Will Anil Agarwal beat Mukesh Ambani?

Dear Anil Agarwal, The Indian media are agog you are set to overtake Mukesh Ambani as India’s biggest corporate promoter. You have made a massive $9.6 billion bid for 60% of Cairn India, which produces oil in Rajasthan and few other places. You will need to borrow heavily for the acquisition, but if you succeed your assets will exceed those of Mukesh. However, the ONGC may put in a higher bid for Cairn. Will you bid even higher?

Times News Network calculates that after you acquire Cairn India and launch your proposed IPO for Sterlite Energy, your holdings will be worth close to Rs 1,67,000 crore. This will beat Mukesh’s Rs 1,45,275 crore.

But it’s one thing to become number one through expensive acquisitions based on huge debt, and quite another to stay number one. Mukesh has embarked on a new strategy that could leave you far behind.

He got into oil long before you by acquiring a small stake in the Panna, Mukta and Tapti fields. Using this to build up his knowhow, he then explored for and found enormous offshore gas reserves in the Krishna-Godavari basin. He also struck some oil in the KG basin, and a bit more in the Cambay basin. But these paled in comparison with his gas finds. Other exploration companies soon confirmed that India had far more gas than oil.

However, Mukesh believes that the fuel of the future could be something else altogether: shale gas. Reliance Industries Ltd generates a huge cash flow, and Mukesh could have made a bid for Cairn long before you did. He could have bought oil companies abroad. Instead he opted to buy stakes in three shale gas companies in the US. He paid $1.7 billion for a minority stake in Atlas Energy’s Marcellus Shale deposit; $1.3 billion for a 45% stake in a Texas shale gas field of Pioneer Natural resources; and $392 million for a 60% stake in Carrizo’s shale gas asset in Pennsylvania.

Your purchase of Cairn India is widely seen as a risky bet on the future price of oil. The high price you have paid can be justified only if oil prices rise much faster than markets expect. You assume that Sebis’s proposed rule – obliging acquirers to pay non-compete fees to minority shareholders as well as the majority – will not apply to you, and this could be very costly mistake.

You bring to Cairn no experience or skills in oil. If your aim is to acquire such experience and skills, you could have done so much more cheaply by taking small stakes in oil companies, and then learning by doing.

Mukesh is following a learning-bydoing strategy in shale gas. His American investments will give him handson experience and knowhow in “fracking” , the special technology used for shale gas drilling. Once he masters this, he will be well placed to outbid all rivals when the Indian government opens up shale gas blocks for exploration in the near future.

The potential of shale gas is huge. Shale is a common sedimentary deposit, and India has major shale formations with gas potential in the Gangetic plain, Assam, Punjab, Rajasthan, Gujarat, Tamil Nadu and Andhra Pradesh. The cost of extraction is low, and so is the risk of dry wells. Mukesh is betting that by becoming shale gas king of India he will also become the energy king, far bigger than oil producers like ONGC or Cairn.

The markets seem to prefer Mukesh’s strategy to yours. Vedanta shares fell steeply after your announcement that you were buying Cairn India. But RIL shares shot up when it announced it was buying shale gas assets from Atlas Energy. More recently, Bharat Petroleum Corporation Ltd decided to buy two shale gas assets from Norwest Energy in Australia, and its share price shot up 8% the next day.

Why? Because shale gas is now seen as a revolutionary game changer. Oil is found only in a few places, and is concentrated in the Middle East. But shale is among the most common sedimentary rocks globally. In the US shale gas has within a decade increased US gas reserves from 30 years of consumption to 100 years. Vast stretches of Europe and Asia have shale deposits. China believes it has 45,000 billion cubic metres of shale gas, more than Russia’s entire proven gas reserves.

One consequence of the shale gas cornucopia is that the US price of gas, which was traditionally one-seventh that of oil, has crashed to one-eighteenth that of oil. The gas glut is here to stay. And as countries across the globe master the technology, gas will drag down the price of oil within five to seven years.

The cost of oil exploration in deep waters keeps rising, and new safety measures after the BP disaster will raise it further. But onshore drilling for shale gas is cheap, and can be economic even if gas falls to just $3/mmbtu, the historical equivalent of oil at $20/barrel.

This means that betting on a high future oil price is risky. In the short-term oil may indeed shoot up if there are geopolitical problems, like an Israeli attack on Iran’s nuclear facilities. But in less than a decade, abundant shale gas will drag down the price of oil. That is why the markets are more enthusiastic about Mukesh’s approach than yours.

Starting from modest origins, Dhirubhai Ambani dreamed of becoming number one in India, and achieved that aim. You too, Mr Agarwal, started modestly from a small business family in Patna. You have been accused of violating several environmental norms, but these charges pale in comparison with charges of crony capitalism against the Ambanis. In a remarkably short time you overhauled Kumar Birla in non-ferrous metals and iron ore, and are now aiming to overhaul Mukesh Ambani.

Maybe the ONGC will outbid you, maybe not. But to become and stay number one, you should follow Mukesh’s lead, and jump into the race for shale gas. That is the commodity of the future.

5 thoughts on “Will Anil Agarwal beat Mukesh Ambani?

  • 2012.Nov.29 at 01:54

    This article is itself very myopic in it’s views. If shale gas is so abundant it’s price will never rise much. The more the technology is mastered for extracting Shale- the more it’s price remains within modest bounds. Oil in the short to medium term future will look like the rare,priceless diamond. Also concentrating on long term strategy all the time is not wise. No one can reasonably predict what will happen 20-30 years down the line. Maybe both oil and shale gas will become redundant. More and much more oil can become economically viable,rendering Shale gas a pipe dream always. It is better to concentrate on more short to medium term targets and not get lost in the arcane.

  • 2011.Sep.01 at 11:57

    When ONGC bought stake in Imperial, Russia @ 100$ per Barrel, many felt that it was a costly aquisition. But it was justified by the then CMD of ONGC by saying that oil price might exceed in future. Others also justified that aquisition was done based on certain minimum reserve, however actual reserve might be much more. This logic might be applicable in cairn India’s case also. K.G. onshore appraisal drilling is yet to be done. I do not know why D.G.H. not expediting, despite of energy crisis in the country. Bhagyam is yet to be added to the production. Who knows what is going to happen with Sri Lanka’s exploration. So please do not conclude in haste. I had bitter experience in past when I sold all of my shares in petronet and purchased RPL, based on the news that petronet is facing fierce competition from RIL based on huge gas find. Situation changed drastically in couple of years. Hope I have clarified, why goat should not be sold at sheep’s price.

  • 2010.Sep.21 at 16:40

    As a reader of your column for some twenty-five years, I am curious when you write columns in an open-letter form like this, do any of the people addressed, ever respond, at least privately? I remember years ago when steel industry was in the doldrums worldwide, you had written an open letter to Ratan Tata urging Tatas to pick up steel mills worldwide for a song. This was a time when IT industry and IT enabled service industry was focus of all investors. I don’t know if Ratan Tata read your column but a certain U.K. based NRI seemed like he did, or at least had the same idea. When steel industry rebounded the NRI, in this case Laxmi Mittal did end up becoming a steel king and one of the world’s wealthiest men.

  • 2010.Sep.05 at 12:46

    Enthralled by the sheer brilliance of analysis of how the energy sector will shape up in the near future. Gradual growth is the key to any business firm. Ambanis have stood the test of time and may be it is time for Vedanta Plc to resurrect their strategies. But, if shale oil reserves are the future for the next couple of generations or so, why can’t we look upto it as an alternative resource than pushing with the Nuclear stations?

  • 2010.Sep.02 at 17:53

    Quite true…..shale gas is the commodity of the future!
    Mukesh Ambani’s foresightedness is being shown in his latest ventures….as he makes his business future-proof.
    Anil Agarwal’s myopic view may fetch him temporary gain
    but Cairn is definitely going to become a burden for him in due course of time.


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