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The energy gamble
Anil’s presence rests on his energy empire’s future potential

Power corrupts, and absolute power can be a mirage that can faze even the hardened veterans. Reliance Energy is all about power. Not the power that the Ambanis are famed to have exercised over the last few decades. It is about generating and distributing electricity. So far, Anil Ambani has displayed the ‘Ambani’ brand of grand proportions while announcing power projects. Power generation would be the ticket that could propel Anil into the stratosphere of corporate stardom that is now monopolized by Mukesh. If the plans do pan out eventually, Reliance Energy can become the behemoth that Reliance Industries is today. After all, the Tenth Five Year Plan has projected that India needs to add 1,00,000 MW of capacity by 2012 if power cuts are to become a memory. Even if Anil manages to grab 20% of that, the business would be worth Rs.500 billion every year. Add transmission and distribution, where Reliance Energy already plays a role in Mumbai, Delhi and Orissa, and you get a glimpse of the power house that Anil can create. Like all fairy tale stories in real life, this one too has a few blemishes. For one, the power projects are dependent on gas that will be supplied by the parent Reliance. Till the brothers were together, Mukesh and Anil could indulge in creative internal transfer pricing to kill any birds with one stone. Now, Anil will need to buy gas from Mukesh at market prices. More importantly, Anil might find his power ambitions thwarted by politics. Th e eternal hunt for votes has forced major political parties to stall the Electricity Act of 2003. With the reform process in the dog house, bankrupt state electricity boards and massive transmission and distribution losses will mean no serious player will dare to enter the power sector. The Ambanis are known to pull off miracles. If one particular Rajya Sabha member from U.P. concurs, Anil Ambani can persuade fellow politicians to allow power sector reforms; and then he might just snatch the ‘powerful’ tag from elder brother Mukesh.

Long live the Ambani legacy!
The future of both brothers is quite bright despite the split

It has been historically proven that business families split eventually - sometimes by the second generation and definitely by the third. It has also been historically proven that not all siblings are born equal - at least when it comes to business acumen, leadership skills and vision. There is a third fascinating facet of splits that too has been historically proven: most first generation entrepreneurs have such touching faith in the power of family bonding and brotherly love, that an overwhelming majority do not leave behind a clear-cut will or a demarcation of responsibilities.

Dhirubhai Ambani, in his own unique style, does not exactly fit any of the models analysed threadbare by strategic analysts the world over. No doubt, he did not clearly divide the empire before his death. No doubt, he had touching faith in the bonding strength of Mukesh and Anil.

Yet, he was different. before his death, he ensured that the group has an unbeatable presence in both the manufacturing and the services sector. That presence has made the split between the brothers easier.

Reliance Resurrected In Ambani Style
Of course there were sniggers a plenty when Business & Economy wrote just after the brothers split that the race between the two to prove who is the true inheritor of the Dhirubhai legacy would mean that both the brothers could end up doing spectacularly well. There were also some titters when we pointed out that Anil Ambani was the more vulnerable of the two; while also predicting that the younger brother would wipe out this handicap in no time. We also talked about the split unlocking value for the two separate empires. Today, the two brothers might still be estranged. But the roadmaps they have drawn up for corporate futures is quite clear. The elder brother Mukesh is now determined to recreate India's Wal-Mart in his own vision. The younger brother Anil has a far more sprawling vision and is betting heavily on the growth potential of the services sector to fuel his future. But make no mistake. Both the brothers have decisively proved that they were actually better off pursuing their separate dreams than be hemmed in by a single legacy.

Turm Oil
As oil prices exceed $60 per barrel, energy security emerges as the key strategic challenge for major powers, overshadowing even the threat of terror

Which is the bigger nightmare that confronts George Bush, Manmohan Singh and Tony Blair? Is it the cascading wave of terror, with London added to the gory books of death? Or is it the spectre of oil shortages bringing the engine of economic growth to a grinding halt? The truth is: energy security and terror have become inextricably enmeshed with each other

As Blair and Bush fi ght the demons of terror, Manmohan Singh needs to keep an eye on a deal that is rocking Washington: China under Hu Jintao has just upped the ante in the Great Game. China National Oil has made a $18.5 billion ‘hostile’ bid to take over Texas based Unocal; $2 billion more than what American oil giant Chevron wants to pay. Predictably, this has set the cat among the pigeons in Washington, with far right lobbies spewing venom at China’s ‘cheek’ and perfidy.

Can Singh convince Washington to let ONGC make a counter offer for Unocal that could derail the Chinese takeover bid? That premise might be fantasy; but it underscores the urgent need for India to secure its future energy security. In 2004- 05, India paid almost $20 billion more for oil imports than it did the previous year. That money could have been used to build 20,000 km of highways across India. It could have added a badly needed 20,000 megawatt of capacity to India’s power-starved sectors. In terms of sheer cash, the additional money could have meant Rs.7,000 to every Indian living below the poverty line. But that money may never come as oil prices breach the $60 a barrel barrier, ensuring that India’s dollar haemorrhage of oil imports will worsen this year, and in the years to come.

A recently released policy brief by the Centre for Economic Research at the rating agency CRISIL sums up the short term outlook for oil prices: “…as the weeks pass, the likelihood of a downward correction anytime soon seems to be getting more and more remote…the world economy clearly has to begin preparing for a scenario in which prices continue to climb to levels that compare only with distant memories”.

In the longer run, it would be foolish to invoke Keynes and proclaim that we are all dead. In fact, without a coherent policy to ensure oil and energy security in the long run, it is profits and growth that could be dead. And India could once again be consigned to the roster of those chronic cases that have promised to bloom and then withered away.

Three factors make India particularly vulnerable to volatility in oil supplies and prices. First, India depends a lot on West Asia (or Middle East as it is more fashionably called) for oil supplies. More than two-thirds of India’s oil imports come from that politically volatile and unstable region. What if the conflict in Iraq spreads to neighbouring states? What if Islamist jihadis cause such mayhem that supplies from the world’s largest producer and exporter, Saudi Arabia, are disrupted? What if the US goes for a regime change in Iran? Frightening scenarios no doubt. But as P. Sugavanam, director (finance) of Indian Oil – India’s largest company in terms of revenue – ventures to say: “Commercial compulsions have always driven the oil business there since it was discovered, and commercial compulsions will continue to be decisive. Even if there are upheavals, oil supplies would not be disrupted for long – long enough for India to use its strategic reserves”. He adds, “there is nothing much that India can do about it and in any case, India will not be the only country to suffer.” However, in what could be a bold or foolish move (or both) depending on the outcome, petroleum minister Mani Shankar Aiyer is stitching together long term deals with countries like Iran. According to him, cooperation within Asian countries is the key to long term energy security.

Factor number two that makes India vulnerable is the future of the rupee vis-à-vis the American dollar. Historically, the Indian rupee has always fallen in value against the dollar, increasing the burden of oil imports. Take 1991, when the combination of Manmohan Singh as finance minister and P. Chidambaram as commerce minister launched economic reforms by devaluing the rupee against the dollar by almost 50% in a phased manner. The immediate result: a 50% jump in the rupee burden of oil imports. If there is sustained pressure on the rupee, India will be vulnerable to higher import bills. Yet, the performance of the rupee against the dollar over the last few years has been remarkably stable. And if FII and FDI inflows continue to accelerate, there will be no significant pressure on the rupee. Nevertheless, going by the historical behaviour of the rupee against the dollar, future areas of concern remain.

The third factor that makes India vulnerable is the growing oil intensity in the economy. In layman’s terms, oil intensity refers to the amount of oil used to produce one unit of GDP. Traditionally, the oil intensity in a developing economy keeps going up. India is no different, though there was a decline in the 1990s. The sustained growth in India’s transportation and automotive sectors means that oil intensity will remain high, leading to higher oil consumption and inflated import bills.

So much for the factors that could make the Indian economy vulnerable in the long run. The key concern relates to what Indian policy makers can do to ensure two things: One, that India pays as less as possible for oil imports in the long run. And, two, that political and other upheavals do not disrupt oil supplies resulting in yet another dose of oil shock to the Indian economy.

Intensive discussions with oil experts and strategic analysts suggest a five pronged strategy with these thrust areas acting as the pillars of a strong foundation of energy security for the Indian economy. According to Subir Raha, chairman of ONGC, India needs to pay attention to all five, even if some appear contradictory in the short run. The five pillars, in a nutshell are:

At the moment, policy makers are pursuing or mulling over the five thrust areas independently. What needs to be done perhaps is for a ‘brains trust’ at the policy level to put them together as an integrated strategy. Public sector bosses of India’s oil and petroleum companies do seem to be playing a more proactive role in recent times. According to MS Ramachandran, chairman of Indian Oil, a reorganisation and consolidation of the oil companies could make them stronger and more competitive. In fact, there is a move at the top to attempt precisely this, creating even bigger oil giants in the bargain.

But then, to what extent are Indian policy makers pursuing this ‘integrative’ strategy? As mentioned, individually, something is being done about each of the four strategies. For instance, the Ministry of Petroleum has recently cleared a Rs.2 billion plan to store oil underground in caves near Mangalore – a first of its kind for India. OVL – the overseas wing of ONGC - GAIL, IOC and Reliance are all aggressively pursuing acquisitions. OVL has, in fact, already invested more than $2 billion on overseas joint ventures in countries like Vietnam, Sudan and Algeria. Companies ranging from Oil India to Reliance to Cairns are significantly stepping up exploration activities across possible strikes all over the country. Even though many new promising finds are being claimed, they are yet to be added to official reserve estimates. The Ministry of Petroleum is talking to the Ministry of Finance to offer tax breaks to downstream industries that could soak up the huge discoveries of gas. And encouragement to private players in the mining industry could lead to a big jump in coal production.

Corporate India should be rejoicing that policy makers are doing so much for oil security. Or should they? Are these steps interlinked parts of an integrated strategy? Or are these ad hoc, piece meal efforts for which policy makers in India have acquired a degree of notoriety?

There is a need to develop a coherent policy for India’s long term energy security. Oil becomes important and controversial because India doesn’t produce enough of it and has to rely on imports. India did not have a typical oil crisis either during the oil shocks of 1973 and 1979, or during the Iraq-Kuwait conflict in 1990-91. Because of the existence of the price control regime, the corollary of the crisis, namely availability of dollars to pay for oil imports, has been more troubling than probably internal fluctuations in demand of oil. Yet, when one extrapolates the demand for oil imports that would be required to sustain India on a high growth path, the figures look staggering. If the current rates of growth are sustained, the demand for oil imports by 2020 would have gone up to about 250 million tonnes. Assuming a price of $40 per barrel, the country’s import bill could be around $100 billion. At $60 a barrel, the figure would be $150 billion.

This is presuming that West Asia remains stable and the oil supplies from there are not disrupted. According to Al Ahji, senior advisor, OPEC, even though these high prices cannot be sustained, the best way out for India is to become a stakeholder in oil exploration projects in countries that have the reserves. If OVL is already doing that in Vietnam, Sudan, Algeria and Iran, various other public sector oil companies have been figuring out ways of tying up with upstream oil suppliers in exporting countries to secure long term supplies. Yet, there still appears to be no coherent long term vision at the top. One day, one hears about an LNG pipeline from Oman to India running through the Arabian Sea. The next, one hears about a pipeline from Iran to India running through Pakistan. Yet another day, one further hears of oil and gas pipelines snaking their way from Central Asia through Afghanistan and Pakistan to India. Oil industry analysts have been hearing about these schemes for the last 15 years. The truth is: not a single project has taken off so far.

According to analysts, even if there were peace with Pakistan in the long run, it will be virtually a decade before a pipeline driven system of oil and gas supplies through Central and West Asia can be set up. There are analysts who see India’s ventures in countries like Sudan and Algeria being on shaky ground. According to political and strategic analyst Saeed Naqvi, “USA has a nasty habit of mentoring civil war like situations in countries that are hostile to US oil firms”. Can Manmohan Singh clear the air on this during his Washington visit?

There is unanimity on two things: gas and coal. However ancient it might seem, India is discovering huge reserves of both gas (especially in the last year) and coal; and they can act as substitutes for crude oil. But the lack of a coherent policy framework has hindered the development of these two sectors.

Many such policy initiatives have been forthcoming over the years. Yet, they appear fragmented as India’s energy planning is done by too many cooks. At the Centre, there are separate ministries for petroleum and natural gas, coal, non-conventional energy, power, hydroelectric projects and heavy industries. All of them deal with the problem of energy. What experts suggest is an omnibus body like the Department of Energy in US that looks at the overall energy scenario – oil being just one component of it. In India of course, as many analysts point out, the creation of such a huge body would perhaps lead to more red tape and political jockeying.

As parts of London were burning, many analysts wondered about the determination with which Bush and Blair have been trying to secure the alliance’s future energy security - even at the cost of thousands of deaths. They also recall how the primary quest for Japan fighting against the allies during the Second World War was its thirst for energy and natural resources in Asia. China is already showing clear signs that it can go to any length to secure oil and gas supplies for the future. It is aggressively investing in African countries like Ethiopia and Sudan in search of oil security. Can India acquire that kind of determination and resolve?

The answer will determine whether India is an active participant in the new Great Game, or a hapless bystander.

Global Oil And Terror Equation
The last time around it happened, the war lasted more than a few hundred years. This time, it's just about 15 years old. Strategic analysts and policy makers in the West are loath to use that term; yet for the man in the street in the Arab world, the alliance led by George Bush Jr. is waging Act Two of crusades against Islam. More than a decade ago, well known author and ‘thinker’ Samuel P. Huntington had already provided a hypothesis about the forthcoming ‘clash of civilisations’ between Islam and the West. More than 400 years ago, the French mystic Nostradamus had foretold of a third World War starting in West Asia. For conspiracy buffs, all this is a great opportunity to while away hours with friends.

Serious analysts don’t really take this seriously. Yet, even they appear worried by the growing cleavage between political and radical Islam and the West. A day after the London blasts, columnist and author Tariq Ali commented that these terrorist attacks are the symbol of Muslim youth’s impotent anger against the West. Echoing something similar, columnist Thomas Freidman said that it would be folly for the policy makers to demonise and alienate Muslims. For example, can France wish away the more than 5 million Muslims living in their country?

For that matter, can the US leave West Asia alone – to prosper or destroy each other, as the citizens and governments there decide? It simply can’t, because of oil and gas. In an interesting analysis, columnist Fareed Zakaria of Newsweek had linked the lingering and traumatic presence of American troops in Iraq to the obsession of Americans to drive gas guzzling monsters called SUVs. The result: Since Americans do not want to give up on their lifestyle, they have to continue Act Two of the crusade. At least till the world finds a credible alternative to oil as a source of energy.

The New Great Game Is Truly On
Back then, we wrote in the Business & Economy that Indian policy-makers are great at announcing a slew of new projects while it is nations like China that walk away with all the honours at the end of the day. We also wrote that energy security will become an issue that will be even more important than global terrorism. For better or for worse, we added that India is simply not exploiting the massive reserves of coal and its equally huge hydro-electric potential to satisfy rapidly growing demand for energy.

Nothing much has changed over the last two years. China continues to steal a march over India and even other countries, when it comes to persuading emerging suppliers of oil and gas to favour the Dragon. The disaster in Iraq shows how the whole Bush gambit was about energy security. And despite endless debates and seminars and talks, India continues to muddle its way through. There is no doubt that oil prices are not going to come down to old levels of $40 a barrel. So India has no choice but to keep looking for the elusive energy security that could determine the future of economic growth.