ONGC - Biggest Domestic Player in the Oil Sector
Whether it was the takeover of Gujarat State Petroleum Corporation’s (GSPC) Krishna Godavari (KG) block or the gas migration dispute with Reliance Industries (RIL), Oil and Natural Gas Corporation (ONGC) dominated the headlines in the last financial year (FY17). In an interview with Jyoti Mukul and Shine Jacob, ONGC Chairman and Managing Director D K SARRAF talks about low oil prices and the need to adopt a contrarian view.
As the biggest domestic player in the oil sector, what is your view on oil prices and how do you plan to tackle them?
Though it is difficult to predict oil prices, expectations are that crude oil in the near term will continue to be within $50-55 a barrel. Exploration and production (E&P) companies need to learn not only to survive but also to grow in the low-price environment. At the same time, such low prices have thrown open opportunities for companies that can adopt a contrarian view. For them, it is a good opportunity to develop existing discoveries because oilfield services and equipment are cheaper and good vendors and contractors are available. Also, this is an opportunity to carry out low-risk exploration to accumulate more reserves. ONGC has adopted this approach.
At the same time, E&P companies are learning how to increase operational efficiencies and reduce costs. US shale oil producers have proven this by converting erstwhile “uneconomical" oil. ONGC has also increased its efficiency in drilling, which accounts for more than 55 per cent of its capex (capital expenditure). Its drilling speed, in terms of metres drilled per rig month, has increased 25 per cent in 2016-17 from 2015-16. However, to grow in this market, this needs to be repeated year after year.
How does ONGC plan to monetise its fields?
Of the 13 discoveries made by us in onshore areas in 2016-17, we monetised eight discoveries during the year itself. These discoveries have a production potential of 0.218 million tonnes of oil and gas, and have 3.4 million tonnes of oil and gas producible reserves.
Around 95 per cent of total producible oil and gas reserves discovered by us to date are either currently producing or their development activities are in progress and will be completed in the next three years. We recently completed a study of 115 discoveries and set a time frame for starting development for each; development activities in 25 of these will start in 2017.
A major highlight for ONGC in 2016-17 was the takeover of GSPC’s Deen Dayal West (DDW) field. Now, what is your plan?
We are yet to receive government approval. It may come in anytime. Once we receive the approval, we plan to complete the transaction as soon as possible. Detailed plans have already been made to monetise and further develop the DDW field.
We also plan to integrate this block with Cluster 1 of our block KG-DWN-98/2, where we had a dispute with RIL about our gas being produced by them in connected fields. Here we have some unconnected fields as well, but since the gas reserves in such fields are not large, we cannot justify capex for producing these unconnected fields. Putting up separate infrastructure may not be viable.
Now, gas from the unconnected fields will be produced utilising GSPC’s infrastructure - gas processing platform, pipeline to shore and onshore gas terminal. Thus unviable gas has been converted into viable gas. We also intend to utilise these facilities for monetising some of our HP/HT (high pressure/high temperature) discoveries in nearby areas.
What are your views on the open acreage policy?
It is going to be a game-changer. First, instead of the government specifying to E&P companies where to explore and exploit hydrocarbons, companies will now be able to carve out their own blocks. The backbone for this – the National Data Repository – has been launched. This contains huge a database, including processed seismic data, well logs and reports on India’s hydrocarbon basins. Further, ONGC and Oil India have been assigned the task of coordinating acquisition of seismic data in unexplored areas, which will become a part of this depository.
Second, the open acreage bidding round is based on revenue sharing instead of production sharing. Revenue sharing is going to be far more investor-friendly, as this ensures less interference by the government.
RIL and BP have announced their investment plan for their KG block. How do you view this?
It is a positive step. This will increase domestic gas production, which will substitute imported LNG (liquefied natural gas). It will encourage further investment in the oil and gas sector as well as in the region. But they will perhaps expect deregulation of gas prices and marketing.
What is the status on your dispute with RIL over gas migration?
The arbitration is between RIL and the government. The Shah Committee’s recommendations that compensation for the migrated gas be paid by Reliance to the government have been accepted by the government. ONGC has currently no role.
Is there any plan for joint development with RIL?
Those connected fields would perhaps have been produced.
There is talk about consolidation among oil public sector undertakings. Will it be beneficial for ONGC to acquire Hindustan Petroleum Corporation?
There appears to be no decision by the government. ONGC has not decided anything yet. However, integrating upstream and downstream is good because horizontally integrated companies are financially more stable. Internationally, the value for integrated companies is higher in terms of PE (price/earnings) multiples. If something like this happens, it will be good for the sector.
Any such acquisition can be completed in a few months once a decision is taken. For the process to start, there needs to be a firm decision by the seller and buyer.
What is the status of ONGC Videsh’s (OVL) Vankor Russia acquisition?
We hold 26 per cent, which we acquired during 2016-17 in two tranches of 15 and 11 per cent. It made a profit about 750 crore during 2016-17 itself, though the acquisition was only for a part of the year.
Why has the global scenario for oil and gas deals slowed down?
OVL has been looking for new opportunities but these have to be good at today’s price. Currently, deals are difficult as expectations of sellers are higher than what buyers are ready to pay. Further, transactions in exploration areas are difficult as very few companies are taking on the exploration risk.