The Rise of Goliath

by AK Bhattacharya

  The strained relations between the Indian government and the foreign oil companies operating in India owed their origins to the realization of the Indian political leadership that the country was far too dependent on the latter. India’s oil industry was effectively controlled by a few foreign oil companies like Burmah-Shell, Standard-Vacuum and Caltex. The writing was on the wall for these foreign companies when the Indian government gave vent to its intentions—first in the industrial policy of 1948 and later in 1956—that the State would like to see all new facilities in the petroleum industry to be set up in the public sector.4 The foreign companies realized their days in India were numbered. However, in spite of the change in the policy, India remained tied to a colonial oil-supply system in which India could import its petroleum products only from Sterling-area countries, which meant India had to make payments in dollars or pounds. Recognizing the hardships in paying for oil in dollars, India considered the option of reaching out to the oil companies to explore the feasibility of setting up a refinery in the country to reduce India’s dependence on imports of petroleum products. However, there were not too many takers of this approach within the country. Many experts advised the government that reaching out to foreign oil companies and requesting them to set up refineries in India would not bear fruit.

  However, the foreign companies operating in India had expressed their willingness to set up two refineries in the country provided that they could sell the products at a price that was 10 per cent higher than the price at which they would be available in the international market. That was in 1949. For good reasons, the Indian government spurned such offers and the relations between the foreign oil companies and the Indian government reached a new low.

  Two years later, international developments in West Asia changed the foreign oil companies’ minds once again. Iran, where these foreign companies had a huge presence, decided in 1951 to nationalize the British Petroleum-controlled oil refinery in Abadan, Anglo-Iranian Oil Company, and expelled other Western companies from other oil refineries in the city. Supplies of petroleum products to India from Sterling areas (markets with which India would trade using Pound Sterling as the currency) became a problem and the Western companies also feared that in such a situation Iran might make inroads into the Indian market. Burmah-Shell and Standard-Vacuum decided to extend an olive branch and set up a refinery each between 1954 and 1957 near Bombay. Another refinery was being built by Caltex in Visakhapatnam.

  Even after the setting up of these refineries, the relations between the Indian government and the foreign oil companies saw no significant improvement. The first note of discord surfaced over the crude oil discovered in 1953 at the Naharkatiya oilfield near Dibrugarh in Assam.5 The government was keen that the crude oil from Naharkatiya must be processed under a joint production arrangement with Burmah Oil. In other words, Burmah Oil was denied the exclusive rights over refining or marketing of the oil from Naharkatiya. Burmah Oil retaliated and suspended all exploration activities in India. This decision was prompted by the government’s thinking that such oil assets should be exploited in the state sector as part of its policy on developing the hydrocarbons sector keeping in mind the strategic goal of building domestic capacity in this area. Burmah Oil, on the other hand, was naturally disappointed as it felt cheated out of an asset it wanted to exploit and through that expand its presence in the Indian market. The second note of discord arose out of the government’s charge against the foreign oil companies regarding the pricing of the imported oil. The government said the foreign companies were charging a price for imported oil that was much higher than could be justified by any yardstick. Complicating the situation further, these oil companies were not in favour of refining the Soviet crude oil that the Indian government had by then begun to import at relatively better and easier terms. With impatience with the foreign oil companies running high as they were not too keen on either expanding their refineries capacity in India or training Indian engineers for refineries, the government decided in 1958 to set up Indian Refineries Limited in the state sector, which in the next few years was able to set up, with Soviet and Romanian assistance, new refineries at Noonmati near Guwahati in Assam, Barauni in Bihar and Koyali in Gujarat. Making life more difficult for western foreign oil companies in India, the government told them that no permission would be granted to them to build new refineries in the country unless they agreed to offer the Indian government a majority shareholding in them. It became clear that just as oil influenced global politics, the reverse also was true in India.

  It was under these circumstances that the government decided to set up the Indian Oil Company in 1959, with the primary objective of supplying petroleum products to Indian public-sector enterprises to meet their demand. Gradually, its role expanded and it was entrusted with the responsibility of selling petroleum products of state refineries. After a short period of relative stability, the domestic oil market was once again disrupted by a price war triggered by the foreign oil companies in India. This was in August 1961. The foreign oil companies were uncomfortable with the rapidly rising imports of oil by India from the Soviet Union and undercut prices quoted by Indian Oil, which retaliated with even lower prices. As a result, it was faced with margin pressure, made worse by its storage problems. The western foreign oil companies soon realized that it was a losing battle as the government of the day had decided to side with Indian Oil Company as it was driven by the national considerations of allowing an Indian company to secure and preserve its dominance in the market. The government also placed a cap on the foreign companies’ marketing share, which was linked to their share in the domestic refining capacity.

  The early 1960s saw further consolidation of Indian oil companies and marginalization of the foreign oil players. Indian Refineries Limited, with its three refineries, was merged with Indian Oil Company in 1964. The merged company was rechristened Indian Oil Corporation, which now was in the business of both marketing petroleum products and refining oil. The primacy of Indian Oil Corporation was also ensured with the government deciding that all future refinery ventures would have to sell their products through its marketing network. Not only that, the government prohibited imports of crude oil and petroleum products by private companies and made IOC the exclusive agency for importing petroleum products, including crude oil, and distributing them to other refineries or companies in the Indian market. It was becoming clear that closer ties with the Soviet Union and India’s increasing reliance on oil imports from that country led to a set of economic policies that gave rise to state controls in more areas of the economy, including the oil sector. If Western oil companies had to set up refineries in India, they had to partner the Indian government. Thus, in 1963, the Indian government, Phillips Petroleum Company of the US, and Duncan Brothers & Company, an Indian firm, joined hands to set up Cochin Refineries and started refining oil from 1966. Similarly, Madras Refineries (later renamed as Chennai Refineries) was set up in 1965, where the Indian government had a share of 74 per cent, with AMOCO of the US and National Iranian Oil Company of Iran, holding 13 per cent shares each.6

  The frosty relationship between foreign oil companies and the Indian government continued even in the early 1970s. Nevertheless, foreign oil companies maintained their dominance in the Indian oil sector until the mid-1970s. As explained earlier, many minor problems arose in the way these foreign oil companies were operating in India. There were irritants arising out of their pricing policies and the margins of profit they were hoping to earn from their operations in India. But there was a new trigger in October 1973, when the OPEC decided to cut oil supplies to the US and Western countries and jacked up global crude oil prices.

  One of the consequences was the Indira Gandhi government’s decision to nationalize the three foreign oil companies that were still operating their refineries in India. The response from the foreign oil companies was of shock as their worst fears of growing Soviet influence on the Indian economy were coming true. They also apprehended
that the Indian government would continue to adopt socialistic policies. Caltex and Esso were quick to decide on leaving India as a market, but Burmah-Shell explored the options of staying on in the Indian market even as a minority partner in the ventures that had been launched in the country. The government did not accept the proposal. On the other hand, Caltex and Standard-Vacuum faced their own internal organizational challenges and were quick to quit India, though they retained their linkages through crude oil supplies.

  The first to go was Esso, which had a 26 per cent stake in Hindustan Petroleum. In 1974, the Indian Parliament passed the Esso (Acquisition of Undertakings in India) Act, 1974, that would allow the government to take over the assets and business run by Esso Eastern Inc. The stated objective of the takeover was to ensure coordinated distribution and utilization of petroleum products marketed by Esso Eastern Inc. in India. Burmah-Shell was the next company to exit when a similar law was passed in 1976. A year later, in 1977, another law was passed by Parliament to nationalize the businesses of Caltex—the third foreign oil company to be affected by the government’s nationalization drive.

  On 28 November 1975, The New York edition of the New York Times7 carried a small news item that brought out how India had said goodbye to foreign oil companies. Datelined New Delhi, the report filed on 27 November 1975 stated:

  The government announced today that Burmah Shell, the British-owned oil company in India, would be taken over at the start of the new year. An agreement, signed last night, provides for 100 per cent acquisition of the company, the largest foreign oil operator in India, which owns a 6-million tonne refinery and a vast network of gasoline stations. The take-over is the second of a foreign oil company here. An Exxon subsidiary was taken over by the Indian Government two years ago. Burmah Shell would be paid adequate compensation, official sources said as was Exxon. Negotiations for the take-over of Caltex, the third oil company here, would begin soon, they said. But with the acquisition of Burmah Shell, the government brings under its control 95 per cent of the entire petroleum industry in the country.

  There is little doubt that Indira Gandhi was the primary force behind the series of disruptions that were unleashed in just about six years from 1969 to 1975. The economic disruption they caused in a wide range of sectors of the Indian businesses and economy was actually a response to a political challenge to Gandhi. A potential political disruption was averted through economic disruption that delayed by at least a couple of decades India’s eventual turn to private enterprise and competition. But the sustained manner in which Gandhi used economic policy disruptions to achieve political goals will have few parallels. What is remarkable is that she managed to get around her a set of key advisers who helped execute her ideas and offered justification for the steps she took during those years. While those advisers had reasons to believe in the economic merit of the steps they endorsed like nationalization of banks, Gandhi chose to adopt them initially for her own political survival and then to strengthen her position within the Congress and the government.

  The importance of the influence of people like Kumaramangalam and Haksar, as well as the ideological force exerted on her by political leaders like Chandra Shekhar, is difficult to ignore. Once those influences were over or when these personalities ceased to hold any sway over her or when she saw that the potential political benefits of such Left-of-Centre economic policies were on the wane, Indira Gandhi looked like a different political leader. She lost little time in abandoning those policies on nationalization and state control. Instead, she embraced more market-friendly economic policies. When she returned to power, after the Emergency, and again assumed charge as prime minister in 1980, her economic policies changed direction, ushering in the first phase of liberalization, encouraging foreign investment, moderating import duties and relaxing industrial licensing policies. Gandhi’s nationalization drive was the outcome of a political necessity and the influence of her political colleagues and advisers.

  Section 6

  The Oil Jolt

  CHAPTER 10

  INDIA’S NEW DISRUPTION

  For most Indians, 19 October 1973 does not ring a bell. But this was the day when a decision taken by twelve members of the OPEC fundamentally altered the way India would manage its economy for all times to come. That day at Vienna, OPEC decided to place an embargo on oil exports to the United States and raise prices of crude oil. In six months or so, oil prices spiked by over 300 per cent. The primary reason for the OPEC countries placing an embargo on exports of oil to the US was because the latter had intervened in the West Asian war between Israel on the one hand and Syria and Egypt on the other. The US intervention tilted the balance in the war in favour of Israel. The OPEC decision was a retaliatory move.

  India, among many other countries, was a major sufferer. Its dependence on crude oil imports to meet its energy requirements was almost 65 per cent. Even after the OPEC embargo was lifted, oil prices remained elevated. A new uncertainty in the global oil economy was introduced. Whenever OPEC, which accounted for a large chunk of global oil production and exports, decided to cut supplies or production, prices shot up. The disruption to the Indian economy was huge. Fresh from a victory in its war with Pakistan, which led to the creation of Bangladesh, India was politically resilient. But its economy was a victim of global oil politics played by OPEC.

  The decision of OPEC in 1973 was its first big action since its formation in 1960. Five oil producing and exporting countries—Iran, Iraq, Kuwait, Saudi Arabia and Venezuela—had signed an agreement in Baghdad in September 1960. OPEC’s mission was to ‘coordinate and unify the petroleum policies of its member countries and ensure the stabilisation of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry’.1 Shorn of the jargon and niceties of the phrases used to describe its mission, OPEC was essentially meant to galvanize joint action from the major oil-producing and -exporting countries to secure higher prices for a raw material they knew was finite and would not last long. Hence, they recognized the need to raise the price of crude oil so that they could make the most of their non-renewable natural resources.

  The idea of regulating oil supplies in order to protect the producers’ income was so appealing that by 1962, three more countries—Qatar, Indonesia and Libya—joined OPEC. And by the time OPEC took that momentous decision to impose an embargo on oil supplies to the US in October 1973, four more countries—the United Arab Emirates, Algeria, Nigeria and Ecuador—had joined the group. Four more countries joined OPEC—Gabon in 1975, Angola in 2007, Equatorial Guinea in 2017 and Congo in 2018—but in 2016, Indonesia suspended its membership for the second time since it joined OPEC in 1962. With fifteen member-countries, OPEC by now controlled over 42 per cent of the world’s total oil supplies, 61 per cent of total oil exports and 80 per cent of proven oil reserves. During the early years of its existence, OPEC did not have much of a say or role in the way international crude oil prices behaved. But things began looking up during the early 1970s, when first the international demand for crude oil went up and simultaneously the domestic production of oil in the US declined.

  Two sets of developments, no less significant in terms of their potential for causing major international disruptions in the world economic order, had led to the further hardening of oil prices. In a dramatic move, US President Richard Nixon decided in 1971 that he would take the dollar off the gold standard. This was a reversal of a policy that the US had adopted in 1944 in the wake of the Bretton Woods arrangement that among many other things also led to the creation of the World Bank and the IMF to restore economic order and fuel growth in the aftermath of the Second World War. On 15 August 1971, after a couple of days of intense consultation with his economic advisers and senior officials of his government, President Nixon announced what is by now known as the Nixon shock or the New Economic Policy.2 It marked the start of a process to end the B
retton Woods system of fixed exchange rates, which had come into being after the end of the Second World War.

  What did the Bretton Woods system seek to achieve? It had envisaged a system where the external values of foreign currencies would be fixed in relation to the US dollar. And the US dollar’s value would be expressed in gold at the price of $35 an ounce, fixed by the Congress. In less than two decades, the dollar became overvalued. This was because a surplus of the US currency—caused by its foreign aid, military spending and foreign investments—created an untenable situation wherein the US did not have enough gold to cover the volume of dollars in circulation globally if measured against a gold price of $35 an ounce. Two of Nixon’s predecessors had made valiant attempts to support the dollar and keep the Bretton Woods system alive. John Kennedy and Lyndon Johnson had introduced various measures to achieve the same goal of supporting the dollar and protecting the Bretton Woods system, but had not achieved much success. Some of their steps included the imposition of curbs on foreign investments and foreign aid, in addition to reducing the outflow of dollars. But the dollar’s volatility increased as the foreign currency markets sensed that the situation on the ground would someday force the US government to go for a devaluation of the greenback.