Spotlight

 India's great oil gulp 

Subir Raha, M.S. Sirinivasan, S. Behuria and N.K. Nayar

Sri Lanka - a convenient energy supplier to India?

By Sonali Samarasinghe  Sri Lanka's energy supply is in danger of being almost totally controlled by its giant neighbour, as India joins China in a frenzied race for oil and natural gas fields around the globe. India has now started dichotomous negotiations with the government of Sri Lanka, which will effectively hand over to the Indians two thirds of Sri Lanka's petroleum retail sector and total control of the wholesale sector if successful in its bid to take over the exploration and development of the Western Offshore block of Sri Lanka in the Gulf of Mannar.

The heightened interest by the Indians comes at a time when seismic studies and data collection by reputed Norwegian and Australian firms for positive signs of oil have proved very encouraging. TSG Nopec, an oil exploration firm is now in its second phase of data gathering in the region.

In Sri Lanka the bid for control by the Indians also comes at a time when attempts to kick start the lagging peace process is gathering momentum. With the north eastern Trincomalee oil farm already under Indian control, the presence of Indian personnel in the Gulf of Mannar in the north west of the country may prove detrimental to the shaky peace agreement. As important to Sri Lanka's geopolitics, is the daunting prospect of India's possible control of Sri Lanka's energy resources.

Keeping outsiders away

While the strategic importance of the Trincomalee oil farm project was the fulfillment of a 15-year-old objective in the Indo-Sri Lanka agreement to keep 'outsiders' out of the Indian Ocean for India, the objective remains very real. The importance of Sri Lanka and Trincomalee cannot be underestimated given the uncertainty over the peace process. The security situation in the north and east of the island remains highly vulnerable especially with the UPFA government on the brink of a split over the government statement that it was ready to start direct talks with the LTTE based on the interim authority.

Meanwhile India would certainly want to maintain a significant presence in Trincomalee and other parts of the country if possible for regional and international geopolitical reasons. India would not want another multinational petroleum major to set up shop at this strategic location.

As early as November 2004, Chairman and Managing Director, Oil and Natural Gas Corporation (ONGC), Subir Raha had indicated to Indian media that he hoped an agreement would be signed shortly with Sri Lanka allowing the corporation to take up oil exploration off Sri Lanka.

Such coming events were casting their shadows as far back as December 2004 when Indian High Commissioner, Nirupama Rao personally handed over an original proposal by ONGC Videsh Limited (OVL)for Exploration and Development of the Western Offshore Block of Sri Lanka in the Gulf of Mannar region (see map) to Minister of Power and Energy, Susil Premajayanth on December 23, 2004. She was to diligently follow this up by holding a conversation on the matter with Senior Presidential Advisor Mano Tittawela on January 13, 2005. She then promptly sent him a copy of the proposal reminding him that the original had already been sent to Premajayanth.

That diplomatic channels are being used by New Delhi to secure a negotiated contract for ONGC is nothing new. Diplomats have long since wheeled and dealed to secure contracts for their countries. Traditionally, rising economic powers at any given time would seek to secure energy supplies around the world.

Certainly with oil exploration by India and China going on in states like Sudan, Vietnam, Russia, Iraq, Iran, Lybia, Syria, Myanmar, Australia and the Ivory Coast, the political dynamics of the world oil market is changing.

What is evident is that India is keen to take on the mantle of a neo-colonial power in the region. When the tsunami struck, India was not seen with a mendicant's bowl despite its own losses. It acted as a donor and within hours dispatched supplies and army personnel to Sri Lanka. And petroleum and natural gas is a good resource to control.

Largest corporate 

The Oil and Natural Gas Corporation (ONGC) is India's largest corporate by market capitalisation and net profit as well as its first integrated oil and gas major. ONGC Videsh Limited (OVL) is a wholly owned subsidiary of ONGC and is engaged in exploration and production of oil and gas outside India.

The OVL proposal was the outcome of a meeting between a Sri Lankan delegation led by Weerahendi and the ONGC Videsh Ltd (OVL) held on November 18, 2004 in Colombo where after discussion, the Sri Lankan delegation invited OVL to submit a comprehensive proposal for the exploration and development of Western Offshore Block of Sri Lanka in the Gulf of Mannar region. According to the proposal, the exploration will be carried out in three phases spanning seven years.

The Indian High Commission in Colombo told The Sunday Leader that India is interested in prospecting for oil in Sri Lanka and confirmed that ONGC Videsh Limited is currently holding discussions with the Petroleum Resources Development Committee (PRDC) of Sri Lanka with regard to oil exploration.

But it is not the first time ONGC has shown interest. During the UNP administration, ONGC and India showed an intense interest but the ONGC offer on a negotiated basis was rejected by the PRDC and the Ceylon Petroleum Corporation (CPC), as it was clearly not in the best interests of Sri Lanka. 

The UNP administration rejected the ONGC offer on several grounds.

Grounds for rejection

(1) The ADB in its Technical Assistance (TA) agreement with Sri Lanka for the promotion of private sector involvement in oil and gas exploration signed in 2000 states that the development of a country's natural resources and the best outcomes are normally achieved through informed, prepared, competitive, and transparent transactions. The ADB reserved the right to suspend TA amounting to US $325,000 if deals were made with groups that presented unsolicited proposals.

(2)The T.S.G.Nopec Agreement signed with Ceylon Petroleum Corporation (CPC) at a time when there was hardly any interest in oil prospecting in Sri Lankan waters states they should have the opportunity, having undertaken the survey at an enormous cost and risk to themselves, to sell the data gathered by them to anyone bidding for exploration blocks. An attempt to deviate from a transparent process could therefore have legal implications.

(3)CPC delegations which undertook promotional campaigns in Houston, Denver, Salt Lake City, London and a few other cities gave firm assurances that they could all bid for exploration blocks in an open and transparent process.

(4)The Petroleum Resources Act of 2003 also envisages that the exploration blocks be awarded in an open and transparent manner.

Foiled in their attempts to secure the deal on a negotiated basis rather than through a transparent bidding process during the UNF administration, the Indian government and the ONGC have been working like beavers to secure the deal on a negotiated basis through the Chandrika Kumaratunga administration. Intense pressure is obviously being applied by India through its senior diplomats. Consider - its High Commissioner personally hands over the proposal to the Minister of Power and Energy and also writes on January 13, 2005 confidentially to Senior Presidential Advisor, Tittawela on the subject.

The ONGC attempting to secure the contract on a negotiated basis becomes even more ridiculous as it is seeking a privilege it is not even afforded in its own country. In India, the director general of hydrocarbons (DGH) acts as a strict regulatory body under the Ministry of Petroleum and Gas. It has what is known as a New Exploration Licensing Policy (NELP) that releases blocks for exploration on a strict open bidding process that is fair and transparent. Surely there is an irony in the fact that the Indian government that has set up such an exemplary process in India, is seeking to obtain by unfair means an advantage in Sri Lanka.

Alas, the same cannot be said of Sri Lanka. The very fact that this government is secretly holding discussions with one company rather than opening up the process in a transparent manner is not only suspect but also detrimental to the nation for a variety of reasons. Not least of which is that Indian companies that already dominate the petroleum distribution industry could also dominate the exploration and production industry as well.

Credit line manipulation

Meanwhile the Indians we learn have now nominated ONGC to supply petroleum products to the CPC on the US$150 million credit line supplied by them. Reportedly, a paper has been presented to cabinet for approval. However sources say that premiums offered for the said products by the ONGC are much higher than what the CPC could buy on the open market on spot tenders. Thus while offering attractive credit terms on the one hand and nominating the ONGC to supply products on the other, India is merely gaining on the roundabouts what they lose on the swings.

With diplomacy so intricately intertwined with economics and power play, one is perhaps prompted to wonder why during the latter stages of the UNF administration the Indian government and especially its then High Commissioner Nirupam Sen withdrew his obvious early support to the administration in power and in the latter stages openly backed the Kumaratunga-led opposition.

Coincidentally, it was at these crucial stages in Sri Lanka's politics that many of the petroleum deals were being discussed. Not only with regard to oil exploration but also with regard to the petroleum retail sector.

Recall that the Public Enterprises Reform Commission (PERC) conceptualised a model for restructuring the CPC in 2002. They sought to do this by the formation of a single terminal company called the Common User Facility (CUF) or Ceylon Petroleum Storage Terminal Ltd (CPSTL) of which each of the three players will own one third. Out of approximately 359 CPC-owned filling stations, 100 were formed into a company called Independent Petroleum Marketers Ltd (IPML), sold to Lanka Indian Oil Company (LIOC), a fully owned subsidiary of Indian Oil Corporation (IOC), and another 107 into a company called Modern Petroleum Marketers Ltd( MPML) earmarked for the third player.

Level playing field

The market was to be partially liberalised by allowing only three players for the first five years in the downstream petroleum retailing in Sri Lanka competing on a level playing field under a strong regulatory authority. The third player was to be identified through a competitive bidding process and the three final bidders were Hindustan Petroleum Corporation Limited, Bharat Petroleum Corporation Ltd, and Sinopec (HK) Ltd. Incidentally, both Hindustan and Bharat are partners of ONGC.

Sinopec (Hong Kong) Ltd, a Chinese owned company emerged the highest bidder with US$ 88 million and the Technical Evaluation Committee and Cabinet Approved Negotiation Committee recommended acceptance of their offer and a draft cabinet memorandum was prepared seeking cabinet approval to award the third player license to Sinopec. However, the memorandum was never submitted due to the political situation in the country and the results of the April 2, 2004 elections, which brought the UPFA into power.

The new government then started negotiations of its own and due to various pressures perhaps from the JVP and other economically regressive lobbyists, sought to change the conditions of the bid by negotiating not for 100% equity in Modern Petroleum Marketers Ltd but for 49%. Thus the GOSL was to own 51% of the equity.

Because this was a considerable variation from the original conditions of the bid, Sinopec (Hong Kong) Ltd. backed out of the process. Bharat Petroleum remained. In the meantime the Attorney General was to reportedly give an opinion that the changing of the original bidding conditions was against tender procedures and illegal. However, when The Sunday Leader spoke to the Minister Susil Premajayanth, he said that negotiations were still underway based on a 49 /51%  equity shareholding.

In any event, consider the impact on Sri Lanka's petroleum retail sector. Of the 359 stations owned by CPC, one third is with the CPC. Another one third has already been handed over to LIOC. The final one third may now be handed over to another Indian company. Despite Minister Premajayanth's assertion that negotiations for the third player is for a 49 percent stake of the one third share, sources within the petroleum sector maintain that based on the Attorney General's opinion, the negotiations reverted to 100% equity in the one third share.

Some sources in the industry maintain that the Chairman and Managing Director of Bharat Petroleum, S. Behuria visited Sri Lanka on January 18, and signed a MOU with Treasury Secretary Dr. P.B. Jayasundara as the third player in the petroleum sector, for an agreed payment of US $ 85 million.

However that an agreement has yet been signed is denied by both parties, with Bharat Petroleum stating to the The Sunday Leader that negotiations were still underway.

Game afoot

That there is a game afoot it is certain. Finance Minister, Dr. Sarath Amunugama has gone on record to the media declining to comment on whether Bharat Petroleum is going to be the third player and nicely avoiding the issue by stating that the final decision regarding these matters must be taken by the Power Ministry. Ironically, Minister Premajayanth told The Sunday Leader that since the final one third share was vested with the Treasury, it is the Treasury that will make these decisions and not his Ministry.

Consider the implications of Bharat Petroleum coming in as the third player.

It would effectively hand over two thirds of Sri Lanka's wholesale and retail petroleum business to India. In excess of the number of stations obtained under agreement, they will be able to buy upto one third from the dealer owned category. Currently, there are some 600 dealer-owned petrol stations in the country. Already the IOC has bought up over 50 of these private stations by offering better terms. Minister Premajayanth however estimates the number to be between 20-25.

This clean sweep will position India in such a sweet spot that she will even be able to dictate prices of petroleum in Sri Lanka.

The whole purpose of restructuring the infrastructure was to bring out a competitive environment within a level playing field. However, the state-owned Ceylon Petroleum Corporation itself will not be able to compete with such giants as the LIOC and Bharat Petroleum Corporation who will act in cohorts with each other for the obvious reason that they are both owned by the government of India and have directors on their boards common to both corporations.

Petroleum sector sources also revealed that there is wide speculation that the Chairman of Bharat Petroleum S. Behuria will assume duties as chairman, Indian Oil Corporation with effect from March 1, when current IOC Chairman M.S.Ramachandran retires. This makes the interconnection between IOC and Bharat even stronger.

A look at the board of directors of Indian owned companies in the industry will show that government officials are often the common denominators thus interconnecting the bodies to ensure Indian government control. The Indian Oil Corporation board of directors includes M.S. Srinivasan, Additional Secretary, Ministry of Petroleum and Natural Gas, who also happens to be a director of Bharat Petroleum.

But the interconnection doesn't end there. On the board of directors of ONGC is N.K. Nayyar, who is also the director of planning and business development in the Indian Oil Corporation(IOC)

With India in control of our petroleum retail sector due to this government effectively shutting out the China-owned company Sinopec (Hong Kong) Ltd., in favour of Bharat Petroleum, a takeover by ONGC of Sri Lanka's oil exploration blocks would effectively mean that India controls Sri Lanka's energy resources.

Legal issues

It also means that Sri Lanka may be subject to a great deal of litigation as it would be in violation of agreements signed with the ADB, with T.SG.Nopec and the country would lose its credibility as a player in the investment market and be relegated to the status of a banana republic.

Furthermore, President Kumar- atunga herself on a state visit to Teheran in November 2004 requested Chairman of the Expediency Council and former President of Iran, Hashemi Rafsanjani  to consider assistance for offshore exploration for petroleum resources in Sri Lanka.

Mind you this was while the ONGC delegation led by Executive Vice President of OVL, Joeman Thomas, was meeting officials of the Ministry of Power and Energy in Colombo attempting to strike a deal with the government. ONGC sources confirmed that officials representing them had travelled to Colombo.

Petroleum sector sources in Colombo also reveal that several international leading oil drilling companies from the United States, United Kingdom and China have already given a commitment to be present when open bidding begins in Sri Lanka for exploration of oil.

Indeed visiting Australian delegations have also shown interest in the energy sector and it is to Sri Lanka's benefit to obtain the best possible price on the best possible terms for the nation under an open bidding process. It is prudent for Sri Lanka to be geopolitically astute and while maintaining cordial relations with our giant neighbour to also maintain economic relations impacting on the geopolitical balance, with the rest of the world. Too much of India may prove too much of a good thing.