Will Anil Agarwal beat Mukesh?

To become and stay number one, Anil Agarwal should follow Mukesh's lead, and jump into the race for shale gas. That is the commodity of the future, says Swaminathan S Anklesaria Aiyar

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.