Petroleum minister Murli Deora, currently on an African oil safari, is hunting for oil and energy assets for the country armed with a budget that seems a mere pittance while competing with multi-billion dollar budgets from Chinese and Western rivals.Ravi Kunder reports

Petroleum minister Murli Deora, currently on an African oil safari, is hunting for oil and energy assets for the country armed with a budget that seems a mere pittance while competing with multi-billion dollar budgets from Chinese and Western rivals.

This week, Deora, who has been in Nigeria, said that India will invest $350 million in developing two oil blocks in the West African nation, besides increasing its engagement in the gas sector as well (See: India set for heavy investments in Nigeria's energy sector)

Commentators say either the petroleum ministry has not done its homework well or it is out of sync of what is happening in the oil and gas industry in Africa.

They aver $350 million is loose change compared to what Western oil majors and China has already invested and would be investing in the near future in Africa.

The battle for energy assets in Africa has become so fierce that existing licences for oil exploration and production are virtually being torn up and new ones being offered to a willing buyer as long as a higher price can be got.

In September, it was reported that China's state owned oil company China National Offshore Oil Corporation (CNOOC) was willing to acquire all the Nigerian oil licences held by Western oil majors for as much as $30 billion.

Armed with nearly $2.4 trillion in foreign exchange reserves as of this month, China has been making heavy inroads into Africa and is on the verge of overtaking  Western dominance in Africa.

China is now Africa's second-biggest trading partner, behind the US, with a bulging trade of over $168 billion as of 2008 with African countries like Nigeria, Algeria, Angola, the Republic of Congo, Equatorial Guinea, Botswana and Sudan.

A majority of these investments are in the newly found hydrocarbon sector in which most of these African nations have no experience, which China is exploiting to its national advantage by supporting some of the most notorious regimes.

According to a British Petroleum Statistical Energy Survey, Africa had proven oil reserves of 117.481 billion barrels at the end of 2008 or 9.49 per cent of the world's reserves. In 2007, the region produced an average of 10,317.6 thousand barrels of crude oil per day, or 12.5 per cent of the world's total.

Nigeria, Libya, Algeria, Egypt and Angola.dominate Africa's upstream oil production. Together they account for 85 per cent of the continent's oil production. Other oil producing countries are Gabon, Congo, Cameroon, Tunisia, Equatorial Guinea, the Democratic Republic of the Congo, and Cote d'Ivoire.

China's challenge
CNOOC has been holding talks with Nigeria since September to acquire a 49-per cent stake in 23 prime oil blocks, estimated to hold 6 billion barrels of oil, for around $30 billion, and according to some oil executives, CNOOC's offer could go even go as high as $50 billion. (See: China keen to acquire $30-billion oil stake in Nigeria: FT).

Since the Chinese are offering multiples of what existing western oil companies are pledging for licences already held by them, Nigeria is willing to risk the ire of the oil majors as well as potential litigation in the future.

In an effort to revamp Nigeria's massive energy sector reform law, President Umaru Yar'Adua introduced a bill in parliament last month, which would give the government greater powers over oil concessions while raising taxes paid by energy companies.

Yar'Adua had approved a bill for the petroleum industry last year, which empowered the government to renegotiate old contracts, impose higher costs on oil companies and retake acreage that firms are yet to explore.

The new energy legislation, if passed, would rewrite Nigeria's relationship with the US and European oil companies like Shell, Exxon Mobil, Chevron, Total and others, which had a monopoly over the country's oil assets.

Licences for 16 fields operated by Shell, Exxon Mobil, Total and Chevron are currently up for renewal and so far only ExxonMobil has managed to a renewal for three licences while Shell and Chevron are still negotiating with the government.

Two Chinese government-controlled companies, Sinopec and CNOOC, are said to be among the front-runners to acquire the assets already held by the Western oil companies.

China Exim Bank is making loans worth billions of dollars to African nations in return for hydrocarbon assets.

Tied to the China Exim Bank loan, which is at Libor plus 1.5 per cent payable over 17 years, China has secured oil exploration and production rights circumventing a tendering process as China prefers to deal with some African nations that does not allow public access to information surrounding the transfer of oil assets.

Such deals also do away with transparency and accountability. In 1997, the International Monetary Fund reported that $ 4.2 billion of oil revenue disappeared inexplicably from Angola's state coffers. China has built srong ties to secure hydrocarbon assets in the country, which has now overtaken Saudi Arabia as top exporter of oil to China providing 16 per cent of China's oil imports.

China also secures energy assets in Africa differently from Western oil companies by often packaging oil deals in exchange for infrastructure project loans.

The petroleum ministry suddenly woke to China's inroads in these countries in the last few yars, and decided to launch its own hunt for hydrocarbon assets in Africa.

This month, Deora had asked the finance ministry to allocate a special fund to help public sector oil and energy companies to enable them to match foreign bidders for overseas energy assets. (See: Petroleum ministry wants special fund for overseas acquisitions)

Sovereign funding lacking
Unlike other nations like China that use huge sovereign wealth funds to make overseas acquisitions, India has no such fund.

Such a fund fund  would have proved valuable in acquiring foreign resources when hydrocarbon assets value had plunged in the wake of recession and price of oil falling to a low of around $42 a barrel.

The much needed fund is required to sidestep the multi-layers of approvals required for Indian oil and gas majors to make instant decisions in acquiring resources, to prevent Indian state-owned firms being repeatedly sidelined.

Although the petroleum ministry has left it to the finance ministry to work out the details, including how the fund is likely to be created and the size of the corpus, the ministry should recommend a fund at least the size of $25 billion since India's current forex reserves are at a healthy $285 billion.

If the fund is a measly $2-3 billion, it would be extremely difficult for Indian oil companies to compete for overseas energy assets as they are pitted against the two Chinese sovereign wealth funds, each having over $200 billion. (See: ONGC, OVL pitted against Chinese sovereign funds for foreign acquisitions)

The petroleum ministry should also evolve a strategy as to which assets to bid for in Africa keeping in view that some nations have unstable governments, while in some civil unrest torpedoes foreign investments including Nigeria. (See: Nigerian militants target Chevron, Shell oil installations; capture ship)