Volatile crude prices to hit investments in oil, gas

Global investments in oil and gas are headed to face turmoil. It has seen a
sharp fall in 2008 and till the last reports came in for 2009, many of them
are expected to go bad. Recession and lack of financing apart - if oil
prices do not stabilise, new investments will fall and many of those, which
are already in the pipeline, will not see the end of tunnel very soon.

Investment in oil is being adversely hit by volatility in oil prices. The
oil prices have turned increasingly and rather unduly sensitive to market
demand, supply and stock positions, and to put it more precisely the rumours
and speculations about them. The oil price indices are not necessarily
reflective of the real market conditions and with multiple of them running,
the spot market provides huge arbitrage opportunities making things worse.

It is possible that large international oil companies or the national oil
companies are in a position to absorb the shock created by extraordinary
changes in the market conditions and overcome and withstand the inefficiency
created by such speculation-driven consequences in the market. But, not the
small players, for sure.

It is also difficult to expect the large international oil companies and
cash-rich national oil companies to remain calm about it and go ahead with
their upstream investments such as those in exploration and prospecting.
They have also been hit hard both by the recession and the political issues
in many nations where investments have already been made rare planned to be
made. They may be better placed in the capital market to mobilize resources,
but the investors are wary of the prospects of oil prices, especially if
they believe that the same may remain below $80 a barrel on the average for
a long time, they may also not jump into oil so easily.

After all, while from most of the conventional assets, one can deliver oil
at $15-30 a barrel, the costs may rise
to$60forseveralnewprojectsandcon-sidering the investments they are often
forced to make on building infrastructure in economically backward areas
where oil resources are being explored and pay taxes at steep levels, a
price below $80 is certainly a risky proposition for investments in new
upstream oil assets.

When the oil prices rose sharply till the middle of last year, fight for oil
resources went up in the same proportion. The investments in both
conventional and non-conventional oil and gas assets saw increases in
multiple levels driven also by national energy security concerns of
countries which are expected to remain dependent on imported oil. Such as
China. Today, with oil prices down to below $80 levels (or around that) from
the peak of about $145 last year, investments made in most of these assets
in the past are proved burdensome. While the larger oil companies have been
managed to sit pretty with them, the small and mid size players are in real
trouble.

There is, in fact, nothing to worry about the long-term prospects of oil and
gas demand. The problem lies in the immediate and short-term scenario, where
oil demand is likely to remain tightly range bound for another year or so.
The global oil demand has been estimated to grow to 116.3 million barrels a
day by 2030 from the current levels of about 84 mb/day.

The investments made in all segments of the oil industry and those, which
are being planned right now, have the potential to maintain a huge excess
capacity in the industry for a long time. The Opec policy of maintaining a
spare capacity "strategically" will also not facilitate new investments by
others, however good they might look at the first sight. With gradual and
large capacity expansions and maintaining a moderate oil price regime, the
Opec may be able to discourage high cost investments in new conventional or
non-conventional areas, mainly to maintain their oligopoly position in the
market.

The global oil market for both crude and refined products are turning
increasingly complex with issues such as geopolitics, logistics, capital
investments trends, uneven course of economic development and diverse
regional trends in economic recovery post recession.

This will also adversely hit the free will of oil companies to invest
anywhere and everywhere thinking that oil resources are the safest bets
considering the long-term energy security concerns of the parent nations.
Today, politics playing above pure economics of oil exploration and
refining, even the cash rich companies seeking their national interests will
have to follow a different approach to acquire these assets.

More importantly, not all the assets talkedaboutare as attractiveasthey are
made out to be. They will be proved risky at current swings in the market.
By A. S. Firoz, Financial Express, New Delhi, 27 November 2009

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Green flights: Airlines go for biofuels

To counter the fluctuating ATF prices, this alternative source can bring a
revolution in aviation

The world's first demo flight with 40 people on board a KLM Boeing 747,
fuelled on 50% camelina, a biofuel, and 50% traditional fuel, circles over
Netherlands for an hour. January 30, 2009: A Boeing 747-300 Japan Airlines
test flight takes off from Tokyo with a biofuel mix of camelina, jatropha
and algae.

These are not flights of fancy. The humble blue-green algae, the innocuous
jatropha plant and the fast-growing camelina could well power a 735,000 lb
plane soon. And airlines, plane manufacturers and engine companies have
joined hands to see that these biomass sources oil the wheels of aviation as
early as 2013 along with fossil fuels.

The International Air Transport Association's goal is to see that
alternative fuels form 10% of aviation fuel consumption by 2017. Boeing
foresees them being used regularly within 3-5 years, while Airbus believes
that by 2030, up to 30% of aviation fuel will be alternative.

Aviation is responsible for 2% of carbon emissions, but unlike other sectors
such as power and ground transport, it doesn't have alternative energy
sources such as wind, hydro and electricity. Besides, almost 40% of an
airline's costs go towards fuel. It therefore makes good business sense to
commercialize sustainable fuel sources, says Dr Dinesh Keskar, president of
Boeing India.

"Sustainable biofuels unlike other energy sources, meet the unique
requirements of aviation jet fuel," he says. These include having the
correct energy density, freezing points and high energy content per unit
weight and volume.

"Any biofuel used," says Paul Nash, head of New Energies at Airbus in
Toulouse, "should be able to work on all aircraft types, new and old and
without the need to modify either the aircraft or the engine and be able to
mix with existing jet fuel." And the aviation industry is only interested in
those sources that don't compete with food or fresh water resources or lead
to land use change, explains Keskar. These are called second generation
biofuels.

The best biofuels, says Charlie Miller, vice-president, International
Corporate Communications at Boeing, are algae, jatropha, halophytes and
camelina. "Algae can produce all the biofuel needed for all planes if grown
in a water mass as large as Belgium. Halophytes can grow in salty
conditions. And what's encouraging is that the biofuels used till now have
performed better than fossil fuels."

Says Alok Adholeya, director of Biotechnology and Management of Bioresources
Division at The Energy and Resources Institute, Delhi, India has good
resources for algae. "We have a large coastline of over 7,000 km where algae
can be grown. This, along with sunlight and flue gas (a pollutant from
industries) can be used to produce this fuel on a continuous basis." Algae
can produce 15-300 times more oil per acre than conventional crops, such as
rapeseed or soybeans.

Would these biofuels actually bring down the cost of air tickets? "If their
production costs can be brought down as the market matures," says Miller,
"we'll get more miles to the gallon and this cost benefit can be passed on
the consumer." Prices will be then be comparable to that of petroleum-based
jet fuel, assures Keskar.

The biggest challenge though, says Kapil Kaul, CEO, South Asia of Centre for
Asia Pacific Aviation, is to ensure that biofuels can be mass produced at a
low cost/high yield. "Initial studies anticipate an 80% reduction in overall
emissions due to biofuels." Jitender Bhargava, executive director, Air
India, says it's important to know how these fuels will be priced and their
effciency in terms of miles flown per kilolitre.

Meanwhile, extensive tests and flight demonstrations are taking place so
that safety is not compromised.

By Shobha John, Times of India, New Delhi, 26 November 2009

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India's fuel consumption rose 12 percent in October, the highest growth rate
this financial year, on the back of a surge in demand for auto fuels petrol
and diesel.

Fuel consumption rose 12 per cent to 11.058 million tonnes in October,
against 9.872 million tonnes a year ago, according to the data available
from the petroleum ministry.

The surge was led by a smart 12.5 per cent growth in demand of diesel, at
4.768 million tonnes. Diesel is the most consumed fuel in the country.

Petrol sales soared 18.6per cent, to 1.11 million tonnes, while liquefied
petroleum gas (LPG) demand increased 10.1 per cent to 1.095 million tonnes.

The robust increase in fuel consumption in October comes on the back of a
near-flat growth rate in the previous month. Fuel demand had risen 0.8 per
cent in September, to 10.69 million tonnes.

Private firms, notably Essar Oil, recorded impressive 57.1 per cent growth
in petroleum product sales at 1.2 million tonnes, while the sales of public
sector companies increased 8.2 per cent to 9.855 million tonnes.

Business Standard & Press Trust of India, New Delhi, 21 November 2009

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Mumbai, Nov. 22 GIC Re, the designated national reinsurer, has taken a hit
of Rs 100 crore on account of the recent fire at the Indian Oil Corporation
depot in Jaipur.The IOC depot installation was insured for around Rs 230
crore by a consortium of insurers led by ICICI Lombard General
Insurance.IFFCO Tokio General Insurance, Oriental Insurance and National
Insurance Company were the other insurers.

"Of the Rs 230 crore, GIC Re has reinsured around 30 per cent of the cover.
We will have to pay around Rs 69 crore as claims," said Mr Yogesh Lohiya,
Chairman and Managing Director, GIC Re.
Besides the main cover, IOC had also taken a statutory public liability
cover for Rs 50 crore and additional third-party liability cover for Rs 100
crore. "We have reinsured around 20-25 per cent of both the statutory public
liability cover and the additional third-party liability cover," he added.He
was speaking on the sidelines of an insurance summit organized by the
National Insurance Academy.
Rethink on UK arm

The reinsurer, which was planning to set up a subsidiary in UK, is now
having second thoughts."We are in a double mind. We might set up a
subsidiary or enter into syndication in Lloyd's," said Mr Lohiya.Lloyd's is
a British insurance market where multiple financial backers and underwriters
come together to pool and spread risk.The advantage of entering into
syndication in Lloyd's is that the rating is taken care of, he added.
For GIC Re, around 39 per cent of its total business comes from
international operations. "We plan to increase it to 42 per cent by the end
of this financial year," said Mr Lohiya. The reinsurer, which is also the
administrator of the terror pool, has paid around Rs 167 crore in claims to
Hotel Taj Mahal and Hotel Trident. "The renovation work is still going on.
We expect the total claims from both the hotels to be around Rs 500 crore,"
he said. The terror pool has a corpus of more than Rs 1,300 crore.
THE HINDU BUSINESS LINE newspaper

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IndianOil climbs onto the nuclear power bandwagon

IndianOil is looking to invest up to Rs 1,500 crore in its maiden nuclear
venture in partnership with Nuclear Power Corporation of India Ltd (NPCIL).

The oil major is eyeing the nuclear generation space as it sees assured
returns on investments. It is actively looking at project capacities ranging
from 2 x 700 MWe to 2 x 1,650 MWe in the first phase.

"To start with, IndianOil will be investing close to Rs 1,500 crore in one
project, and this investment can be increased as we get more projects," Mr.
B. M. Bansal, Director (Planning and Business Development), IndianOil, told
Business Line.

NPCIL is setting up new capacities based on pressurised heavy water reactors
of 700 core group to study investment options MWe. It is also in talks with
global players such as GE-Hitachi and Toshiba Westinghouse for light water
reactors of 1000 MWe configuration, and with Areva SA for European
pressurized reactor (EPR) models of 1,650 MWe for new capacity. A core group
comprising officials of both NPCIL and IndianOil will be set up to make a
detailed study and assess the investment option for participation either in
existing or upcoming projects, including details about the site. The
companies will either form a joint venture company or float a special
purpose vehicle.

Internal Resources

"We would like to go as a minority partner. Subsequent to the MoU with
NPCIL, data exchange will start since the investments in a nuclear project
are comparatively lower than in a refinery, IndianOil will fund the project
through internal resources," he said.

Also, this venture will offer an assured return, he said. "We consider
nuclear energy as an important source to bridge the energy deficit and also
as an organic route of growth across the energy value chain," he added. The
present installed nuclear power capacity in India is 4,120 MWe. "Of the
20,000 MWe target for 2020, which is likely to be revised upwards, NPCIL can
manage about 10,000 MWe through its own financial resources. So we need
funding from other sources to supplement NPCIL's efforts and the best
candidates are PSUs, especially those in the core sector having adequate
cash flows, strong financials and borrowing plans," a Department of Atomic
Energy official said.
By Richa Mishra & Anil Sasi, Business Line, New Delhi, 19 November 2009

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