Corporate Front: Strategy, Can Unocal Strike Black Gold In India?

CORPORATE FRONT: STRATEGY
Can Unocal Strike Black Gold In India?

Its integrated Asia gameplan makes the oil giant revel in a cocktail of politics, lobbying, and sanctions.

By George Skaria & Sunit Arora

John F Imle and Arun Metre (right) Staring across the vast reservoir that is Asia, the $6.06-billion Unocal Corporation (Unocal) seeks oil and gas. But in these complex markets brimming over with potential, it finds controversy. If the $13.34-billion Enron Corp. always seems to be gobbling up projects in a hurry, countrymate Unocal claims that it is taking a long-term view. Indeed, Arun Metre, 54, the President and Managing Director of the wholly-owned, Mauritius-based Unocal Bharat will be 94 if (and not when) his company's grand plan for the sub-continent plays itself out.

To his credit, Metre is adept at waiting to strike black gold. For instance, in the 1980s, he oversaw Unocal's gas-exploration projects in Thailand, where it took 15 frustrating years to discover commercially-exploitable reserves. Explains Metre: "We are not throwing darts at the Indian, or other countries', boards." Adds John F. Imle, Jr, President, Unocal, who visited the country early this month: "Unocal's strategy is spread across borders, and hinges on integrating our different lines of businesses through regions."

Therefore, the search for the right fit: integrated projects that will mesh with its plans in neighbouring countries, like Bangladesh, Myanmar, and Pakistan, as well as in the other Asian nations like Turkmenistan (Central Asia), China, and Thailand. Explains Yogi R. Mehta, 61, a Delhi-based consultant: "Integrated strategies have been followed by many global corporations. The idea is to balance the risks across the value-chain even though the process of implementation may take longer." The Indian component of Unocal's $10-billion blueprint for South and Central Asia plans to:

Exploit reserves in Assam, Arunachal Pradesh, and Tripura. Ship this gas--along with the surplus gas available from its oilfields in Myanmar and Bangladesh--through a pipeline to West Bengal, Uttar Pradesh, Andhra Pradesh, and Tamil Nadu.

Set up integrated projects to partially consume the gas fed into its pipeline, which include a 650-mw power unit at Bawana (Delhi), and a 1,500-mw power plant and a 2,350-tonnes-per-day urea unit at Haldia (West Bengal). In addition, it plans to set up a 400-mw naphtha-based power plant near Bangalore in partnership with the Karnataka Power Corp..

Participate in 2 Liquefied Natural Gas (LNG) projects at Ennore (Tamil Nadu) and Maroli (Gujarat). Pump this--as well as the gas exploited in its Gujarat reserves--through either its proposed pipeline on the East Coast, or the existing HBJ pipeline on the West Coast.

Develop gas reserves in Turkmenistan and Pakistan, and ship them along a proposed $2.50-billion pipeline that would link Turkmenistan, Afghanistan, Pakistan, and India.

Given the geopolitical sensitivities in both Central and South Asia, controversy has stalked Unocal at every step. The company has been fighting a bitter battle with activist groups in the US urging Unocal to withdraw from its $1-billion Yedana project in Myanmar, where it owns 28 per cent of a joint venture with Total of France, the Petroleum Authority of Thailand, and Myanmar Oil & Gas Enterprise. In April, 1997, the Clinton Administration prohibited further investment by US companies in Myanmar, where a military junta forcibly took power in 1988. In particular, human rights organisations, like the Free Burma Coalition, are putting pressure on Unocal to withdraw from the project.

In reply, Unocal has opted for an open, public war to protect its investments in Myanmar. For one, the company, which is legally headquartered in California, has set up "twin headquarters" in Singapore, from where Imle operates. Moreover, according to the rightist weekly, The New Republic (May 25, 1998): "A former Congressional staffer says that USA Engage (a powerful business lobby in the US formed to fight sanctions) began as a front group for Unocal" Imle defends his company's stand: "Unocal strongly believes that constructive economic engagement, as in countries like Myanmar, can lead to positive changes."

In such a charged atmosphere, Unocal is betting on aggression, rather than patience, to yield results. Similarly, in India, Unocal has kick-started its $4-billion (equity investment: $500 million) strategy by buying out a 26 per cent stake in the Vadodara-based Hindustan Oil Exploration Corporation (hoec) for Rs 80 crore. hoec--which has the rights to exploit gas and oil reserves in Gujarat, Assam, Andhra Pradesh, Tripura, and Arunachal Pradesh--will be an ideal launch-pad for Unocal. Says P.K. Rudra, 61, the former chairman of the Rs 350-crore Engineers India: "The acquisition is a win-win situation for both partners." BT learns that Unocal is also looking at 2 other takeover targets to hasten its entry into the country. Admits Imle: "There could be more such alliances. Our minds will be open."

This urgency is rooted in the reality that some of Unocal's projects may be put on the backburner. And even the ones that will see the light of day have inherent risks--political, diplomatic, and economic. For instance, any fresh investment in the North-East by Unocal will have to take into account, over and above the acreage offered for exploration, the security considerations caused by the worsening militancy in the region. And then, procedural delays could hamper the progress of Unocal's fertiliser and power projects in West Bengal.

Some of Unocal's transnational projects are in jeopardy too. For instance, the Turkmenistan pipeline--proposed by a consortium of 6 companies led by Unocal (54.10 per cent stake)--is a non-starter since the pipeline will pass through politically-explosive Afghanistan. In fact, Unocal had earlier stated that the project would have to wait till Afghanistan achieved the "peace and stability necessary to obtain financing from international lending agencies (and established) a government that is recognised by the US and the United Nations." And, after the US missile attack on Afghanistan's terrorist-bases on August 20, 1998, the project may be in jeopardy. Agrees Metre: "The project may take longer to implement."

Even if the situation in Afghanistan stabilises, the fact remains that the proposed pipeline will pass through Pakistan. Similarly, in the East, like Enron, Unocal's Indo-Bangladesh pipe dreams may not take off until the 2 governments resolve their differences. And then, there's the sanctions imposed on India by the Clinton Administration in May, 1998, which have been partially removed. While Unocal feels that the sanctions will not have a long-term impact, the company is clearly getting bogged down by South Asian politics. Agrees Imle: "While we feel good about our progress in Myanmar, I cannot say the same about India."

On the positive side, Unocal's India-specific projects are progressing smoothly. Apart from exploration activities, Unocal's power project near Bangalore is on stream, but its capacity may have to be reduced to 300 mw due to lower naphtha allocation. While the company has bagged the contract for the Rs 1,200-crore Maroli project, and has been shortlisted for the LNG project at Ennore, the problem, admits Metre, is that "there will be a limited number of LNG facilities built" in India. Hence, Unocal needs to be among the first 2 or 3 of the dozen projects on the anvil to come up.

In any case, integrated projects are generally implemented by a consortium rather than a single company. Not surprisingly, Unocal is roping in other partners to build the pipeline and the LNG projects to reduce risks and investments. So, the company could walk into other projects as a partner at a later date. As it did in Myanmar in 1993--2 years after its unsuccessful attempt to find gas at an on-shore site.

That explains why Unocal insists on a long-term strategy in Asia. Asserts Metre: "We are not talking about a 4-5 year time-frame. We are looking at a time horizon of between 30 and 40 years." But that doesn't imply that Unocal can afford to lose out in the short run. Clearly, it needs to either bag projects or partners to ensure that its Asia strategy flows in a well-oiled fashion. But for now, Unocal is still trying to come to grips with Asia.

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