Monday, April 30, 2007

Now Mittal is eyeing the Oil Industry

Excerpts sourced from Wall Street Journal

Lakshmi Mittal, the global steel business giant, is setting his sights on another elemental commodity: oil. Some of the strategic initiatives by him in the recent times validate this statement:
# In the past year, the London mogul's private investment company, Mittal Investments, has joined with India's state-owned Oil & Natural Gas Corp. for several overseas joint ventures in oil field exploration.
# It also has teamed with large oil firms in Russia and France to develop reserves in Africa and Asia.
# Last year in Nigeria, ONGC and Mittal successfully bid for promising and sought-after oil-exploration acreage. Part of their pitch: a commitment to invest some $6-billion (U.S.) to build, among other things, a refinery, a power plant and a railroad in the country.
# Mittal Investments holds a 48.02-per-cent stake in two joint ventures – ONGC Mittal Energy Ltd. and ONGC Mittal Energy Services Ltd. – while ONGC owns a 49.98-per-cent stake in those ventures, with the balance held by investment firm SBI Capital Markets Ltd.
# Has teamed with Russia's OAO Lukoil Holdings and Total SA of France, paving the way for more deals in Africa and Central Asia. Mittal Investments also is getting into oil refining, recently announcing a $720-million investment for a 49 per cent stake in an oil-refinery project to be built by state-run refiner Hindustan Petroleum Corp. in northern India.

Mittal and ONGC
ONGC has had several prospective deals fall through, sometimes being outbid by others for new oil fields. ONGC's oil-and-gas portfolio outside India is thinly spread around the world, including modest projects in places like Myanmar, Sudan and the Russian Far East. That is where Mr. Mittal comes in. The joint venture gives ONGC a partner who is a specialist in deal making and who also has access to capital, thanks to his reputation on Wall Street. It “improves [ONGC's] ability to go into these overseas areas more effectively,” said Luke Parker of Wood Mackenzie, an Edinburgh oil-consulting firm. The partnership between Mittal and ONGC has plans to move further into energy trading and shipping, and it could stretch to 21 countries in coming years, according to the parties.

Mittal is venturing in Oil sector in a similar manner in which he, over the past two decades, built a tiny Indonesian metals mill into Mittal Steel Co., which will finalize its merger with Arcelor SA of Luxembourg this summer.

Because Mr. Mittal is a force to be reckoned with in the global commodities business, his moves are sending ripples through the oil industry. In spite of these apprehensions in the market, Mr. Mittal is quiet about his intentions. “The family is making investments to diversify the portfolio,” he said in a recent interview, declining to elaborate. “It is a very infant stage. There is nothing much to talk about.”

On the contrary, industry insiders don’t feel threatened by these initiatives. According to billionaire Wilbur Ross, who sits on the board of Mittal Steel of the Netherlands “I don't think that he is going to be able to consolidate the whole world's oil industry; that's a big bite even for him. I think he is doing it partly to help India and partly to make money.”

Any foray into oil comes with risks. While the steel business is cyclical – prices swing with the global economy – there is no business with bigger boom-and-bust cycles than oil. Today's lofty oil prices have inflated the cost of everything from older oil fields to new exploration licenses worldwide, boosting the entry costs for newcomers. If oil prices fall significantly – or crash, as they have after every other boom – it will be much harder to make money from Mittal's investments. Meantime, salaries and other costs have soared, pinching the biggest, most efficient companies, such as Exxon Mobil Corp., Royal Dutch Shell PLC and BP PLC.

There are some parallels between the steel industry of the 1990s and oil today. Like steel was then, oil today is poised for consolidation and is dominated in many countries by state-owned companies. However, the differences are formidable. When Mr. Mittal started building his steel business, many steelmakers were considered dinosaurs and could be bought cheaply. By contrast, the oil business is brimming with highly valued assets and pumping at near full throttle to meet today's demand.

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