Business Today

Out of its shell

Anilesh S. Mahajan        Print Edition: Dec 23, 2012

Ten years ago, when global energy giant Royal Dutch Shell exited its India exploration venture no one doubted the rationale behind the decision. Shell's foray having shown little prospects of striking oil at its block in the deserts of Rajasthan, it sold off its 50 per cent stake to its Scottish partner Cairn Energy for a paltry $7.25 million.

Within two years, Cairn Energy's India arm reported the world's biggest oil discovery of 2004 and its fortunes were transformed. Cairn India - now part of the Vedanta group - owning 70 per cent of the Rajasthan block, is currently valued at more than $11 billion.

Shell's decision to pull out of exploration in India is Vikram Singh Mehta's biggest regret. Mehta was chairman of the Shell companies in India till the end of September this year, starting ever since Shell returned to the country in 1994. "I kept telling them (senior executives at Shell's headquarters) we should not let go of this opportunity. I was overruled," Mehta told Business Today. Was he satisfied with Shell's performance during his tenure? "A lot could have been achieved," he says.

Mehta, as also his successor, Yasmine Ghandhi Hilton, now hope to grow the upstream business in India again. That will not be easy, given that the government's pricing control over some fuel products, its subsidy regime and the bureaucratic hurdles make foreign energy players wary of investing in India. The government is now considering changes in the production sharing contracts it signs with oil and gas explorers. It is also looking at the hindrances related to taxation, licensing and regulatory clearances in a bid to boost investment in energy.

"We believe the government is aware of the factors that will improve investor interest in the sector," Hilton told Business Today in an email interview . "We will closely look at the new regime when it is put in place and consider our way forward."

Hazira LNG terminal
Shell India is increasing the capacity of its Hazira LNG terminal to five million tonne per year
Like Mehta, Hilton is a veteran at the $470 billion energy behemoth. She was born in Mumbai and studied in Dehradun before moving to the UK, joining Shell in 1979. She was responsible for information technology systems in Shell's global retail business at the London office before shifting to India. Barely two months into her new job, her first in India, she has already set her targets. Her first priority, she says, is to seek opportunities to grow the company's downstream and upstream businesses.

In fact, Shell India has had a memorandum of understanding with state-run Oil and Natural Gas Corporation since 2006 to jointly explore for oil and gas in India and abroad. "We have not been able to convert the MoU into something tangible," says Mehta.

The challenge for Hilton will be to convince the Shell management to invest in India. Matthias Bichsel, Director for Projects and Technology at Shell, says the company will weigh opportunities in India against other opportunities globally. "We continue to evaluate India and see if the opportunities are an attractive proposition in terms of geology and then, of course, the terms that make it an economic proposition," he says.

Some analysts feel Shell could benefit from investing in India. "There is no doubt that the potential in West Africa, the Gulf of Mexico or Brazil is huge, but India's advantage is that it has almost no competition," says Aashish Mehra, Managing Partner at the India chapter of global consultancy Strategic Decisions Group. "You can easily look for assets you want to take and do business. Yes, there are regulatory hurdles, but most can be resolved," says Mehra. He adds that this is a good time for foreign energy companies to enter India as there are vast opportunities in deepwater exploration, coal-bed methane, and shale gas.

Hilton says Shell wants to be a major player in the liquefied natural gas (LNG) business, both on the east and west coasts. Shell has an LNG terminal at Hazira in Gujarat, where it has invested more than $1 billion. It holds a 74 per cent stake in the terminal; French energy company Total SA holds the rest. The Hazira terminal began operations in 2005 and can handle 3.6 million tonne of LNG per year. Its capacity is being raised to five million tonne. On the east coast, Shell is setting up a five million tonne terminal at Kakinada in Andhra Pradesh in a joint venture with Reliance Power and the operator of the Kakinada port.

The challenge for Hilton will be to market the gas on the east coast and find new consumers. Besides Shell, local companies Petronet LNG, GAIL (India) and Indian Oil are also looking to set up LNG terminals on the east coast. Though imported LNG is much more expensive than the domestic gas available from the Krishna-Godavari and Mahanadi basins, fuel shortage, which is likely to worsen, will ensure the imported gas also finds takers.

Another challenge for Hilton is the retail business. In 2004, Shell got a licence to open 2,000 fuel stations across India. Besides Shell, Essar Oil and Reliance Industries are the only private players in this business. But Shell has so far opened only 68 stations, mostly in south India. "Our growth in retail is not as fast as we had envisaged," says Ravi Sundararajan, who heads Shell India's retail business.

He blames it on the absence of a level-playing field. "State-run oil companies get subsidies, which distort prices," he says. The government provides subsidies to state-run retailers such as Indian Oil to sell fuel products below cost as part of efforts to keep inflation under control.

Is Shell hopeful of change in India anytime soon? "Politically, it is challenging for the government," says Hilton. "I think it (change) will happen. How quickly? You should ask the government."

Additional reporting by Goutam Das and K.R. Balasubramanyam

INTERVIEW

Yasmine Ghandhi Hilton
Yasmine Ghandhi Hilton
'Shell has always had a keen interest in upstream in India'

Yasmine Hilton spells out her vision in an email interview.

What are your priorities for Shell India?
  • To constantly seek and evaluate opportunities to grow our business responsibly both downstream and upstream
  • To be a major player in the LNG business in India
  • To work with the government to establish a levelplaying field for retail marketing
  • To build our talent pipeline of technical expertise to service global upstream and downstream businesses from our centres in Bangalore and Chennai
Is Shell India looking to enter the exploration sector in India?
Shell has always retained a keen interest in upstream in India and routinely evaluates upstream opportunities on a global basis - and not necessarily on a country basis. We understand that the government is reviewing the entire structure related to oil and gas exploration and production. We believe that the government is aware of the factors that will improve investor interest in the sector. We will closely look at the new regime when it is put in place and consider our way forward.

What are Shell's plans for the LNG business in India?
The growing demand-supply imbalance for gas across the country and the uncertain prospects for increase in domestic gas availability leads us to believe that India needs more LNG supply, and this in turn needs more LNG terminals. The east coast of India does not yet have an LNG terminal. We are moving swiftly to fill that gap. The project to be located at the Kakinada port is making excellent progress.

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