Why Big Oil Is Investing In India

After a brief hiatus following the signing of the Phase One Trade Agreement in January, tensions between Washington and Beijing have once again reached a fever pitch. The two countries have little room to defuse tensions after U.S. President Trump announced he would end Hong Kong’s special status, saying he would sanction Chinese officials responsible for smothering its freedom. While Beijing has refrained from immediate retaliation, observers believe that the tensions are likely to escalate further, given the countries’ competing interests in areas such as technology, trade, and ideology. Given this backdrop, U.S. oil majors are likely to give China a wide berth when they start hunting for oil deals as the global economy bounces back and instead head to its southern neighbor: India.

With a population of more than 1.3 billion, India is the world’s third-biggest oil consumer and offers an attractive market for big oil companies looking to expand. Indeed, N. Vijayagopal, finance director at India’s state-owned oil and gas giant, Bharat Petroleum Corp.(BPCL), has told Bloomberg that some oil companies from the western world have already shown an interest in acquiring the company.

BPCL is India’s third-biggest refiner and the second-largest fuel retailer with a 21% slice of the market. Although the company has not been spared the global energy selloff, its shares have lost a relatively tame 13.8% in the year-to-date compared to -23.3% YTD return by the U.S. oil and gas sector.

It’s not hard to see why the likes of ExxonMobil (NYSE:XOM) or Royal Dutch Shell Plc (NYSE:RDS.A) would be interested in a company like BPCL.India is a huge oil market, producing just over a million barrels of crude per day but consuming about 5 million barrels. The country imports the balance mainly from Iraq and Saudi Arabia after ditching Iran following U.S. sanctions.

Other than the large internal market, India’s oil industry appears to be bouncing back from the ravages of Covid-19 much faster than the rest of the world. Vijayagopal has told Bloomberg that BPCL is already running at nearly 83% capacity, while May sales clocked in at 76% of normal sales. That’s quite impressive considering that Covid-19 has hit India pretty hard, with nearly 260,000 recorded cases and 7,200 fatalities.

Modi’s government has lately revived privatization plans in a bid to raise Rs1.05tn ($14.6bn) through the sale of public assets and is also undertaking measures to make the country an attractive destination for foreign investments. In September, the government announced that it would lower corporate tax from an effective rate of 35% to 25% and also merge a number of state-run banks, which could eventually be privatized.

Last year, the Indian government laid out plans to sell stakes in five state-owned companies in a bid to raise funds amid an economic slowdown. Nirmala Sitharaman, finance minister, announced that the government will sell its stake in Bharat Petroleum, the Shipping Corporation of India, Container Corporation of India, and two other power enterprises. Indian authorities hope that Bharat Petroleum will attract particular interest from oil majors.

The government hopes that selling its 53.3% stake in Bharat Petroleum could provide an attractive entry point for foreign companies looking to get a foothold in India’s fuel retail market. Analysts at Citi have reported that Container Corporation of India is also likely to attract strong interest.

India’s fast-growing energy market has been drawing plenty of interest from oil supermajors such as Saudi Aramco, B.P., and Total, which in recent months have announced plans to invest in the country. With WTI oil prices recently crossing the psychologically significant $40/barrel following the extension of production cuts by OPEC+, it might not be long before U.S. energy giants also come knocking.

More China Tensions Ahead
For Indian oil, then, a lot is riding on U.S. tensions with China, and experts are not all agreed that this will be an all-out ‘cold war’.Indeed, some argue that Trump’s China policy has been largely ineffective, with the trade war failing to cripple the Chinese economy.

But the potential game could change because this isn’t just about “fair trade” and trade balances: It’s about global technological domination, which almost necessitates an all-out ‘cold war’. It’s a strategic rivalry that goes far beyond tariffs, and a global pandemic and U.S. presidential elections that will be conducted at a time of growing instability in the United States itself, further fanning the flames of these tensions.

Big money is increasingly ditching risk, whether it’s climate-related, governance-related, or geopolitical in nature–and that very well might mean ditching China when it comes to potentially lucrative oil and gas tie-ins.