In India, state-owned companies that shine in the marketplace are few and far between. The reasons are equally disparate.
In some cases, perversely enough, adversity helps: in a sick and heavily regulated sector such as electricity, there are public sector undertakings that have done well. They are often backed by a slew of direct and indirect support measures from the state. The sector’s frail health turns away much required investment and, in turn, competition. That said, its decision to embrace World Bank’s procurement systems in its early phase (1970s) has helped it stay healthy and efficient: electricity is produced at a reasonable price. On the other hand, companies such as coal producer Coal India Ltd and hydrocarbon producer Oil and Natural Gas Corp. Ltd (ONGC) are riding the boom in global fuel prices: Their inefficiencies are washed away by the bright spotlight of rising profits. This is all the more evident in the case of ONGC whose annual exploration budget of a couple of thousand crores of rupees—yields little or no results. The best solution for its owner, the government, would be to, in a sense, do a Motorola (the valuation had to do a lot with its gigantic haul of patents). Sell off ONGC’s unexplored fields. But that won’t altogether plug the leak. For clutching ONGC’s apron strings is a little giant—ONGC Videsh Ltd (OVL), its overseas acquisition arm. Over the last 22 years, OVL has grown to produce one-fourth of ONGC’s output.
After striking it rich with properties in Sudan and in Sakhalin, Russia, in the early part of this century when oil prices were low, OVL’s performance has been less than satisfactory thereafter, marked by expensive acquisition of discovered fields and poor strike rate in finding oil and gas; the latter, a legacy of its parent organization. OVL now plans to spend close to $22 billion (around Rs1.01 trillion) over the next five years, shopping for discovered fields and funding exploration efforts in virgin territories. This is a cause for concern. OVL has limited technical skills to find oil and gas. And, its growth was powered by acquisitions in times of low oil price that has led to a bounty in today’s market.
So, what should it do?
There is no doubt that the springboard and exposure to overseas deals offered by its parent, ONGC, are significant owing to its pedigree of being a state-owned oil company. While this must be leveraged to secure virgin acreages overseas (rather than discovered fields that are expensive), OVL should ‘farm’ these out to small-or medium-sized private companies in India that are willing to explore for oil and gas.
What should OVL do: buy known fields or new ones? Tell us at email@example.com