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MUMBAI : In April this year, when media reports suggested that the government was working on a restructuring plan to boost the sagging performance of the country’s largest oil exploration and production (E&P) entity—Oil and Natural Gas Corp. Ltd (ONGC)—the company was quick to issue a rejoinder.

It rubbished the “misleading" reports and claimed that the government has been “continuously encouraging" ONGC to play a larger role in the context of India’s oil and gas sector. The hurried denial and attempts at damage control were, in a way, revealing.

Why does a company that was set up 65 years ago with the sole purpose of discovering and developing new hydrocarbon blocks need encouragement? ONGC remains India’s best bet at shoring up oil security via domestic discoveries. While private firms such as Cairn-Vedanta and Reliance Industries Ltd have entered the exploration arena decades later, ONGC is the undisputed leader—accounting for 76.7% of all domestic production.

Yet, strangely for an E&P major, ONGC has had no significant hydrocarbon find for at least a decade. The firm’s crude oil production has also dropped consistently, falling every year for at least the last five fiscals. The fall in domestic production matters especially at a time when India has repeatedly locked horns with international suppliers over crude oil prices.

Naturally, ONGC has been in the firing line for some time. The company’s capital expenditure is spent almost entirely on keeping its ageing oil and gas fields alive rather than on any new explorations. The last big discovery came in 1976 (the Bassein field, about 80 kilometres off the Mumbai coast). In 1974, the firm hit black gold in Bombay High. Those heady days are all in the distant past.

Clearly, reforms are in order. The Union government, which holds a 60.4% stake in ONGC, wants the oil behemoth to shed some flab by forking out stake in a few of the hydrocarbon producing fields and monetizing existing infrastructure. The directive is also to rope in foreign partners in order to improve exploration and production prospects. Hiving off certain divisions such as seismic and drilling services into a separate arm is also under consideration.

“The problem with ONGC is not (just) their lack of performance but the overhang of government policies," said an analyst from an international brokerage who requested anonymity. “Look at any of the public sector units; their stocks are undervalued. ONGC’s stock is the cheapest in Asia, if not globally."

 

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In April this year, when media reports suggested that the government was working on a restructuring plan to boost the sagging performance of the country’s largest oil exploration and production (E&P) entity—Oil and Natural Gas Corp. Ltd (ONGC)—the company was quick to issue a rejoinder.

It rubbished the “misleading" reports and claimed that the government has been “continuously encouraging" ONGC to play a larger role in the context of India’s oil and gas sector. The hurried denial and attempts at damage control were, in a way, revealing.

Why does a company that was set up 65 years ago with the sole purpose of discovering and developing new hydrocarbon blocks need encouragement? ONGC remains India’s best bet at shoring up oil security via domestic discoveries. While private firms such as Cairn-Vedanta and Reliance Industries Ltd have entered the exploration arena decades later, ONGC is the undisputed leader—accounting for 76.7% of all domestic production.

Yet, strangely for an E&P major, ONGC has had no significant hydrocarbon find for at least a decade. The firm’s crude oil production has also dropped consistently, falling every year for at least the last five fiscals. The fall in domestic production matters especially at a time when India has repeatedly locked horns with international suppliers over crude oil prices.

Naturally, ONGC has been in the firing line for some time. The company’s capital expenditure is spent almost entirely on keeping its ageing oil and gas fields alive rather than on any new explorations. The last big discovery came in 1976 (the Bassein field, about 80 kilometres off the Mumbai coast). In 1974, the firm hit black gold in Bombay High. Those heady days are all in the distant past.

Clearly, reforms are in order. The Union government, which holds a 60.4% stake in ONGC, wants the oil behemoth to shed some flab by forking out stake in a few of the hydrocarbon producing fields and monetizing existing infrastructure. The directive is also to rope in foreign partners in order to improve exploration and production prospects. Hiving off certain divisions such as seismic and drilling services into a separate arm is also under consideration.

“The problem with ONGC is not (just) their lack of performance but the overhang of government policies," said an analyst from an international brokerage who requested anonymity. “Look at any of the public sector units; their stocks are undervalued. ONGC’s stock is the cheapest in Asia, if not globally."

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Over the past five years, even as the broader market Nifty 50 index surged by 97.8%, ONGC’s share price fell by 26.8%.

“As long as ONGC is in the broader government ambit, their decision making and performance will be the way it is. ONGC can’t be compared to any E&P company internationally due to this reason," the analyst cited above added.

ONGC’s travails have broader ramifications. India imports over 80% of its crude oil requirements and the import bill stood at $24.7 billion in the first quarter of this fiscal year. In 2020-21, the country spent $62.7 billion to import 198 million tonnes of crude, according to the Petroleum Planning and Analysis Cell (PPAC) of the ministry of petroleum and natural gas. A decisive energy transition towards cleaner fuels might take years, or perhaps decades. Crude oil will remain a mainstay in India’s energy mix until then. And a well-functioning ONGC could ease the import burden. So, what exactly ails ONGC and what can be done about it?

A glorious past

ONGC was set up by minister K.D. Malviya in the mid-1950s when none of the western exploration firms could find any oil in India after the world’s second major discovery was made at Digboi, Assam, in the 1860s.

In 1956, ONGC not only established new oil findings in the Cambay basin (Gujarat), but also found new resources in the Assam-Arakan fold belt and the east coast basins (both inland and offshore). Its moment of reckoning, however, came in 1974 when it discovered the giant oil field at Bombay High (also known as Mumbai High), followed by the Bassein gas field off Mumbai High in 1976. Since then, though, there was no big discovery for the company until the Krishna-Godavari 98/2 block, which though discovered in the 1980s was commissioned only last month.

“It is not that ONGC has not made new discoveries. Yes, there have not been big structural discoveries (or a single big discovery)—something as sizeable as the Mumbai High. But ONGC’s reserves have been clocking an uptick," said a senior ONGC official on the condition of anonymity. “There have been satellite discoveries (peripheral discoveries at a certain distance from a primary block) made in scattered fields. These are of reduced reserve size and can be brought to production (only) as part of a cluster (several low-potential fields are developed together to keep costs under control)," the official added.

An ONGC spokesperson said that the firm is hopeful of making new discoveries in some unexplored areas. “ONGC has a balanced portfolio of green field projects as well as brownfield redevelopment schemes," the spokesperson said.

But the reality is that around 95% of ONGC’s production comes from ageing or mature fields. Over the past decade, more than two-third of the firm’s capital expenditure or capex has gone towards arresting production declines in these fields; only one-third went towards new exploration. This, say analysts, does not bode well for a company whose core business is E&P.

According to the ONGC spokesperson cited above, it is because of ONGC’s substantial exploratory efforts that the firm is able to maintain a reserve-replacement ratio (RRR) of more than 1 for the past 15 years in a row. RRR is the amount of oil that gets added to a company’s reserves divided by the amount that is extracted for production. While this ratio is indeed used by investors to judge an oil firm’s operating performance, analysts point out that ONGC has maintained a good ratio through a sleight of hand—by simply not drilling the satellite fields yet adding them to the reserves.

One key reason for the firm’s reticence in turning reserves into production blocks is price. While prices at the retail pump might be at an all-time high due to the effect of taxation, the global benchmark price for oil and gas is relatively low. In FY21, ONGC’s production cost for crude oil was $39 per barrel and $3.75 per mmBtu (million metric British thermal unit) for natural gas. The firm then sells the crude oil to oil marketing companies (OMCs) at around $58.10 per barrel and natural gas at $1.79 per mmBtu.

“This (price) is a matter of grave concern for upstream operators and also jeopardizes the potential for further commercial development of gas resources. Without necessary policy interventions and fiscal support, upstream gas development at such price levels is economically a loss-making proposition," said ONGC in its annual report. “The gas formula (which is used to determine prices) was a step away from the regulated pricing regime but because of its linkages to prices in international gas hubs (which are) located in more liquid and gas-rich areas, it does not fully capture the realities of the domestic market," the report added.

The exploration cycle

Oil exploration is a long-drawn-out process. India has 26 sedimentary basins, and each basin has its history of exploration. Usually, companies first study the geological and geophysical data via drilled wells and seismic data.

Based on the available data, an assessment is made regarding the viability of a source rock (whether it could generate movable quantities of hydrocarbons). A slew of follow-up parameters—such as the potential volume, the likely thickness of the reservoir and the amount of hydrocarbon which could be entrapped, among other factors—are then studied. Finally, firms rank all potential blocks in terms of prospectivity and size. Depending on the size of a discovery, the exploration firm then prepares a development plan for the field. The development could be for a particular reservoir or a multi-level reservoir. Once the director general of hydrocarbon (DGH) approves the plan, the company can go ahead with the exploration plan for which it issues tenders and call for bids.

From studying the prospects to producing hydrocarbon, the process could take anywhere between 5-10 years. Due to this long gestation period, most oil and gas exploration firms ought to be nimble and plan well in advance. This is where being a state-run firm comes with its own set of challenges.

While till 2014-15, ONGC along with the OMCs had to bear the burden of selling petroleum products at a subsidized rate, in 2016, ONGC was forced to acquire an 80% stake in the Gujarat State Petroleum Corporation’s (GSPC) Deen Dayal field in the KG Basin for 7,738 crore. Often dubbed as a dud field, ONGC officials say that so far there is no viable deep-water technology that can be used to develop the Deen Dayal field.

In 2018, ONGC had to “buy" the state-run Hindustan Petroleum Corp. Ltd from the Union government. The firm’s cash reserves promptly fell, and debt shot up—from 74,399 crore in FY17 to 1,01,246 crore in FY18. At the end of FY21, the outstanding debt is at 1,23,945 crore.

“To be an exploration company, you need funds to explore. ONGC has been successively squeezed of funds and treated as a cash cow," said a retired ONGC official, who did not wish to be named. “The company is not given a level playing field in terms of product pricing and is expected to perform. How is that possible? You can’t tie ONGC’s hands and ask it to perform," the official added.

Lack of technology

Despite ONGC’s 65-year existence, India has still not been able to build a robust oil field services industry. Oil field services refer to allied services that an exploration company requires in its cycle of exploration and production.

“To an extent, ONGC’s performance also depends on the services available. ONGC has been using its in-house services to meet its needs, but it is not a services company by itself. So, its reach will be limited," said an ONGC official.

The recent quest to establish tie-ups with international E&P companies stems from an acknowledgement of the current limitations—the domestic oil field services industry is seriously underdeveloped and the lack of access to technology continues to be a major bottleneck.

“We are looking for a partner on a case-to-case basis," Subhash Kumar, chairman and managing director, ONGC, told analysts on 14 August.

“We are not necessarily looking for a partner to bridge the investment gap or the risk gap. It is actually the alliance we are more interested (in) so that they bring in value… their international knowledge of similar basins where they have succeeded," he added.

If a combination of organizational reform, urgency, and new technology is infused into the company, ONGC could potentially look beyond the seven or eight basins where oil has been encountered until now. While these could be risky bets, the potential reward—in the event of a new major find—could also be high.

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