No oil in troubled waters

The outbreak of conflict in South Sudan last December led to the shut down of India’s multi-billion dollar oil project in the young country. The instability sent Indian diplomats scrambling to play damage control as ONGC Videsh Ltd (OVL), the international arm of India’s national oil company, was forced to evacuate its personnel from the region.

After a decade of rapid growth in the international oil industry, India’s overseas ventures are buckling under pressure from unstable politics and conflict.

India’s experience of investing in oil in Sudan and South Sudan offers three takeaways. First, investing dangerously has produced tremendous payoffs. By entering countries such as Sudan and Syria, from which American oil companies were sanctioned and European competition generally avoided, India’s OVL has become an international player Even though ONGC had mulled over dismantling the subsidiary in the late 1990s due to its poor performance.

The unorthodox approach and tactic of investing in oil-producing countries with little Western competition produced results. OVL went from holding a single gas project in Vietnam at the turn of the century, to 32 projects in 16 countries today. It is now the second largest oil producing company in India after ONGC. Sudanpropelled OVL’s rise. Before South Sudan separated from Sudan in July 2011, taking 75 per cent of the oil resources with it, a united Sudan made up an average of over 46 per cent of the company’s annual oil production. From 2003 to 2010, OVL’s profits increased six-fold from ₹4,284 million to ₹26,905 million.

However, OVL’s corporate success is now in jeopardy. In this context, the second lesson for India is that local politics in oil-producing countries in Africa and elsewhere is far from static. A decade ago, Sudan’s civil wars and poor relations with the US provided OVL with an investment foothold by driving away Western competition. Today, the separation of South Sudan and its ensuing conflict have put OVL’s oilfields at the centre of instability.

The recent shutdown in South Sudan marks the second time in less than two years that OVL has been forced to halt its operations. South Sudan previously turned off its 350,000 barrel per day (bpd) production in January 2012 in a row with Sudan over pipeline transit fees. This time around, a power struggle between South Sudan’s president, Salva Kiir, and his former vice-president, Riak Machar, degenerated into widespread violence throughout the country.

In the late 1990s, Machar and other Southern Sudanese militias had sided with the Sudanese government to protect the oilfields. The support helped to open up oil areas to exploit. In the current conflict, Machar and his forces now aim to disrupt production from the very same oilfields they once defended. They want to choke off the South Sudan government’s main source of income. And they have largely succeeded in doing so. In Unity state, where all of OVL’s oil interests are located, the oil taps were turned off less than two weeks after the fighting began.

The repeated instability in Sudan and South Sudan is the main reason why OVL’s total production has dropped by over a third in the last three years. But former managing director, DK Sharraf, now at the helm of ONGC, is confident that despite these troubles, OVL will rebound in 2014 on the back of new production in Azerbaijan and Myanmar. The company is trying to aggressively diversify its international portfolio. But South Sudan still holds some of the company’s largest assets. Until there is a political solution to the conflict, OVL will be forced to watch its bottom line languish for some time to come.

The change in fortune of OVL in Sudan and South Sudan gives rise to the third takeaway from a decade of Indian overseas oil investments. New Delhi has been helpful in assisting OVL and other national oil companies enter new markets overseas, but what is lacking is the Indian government’s ability to ensure the sustainability of such investments in the face of political upheaval. India needs to actively shape incentives and support stability in overseas countries where its companies are invested prior to the outbreak of conflict or political change. If not, it will continually engage in firefighting after much of the damage is already done.

The ministry of external affairs was quick to send a team to South Sudan’s capital Juba to assess the situation. But while India has made its presence known, it is still very much on the sidelines of international efforts to help broker peace in South Sudan.

India named a special envoy to Sudan and South Sudan in April 2011. PS Raghavan was the last diplomat to hold the post. Coupled with his leadership of the MEA’s Development Partnership Administration, Raghavan was in an excellent position to advance India’s interests in South Sudan. But he was named India’s ambassador to Russia in late 2013. The special envoy position was left untended.

The structures to protect India’s overseas oil interests have been put in place within the MEA, but they are not exploited to their full potential. Minister Salman Khurshid’s comment that OVL’s troubles in South Sudan were “part of life” was out of touch and unhelpful. A constant and high-level engagement from the Indian government in Sudan and South Sudan is absent.

The Chinese government is adapting its diplomacy to protect its economic interests abroad at a much faster pace than the Indian side. China’s special representative on African Affairs, Zhong Jianhua, was very active in the ceasefire negotiations. He said the diplomatic involvement in South Sudan was a “new chapter” for China’s foreign relations, which, for decades, have followed the policy of non-interference in the domestic affairs of foreign countries.

In India, the clamour to win billion dollar oil deals against Chinese competition will certainly continue in the future. But India’s corporate and political leaders would be wise to take on lessons learned from the rise and fall of their most coveted international oil investments in Sudan and South Sudan. The role of local politics in undermining India’s global oil rise should not be taken for granted.

The writer is the author of ‘The New Kings of Crude: China, India, and the Global Struggle for Oil in Sudan and South Sudan’. This article is by special arrangement with the Center for the Advanced Study of India, University of Pennsylvania

(This article was published on March 25, 2014)