 'Asian Money Complements Hydrocarbon Riches', August 7, 2013), India has struggled to compete. While partially the result of China having a head-start, we also attribute it to the greater resources at Chinese firms' disposal. Indian oil companies not only tend to be smaller in size and market capitalisation, but purchasing power is further constrained by more limited state backing, while Chinese firms benefit from greater access to cheap loans and government support. Indeed, this is likely one of the major drivers of Chinese firms consistently outbidding their Indian counterparts in West Africa.

Feeding The Dragon
Crude Oil Imports To China By Region, 2009 To Year-To-Date ('000b/d)

These factors have encouraged a number of major Indian players to begin more aggressively seeking resources in the Americas in recent quarters. This has been especially highlighted in recent days by a spate of announcements:

  • Indian Oil Minister Veerappa Moily has stated that the country is seeking a long-term supply contract with Canada. This follows from moves by Reliance Industries, Essar Oil and Indian Oil Corp to source Canadian crude as feedstock.

  • ONGC Videsh, the overseas investment arm of Indian state-owned oil giant, has indicated interest in Brazil's highly prospective Libra block. Indeed, the company's administrative director indicated at the 2014 Petrotech Conference it was in talks with Petrobras over the potential for the sale of a small stake (negotiations denied by Petrobras).

  • Reliance Industries has indicated that it is considering acquiring an 11% stake in Venezuela's Carabobo heavy oilfield, taking over the participating interest of Malaysia's Petronas which exited the project in September, citing disagreement with Venezuelan authorities. Reliance is also examining a possible entry into the Ayacucho-8 block, as part of a joint venture with PdVSA, and has indicated it is exploring opportunities in Mexico following regulatory changes, though has not offered any specifics.

However, we view Indian attempts to move into the Americas market with a mixed eye. On the one hand, in the long term we believe such moves may pay significant dividends, and, if investment follows these promises could benefit the Latin American countries in question. That said, in the short-to-medium term, above-ground issues in many countries targeted suggest that this strategy will not be a panacea for India's energy security concerns.

Venezuela: Venezuela is by far the most extreme example. Despite its substantial resource base - with the largest proven oil reserves in the world - we have long anticipated that a poor regulatory environment would weigh on production, underpinning our view that output would remain well below state-owned PdVSA's ambitious 2018 target of 5.8mn b/d ( see 'PdVSA Looking Increasingly Precarious', November 20). Indeed, at the same time that Reliance was announcing its plans to gain further exposure to the country, state-run PetroVietnam had reportedly decided to suspend production at the Junin-2 block, citing unfavourable economic conditions and hopes to renegotiate some aspects of its partnership agreement with PdVSA.

Not Even Close
PdVSA - Liquids Production & PdVSA's 2018 Target

Brazil: While on an entirely different scale than Venezuela, we have also flagged above-ground concerns in Brazil as potentially delaying the country's production. Aside from the poor licensing terms - which saw only one consortium bidding on the highly prospective Libra block in the country's first pre-salt auction last year - Brazil also suffers from substantial red-tape, cumbersome local content requirements and a regulatory system which places a substantial financial burden on state-owned Petrobras and could slow oil development ( see 'Petrobras: Structural Weaknesses Prompt Cautious Stance', September 6, 2013).

Canada: While Canada benefits from a stable political system and strong rule of law, we have long highlighted that a lack of sufficient midstream infrastructure could be increasingly problematic. Indeed, we believe considerable infrastructure bottlenecks are likely to persist on the back of local opposition to pipeline construction ( see 'Midstream Infrastructure Still The Missing Link', January 14) which could begin to make the economics of developing WCS less attractive, and temper production.

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Sector: Oil & Gas
Geography: India, Brazil, Canada, Venezuela
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