Sovereign Wealth Funds to Invest in India’s Oil Exploration Sector

E&Y report also lists China’s SWF as possible investor in India

Ernst & Young has come out with a new report that forecasts India will receive up to USD10 bn of investment in oil exploration and production sector. Interestingly, report also suggests that Sovereign Wealth Fund (SWFs) of Mid-east, Singapore and China would be making such future investments in India’s oil and gas exploration. Also, exploring there chances would be much reluctant Japanese Banking institutions, which so far don’t have a bigger presence in India.

SWFs are surprise entrant to the Indian exploration market. SWFs have been making huge investments in energy sector focused around Mid-east and Africa region but India was never on its target as most of the investment is directed towards securing it energy needs. E&Y has unexpectedly included SWFs from China, which have been in forefront of securing China’s growing energy need and have been competing with India on foreign acquisitions.

India opened its oil and gas exploration sector for private players through New Exploration and Licensing Policy in 1998, so far seven rounds have taken place and 207 blocks have been awarded to the participating companies. This has brought down the average unexplored acreage in India’s total sedimentary area to 15% in FY07 from 41% in FY '99.

UNCTAD ranks India as the 2nd most preferred FDI destination

The United Nations Conference on Trade and Development (UNCTAD) in its ‘World Investment Report 2008’ has ranked India as the second most-favored location for foreign investment in 2008, behind China but ahead of Russia and Brazil. China and India are the two top preferred destinations not only for the current year but for the next three years (2008-2010) as per the report.

Growth in FDI has been on the back of robust economic growth, improved investment environment and further opening up of telecommunication, retail and other sectors. More than a quarter of 300 international retailers told UNCTAD that they have either opened their first store in India during 2007 or are planning to do so in the near future. Large scale investment transnational corporations like Oracle, Holcim and Matsushita has further bolstered the FDI inflow.

India received the fourth largest amount of FDI inflows in 2007 in Asia (after China, Hong Kong and Singapore), at $23 bn, growing by around 17% over $ 20 billion in 2006. Significantly, India is fast giving tough competition to the Singapore that ranked third in Asia in the amount of FDI inflows. India was also the fourth-largest source of FDI in Asia, as Indian companies invested $13.64 bn abroad in 2007, up more than 6% compared with $12.84 bn in the previous year.

The country has improved its ranking in the inward FDI performance index (which measures the flow of foreign investment into a country relative to its GDP) from 110 in 2006 to 106 in 2007, which is above Germany and Taiwan, but below that of Hong Kong and Indonesia. The report also talks about a survey by the Japan Bank for International Cooperation (JBIC), in which Japanese transnational manufacturing companies have rated India higher than China for establishing business operations.

Though the report appeared bullish on India due to the interest shown by the likes of Wal-Mart, and expansion by auto giants, it also warned of possible hurdles which would make it tough for India to reach the annual inflow target of $50 bn by 2010, of which poor infrastructure emerged as the biggest roadblock. Other experts also believe that the global liquidity crunch may impact FDI inflows into the country.