Indian Energy Firms Pursue Assets Abroad

THE WALL STREET JOURNAL

By AMOL SHARMA

Bloomberg News

Reliance of India raised its offer for LyondellBasell Industries. Above, a LyondellBasell complex in Germany.

NEW DELHI—India wants to join the club of global energy giants.

Some of the country’s largest private and state-run firms are in hot pursuit of oil and gas assets overseas as they seek to take advantage of depressed asset prices during the downturn and break free of burdensome regulations at home.

In the latest move, oil-to-textiles conglomerate Reliance Industries Ltd., run by billionaire Mukesh Ambani, upped its bid over the weekend for LyondellBasell Industries, a bankrupt petrochemical maker and oil refiner. The new bid values the Netherlands-based firm at $14.5 billion, according to a person familiar with the matter.

A Lyondell spokesman declined to comment. A Reliance spokesman declined to comment.

Reliance also is scouting other foreign targets including Canada’s Value Creation Inc., which has large oil sands deposits in Alberta, people familiar with the company’s thinking say. Smaller rival Essar Group is stepping up its own bargain hunting abroad, with an eye on assets that Royal Dutch Shell PLC and other oil majors are unloading.

In recent months, the two companies, both based in Mumbai, have each hired top executives from global oil majors to aid their international expansion efforts. Meanwhile, India’s flagship state-run oil company, Oil & Natural Gas Corp., said recently it may spend as much as $30 billion over the next decade on an international acquisition binge.

Indian firms are scouring the globe to secure crude resources and reduce their dependence on imported oil. India imports 70% of its oil, with a price tag of over $90 billion annually. The companies are also looking to expand their global footprint with refineries and other assets in far-away markets. And they want relief from the regulatory headaches of their home turf, where government meddling in exploration and pricing of natural resources has slowed their expansion.

“There’s too much political and regulatory baggage at home, and in the current environment, corporate India sees a lot of bargains overseas,” said Cyril Shroff, managing partner of Amarchand Mangaldas, a top Indian law firm that advises companies on mergers and acquisitions.

India is likely to face competition as it shops for oil and gas, especially from Chinese firms. Last summer, Sinopec Group, a large Chinese oil company, paid $7.2 billion for Addax Petroleum, a Geneva-based company that has oil and gas assets in the Middle East and Africa.

“We see the international players being more often the buyers of these types of assets now, and there’s no reason to think that won’t continue,” said Jon McCarter, oil and gas transactions leader for the Americas at Ernst & Young.

A deal with Lyondell would significantly advance the ambitions of Mr. Ambani to build a global energy conglomerate. It would create a behemoth with $80 billion in combined revenues and interests in oil and gas exploration, refining and petrochemicals used in everything from food packaging to textiles.

Reliance, India’s largest private company by market value, already operates the largest oil refining complex in the world, a site in the western state of Gujarat that can process 1.24 million barrels of crude per day. The facility is designed to handle the kind of ultra-heavy crude that could be extracted from Value Creation’s oil sands.

Value Creation Chief Executive Columba Yeung said there are more than two potential parties interested in his company, but declined to name them or comment on the progress of negotiations.

The firm holds a 430-square-mile block of oil sands resources in northeast Alberta, as well as a proprietary upgrading technology and a half-finished oil sands upgrader. Mr. Yeung said some of the parties were interested in buying Value Creation outright, but that his preference is for a joint-venture agreement.

Value Creation halted construction of a large, 260,000 barrel per day upgrader to support the company’s plans for future oil sands production when debt financing for the project disappeared as credit became tighter at the end of 2008 due to the global financial crisis. “It certainly put a black cloud over us,” Mr. Yeung said, “but we expect that we will be able to come out from under the rain cloud.”

Financing big deals won’t be easy for Indian companies. Reliance has raised $2 billion for its acquisition war chest in recent months through the sale of its own stock. The company has twice increased its offer since an initial bid last November that valued Lyondell at around $12 billion. But it could still face an uphill battle, as Lyondell creditors are already engaged in a separate bankruptcy restructuring plan that values the firm as high as $15.5 billion.

Cross-border acquisitions by Indian companies fell 37% last year to $11.4 billion, according to Dealogic. But activity is picking up as Indian firms rev up for big-ticket deals in sectors such as energy, telecommunications and media. The country’s largest cellphone company, Bharti Airtel Ltd., offered $10.7 billion last week for most of the Africa assets of Kuwaiti operator Mobile Telecommunications Co., known as Zain.

Essar Group, a conglomerate with $15 billion in revenue and interests in steel, oil and telecom, controls oil exploration blocks in places including Nigeria, Madagascar, Myanmar and Vietnam. Now the company has emerged as an eager buyer for European and U.S. oil companies who are struggling with extra refinery capacity due to slumping demand for fuels. Essar owns a 280,000 barrel refinery near Reliance’s in Gujarat, and hopes acquisitions will help it expand to one million barrels per day.

Following on its international acquisitions in steel and outsourcing in recent years, Essar is in talks with Shell to pay as much as $1 billion for three oil refineries in the U.K. and Germany, people close to the situation say. Last year, the company bought out the 50% stake that Shell, BP PLC and Chevron Corp. owned in a major refinery in Kenya.

An Essar spokesman confirmed the company is in negotiations with Shell but declined to comment on the timeframe for the talks or potential deal value.

The strategy of buying up refineries now comes with risks. Refining margins of U.S. and European oil majors have slipped to a few dollars per barrel from as high as $10 a few years ago, and there is no guarantee they will bounce back to peak levels. But analysts said Essar and other Indian companies are hoping to scoop up bargains wherever they can.

“The valuations you’ll get now will be much better than when refining margins were booming a few years ago,” said Sushant Gupta, a Singapore-based oil industry analyst for energy consultancy Wood MacKenzie.

—Mike Spector, Rakesh Sharma and Edward Welsch contributed to this article.

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