Financial Express, India
June 8 2005

Cart before the horse?

Oil economics before oil diplomacy

Petroleum minister Mani Shankar Aiyar’s attempts to douse the
country’s energy thirst, by getting a transnational gas pipeline to
India through Pakistan, from West Asian gas wells, is indeed
laudable. For, few have ventured so aggressively to secure overseas
oil and gas deals. Success could well earn him the nickname
`Talleyrand of oil diplomacy,’ a tag enjoyed by Calouste Gulbenkian,
an Armenian billionaire deal maker, who made his mark half a century
ago by sewing complicated oil deals across the then Turkish empire.

However, unlike Gulbenkian, Mr Aiyar’s overarching reliance on
diplomacy borders on neglect of the economics of the deal. How else
does one explain the recent `oil’ diplomatic overtures in Pakistan by
the minister, when the economics of the deal, including Pakistan’s
take, the transit fees, is nowhere in sight? There is no denying the
fact that the gas pipeline deal finds critical mass in the recent
thawing of relationship between the two countries. But the need of
the hour is prudence. Also, basic negotiating practice demands less
euphoria and more hard-nosed work to get the deal off the ground.
Instead of following up astute commercial calculations with political
manoeuvres, the opposite is being attempted. Cart before the horse,
it appears. And, euphoria is often mistaken for desperation,
especially in the prevailing seller’s market. Transit costs matter,
but the basic economics of the deal lies in securing a competitive
gas producer price.

Agreed, given the volatile global markets, predicting gas prices a
few years from now, when supplies take place, is a difficult task.
However, that should not, in any way, undermine the safeguards and
best practices that need to be adopted while going about commercial
deals. More so when, as in this case, the end consumer is nowhere in
sight! All the more reason, then, that the procurement process is
carefully conducted. Else, we could end with a Dabhol-like situation
on hand, where committed capacity is required to be paid for,
regardless of the level of offtake by the consumer.

If the global gas markets tank a few years from now, coupled with the
intermediary PSU oil companies (which will be buying piped gas) not
having secured long-term supply contracts from end-consumers, we
could end with a replay of the torturous Dabhol crisis, where
taxpayers ended by taking a hair cut. Let the Dabhol lesson not be
lost when Mr Aiyar moves to the next port of call, Iran, where talks
on gas procurement take off.

From: Emil Lazarian | Ararat NewsPress