Mr Vikram Mehta, Chairman of Shell Companies in India since 1993, says his company is looking at consolidating business in India. However, the company is not ready to get into oil and gas exploration. In an interaction with Business Line he spoke about the company's commitment to India's oil retail business, gas market and the global oil and gas market.

What is your take on crude oil pricing?

Price of crude is between $115 and $120 a barrel, depending on the type. The reason why crude prices are in this range is because of trouble in West Asia and North Africa. It is not because of the fundamentals. Demand has increased over 2010 because of economic growth in China, India and indeed in West Asia. There is sufficient supply.

Today, OPEC (Organisation of the Petroleum Exporting Countries) has sufficient capacity of about 4.5-5 billion barrels a day, while the total impact because of trouble in Egypt and Libya is around 2.5 billion barrels a day. Supply itself has not impacted the market, but there is a psychosis of fear and uncertainty in the market place. My personal take is that eventually demand and supply will come into place, and the crude oil prices will soften.

What about the gas market?

It has been impacted by the recent tragedy in Japan. The estimate is that about 22 GW of energy is being (negatively) impacted because of nuclear power. I understand that about 25-28 per cent of Japan's energy is met through nuclear power. There have also been some disruptions in power generation through thermal power (coal-based power plants). And this shortfall in energy is going to be made up in the first instance by gas. There is sufficient LNG (liquefied natural gas) in the market. Most likely spot gas will be diverted from Europe to Japan. The estimate is that Japan will need additional 9-12 million tonnes annually to meet part of the shortfall. This will mean 12-13 additional LNG cargoes. So the price of LNG is going to tighten.

How will the global trend impact India?

Impact in India is pretty obvious — we import crude oil and we also import gas. Increase in crude oil prices will further burden foreign exchange, and this will seep in through inflation.

Where do you see gas price in India going?

Gas is still trading at a discount of $8-9 to crude oil. That is, gas is priced at $10/mBtu, which is equivalent to around $60/barrel of crude oil. So, current gas prices are discounted. The bottom line is that there is going to be some additional pressure on the price of gas, and that is going to impact the consumer.

What is Shell's strategy in India?

Shell's business footprint in India is well established. It has four broad verticals — retail business: ATF (aviation turbine fuel), bitumen, petrol, diesel, and lubricants; gas business: LNG terminal, re-gasification and marketing; technology centre in Bangalore catering to all Shell companies around the world in areas ranging from petroleum engineering to refining to pure research and development; business services centre in Chennai which is involved in providing financial support to the group worldwide.

In addition, a large part of the business is in trading. We trade crude oil and chemicals. We also have technology licensing business — for Reliance Industries' (RIL) refineries, and PSU refineries in Mumbai, Kochi and Visakhapatnam.

But what about exploration?

We are not saying that India does not have hydrocarbons. We are just saying when compared to opportunities in other parts of the world, India is not ranked higher. And that's why we have not invested in the upstream business here. We have not bid in NELP (New Exploration Licensing Policy) rounds also.

This doesn't mean we will not be there in the exploration business forever. Situations change. But it is not part of our game plan right now. Our game plan is to consolidate and grow our current business in India.

Expectations were there that instead of BP, Shell will tie-up with RIL for the exploration business…

We are not the only company that has deepwater technology. We are one of the best. But there are others — BP, Petrobras, and Exxon. We have a strong relationship with Reliance. Shell is always looking at opportunities. We assess those against other opportunities. This one was not something which we were looking at.

Do you see competition in the gas market with BP-Reliance coming together?

Under every scenario the potential demand for gas far exceeds domestic supplies. At significantly high prices that demand evaporates and there is always scope for imports. India currently has two LNG terminals and two are in different levels of commissioning. And if you consider only these four then there is capacity for 20 million tonne per annum (mtpa). Some companies including us may expand. So the capacity could go up to 25 mtpa, but still there will be sufficient gap in demand and supply. We welcome competition. It makes us sharper, we feel we have the strength to compete with the best and competition will create a level playing field.

What is your take is on pool gas price?

Gas-pool pricing as a concept is complicated. A committee has been set up. I hope and expect that they will ask us to submit our views. The bottom line is that ultimately we need to have a transparent pricing system that is related to international market price. We cannot get into a system where there is cross-subsidisation. If there is subsidisation, it will result in distortion of the market. It is the consumer who eventually has to pay. We need to have a pricing structure that meets the demands and requirements of the producer and marketer of the gas, the consumers and the Government, which are the major stakeholders.

But simultaneously you can't have a situation where you are selling at low cost. This is exactly why today the private sector is not selling petrol and diesel. Ultimately it is the consumer who is getting hurt. Competition has a positive impact.

Did Shell opt out of the petroleum retail business because there was no level playing field?

No, we have not opted out. We are very much in the business. We firmly believe that the Government will restore the level playing field. Our strategy is to continue to grow the retail business. We had a few pieces of land and also retail outlets that we decided to dispose of. These no longer met the requirement of our network strategy. We have redesigned our network strategy.

Our broad plan is to continue to grow in the retail business in India. We are bullish. But we, of course, do not want to invest large money as we are not selling large volumes. I am of the view that sooner or later the Government will have to take a call on diesel pricing. I am not talking about deregulation of diesel.

Are you running your LNG terminal to full capacity?

We are running our terminal to 60-100 per cent capacity. Yes, there was a time when crude oil was at $120/ barrel and price of LNG was also high. Then there was a drop. Then there was a time when Reliance started production. But these are ups and downs of the business…but 2-3 years from now we expect the capacity to be fully utilised.

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