India's big private refiners this week staked out aggressive plans to become integrated mini-majors with overseas oilfields and petrol stations, a strategy that just might work -- if they can get big enough.
Top officials from Reliance Industries) and smaller rival Essar Oil Ltd told the Reuters India Investment Summit they needed to boost overseas output to enhance the supply security of their refineries, which they are expanding to become the biggest and fourth-largest in the world respectively.
And they are also eager to buy retail outlets abroad where they can sell fuel at market rates, as opposed to regulated local prices that are kept intentionally low by the government.
But, even with a combined refining capacity of some 1.9 million barrels per day (bpd) at the end of this decade, the two firms are still half the size of vertically integrated majors such as Exxon Mobil Corp or BP Plc.
The key is if you want to be an integrated player then you have to have scale, Manisha Girotra, managing director and chairperson for UBS India, said at the Reuters Summit.
You can't be one of the smaller players.
Reliance, India's biggest listed firm with a market capitalization of over $100 billion, and Essar Oil hope to be producing more than 500,000 bpd at overseas oilfields within the next five years, officials said, covering more than one-quarter of their capacity as a way to guarantee future supplies.
They're not alone in that pursuit.
While huge state-owned refiners like China's Sinopec Corp and national standard-bearers like Malaysia's Petronas PETR.UL have stolen the limelight in the race for resources, private firms like Japan's Nippon Oil Corp and Singapore Petroleum Co are also searching for oil.
However their independent peers in the West, such as Valero Energy Corp of the United States or Europe's Petroplusx, have steered clear of deviating into the upstream.
Some analysts say the logic of integration and supply security may be a smokescreen for the desire to capitalize on oil prices CLc1 of near $100 a barrel, especially with growing fears that the golden era of booming profit margins may be drawing to a close at the end of this decade.
Every commodity guy talks of getting into exploration and production, and they may give lots of excuses, but all of them, cutting across the line, are attracted by high energy prices, said Kumar Manish, associate director at consultancy firm KPMG.
Atul Chandra, president of Reliance's international oil business, this week signaled the firm would shift from years of strong organic growth to pursue acquisitions of up to $15 billion, but said he was reluctant to pay up for proven reserves.
Getting discovered properties is extremely difficult, even if you get that, they hardly leave any value for you. We cannot acquire for the sake of acquiring, he said.
These private firms have the luxury of cherry-picking assets while state-owned rivals like Indian Oil Corp and flagship Oil and Natural Gas Corp are under government orders to help fuel Asia's third-largest economy and meet the energy needs of its 1.1 billion people.
Manish says high oil prices have also boosted valuations of smaller exploration firms such as Canada's Nikko Resources, U.K. firm Hardy Oil & Gas or even India's Hindustan Oil Exploration.
It's a rosy story for many of these guys, and some of the companies do look at market cap as a driver, he said.
Few doubt that Reliance and Essar have the willpower or funds to branch out, extending a long tradition of Indian conglomerates successfully moving into new sectors.
Reliance itself was founded in the 1970s by India's corporate legend Dhirubhai Ambani as a textiles firm before it moved into petrochemicals and later refining.
In September, Reliance bought east African retailer GAPCO for about $100 million, gaining 250 retail outlets in Tanzania, Kenya and Uganda, and hopes to expand on that.
Essar too is interested in selling its products in regions such as Africa, which promise an undeniable combination of high demand and competitive prices.
We are looking for some permanent homes for our products, which may be in retail, Essar Oil Managing Director Naresh Nayyar told the Reuters Summit.
(Editing by John Mair)