PSU RANK 1	"We are willing to spend Rs 9,800 crore every year, for the next five-to-seven years, to gain access to oil reserves" SubirRaha/CMD/ ONGC

Subir Raha, it seems, loves to gamble. The affable, 54-year-old Chairman and Managing Director of Oil and Natural Gas Corporation (ONGC) is betting nearly Rs 12 crore per day on "shallow and deep-water exploration'', especially the kind of deep-water drilling that even global oil majors haven't dared, so far. But then, Raha has been known to be a risk-taker ever since his IOC days. That's why he has no hesitation in admitting that India's most valuable company, as it became with the ending of oil price controls earlier this year, is entering "unknown territory''-a "high-investment, high-risk area"-to get oil from underwater depths of nearly 2,500 metres.

Having netted Rs 6,198 crore on sales of Rs 17,264 crore in 2001-02, ONGC is India's most profitable PSU-which, one might imagine, gives it the nerve to play for such high stakes. But the strong bottomline can be traced to a windfall of high crude oil prices, rather than any great strides in operational efficiency. Whether global oil prices will remain high beyond the near-term is the great big imponderable.

Future Call

Ponderable or not, ONGC appears to have made its move. Pumping money into high-cost exploration, in itself, could be interpreted either as a push for self-reliance or a bet on sustained high oil prices.

So far, ONGC has ventured only 800-900 metres deep, at its Sagar Vijay offshore rig in the Krishna-Godavari basin. Most foreign companies have explored depths of only about 1,500-1,800 metres. And deep drilling is expensive. Just hiring a deep-water exploration rig, for instance, can set you back by Rs 98 lakh ($200,000) a day, and then there are other costs as well. That too, only for a remote possibility of striking extractable oil. Even if it is extractable, offshore extraction costs could be in excess of Rs 490 ($10) per barrel, as global analysts estimate. Compare this with the Rs 49 ($1) per barrel cost of West Asian crude. So imports make sense.

Under normal circumstances, that is. Times are far from normal, judging by America's obsessive search for alternative sources of oil over the past two years. Crude is still nudging Rs 1,470 ($30) a barrel.

Surely, ONGC's dream of another Bombay High is not all that absurd, is it? Yet, analysts remain sceptical. "ONGC neither has the necessary skill set, nor expertise and technology for deep-water exploration,'' says an investment banker.

Raha shrugs that barb off, ready to mount ONGC's biggest-ever onshore and offshore exploration drive by the end of this financial year. He has already lined up seven surveying vessels, around 30 shallow-water drilling rigs and two deep-water rigs. The project is on. And investors like the sound of it, going by the fact that ONGC is a rare PSU that boasts of a market cap almost as large as its total assets. On April 3, 2002, ONGC's market cap hit Rs 49,287 crore, edging out HLL's Rs 47,975 to grab the mantle of India's most valuable company. The status hasn't changed. On October 17, 2002, ONGC was at Rs 53,002 crore, and HLL much lower at Rs 38,774 crore. Notes Raha, "Our stock price have seen a 300 per cent jump between April 2001 and January 2002, and touched Rs 392.65 on May 16, 2002, days after the announcement of the dismantling of the administered price mechanism.''

Leadership Question

Is ONGC's reign on top of the market-cap chart sustainable? Yes, say some analysts. Harendra Kumar of icicidirect.com is bullish on the stock on account of the high crude prices and the gradual move towards market-based pricing for gas.

Others, however, differ. Says Satyam Agarwal, an analyst at Motilal Oswal Securities Limited, "While this year could be the best in terms of profits and return on capital employed because of the high crude prices, it is unlikely to sustain over a long period of time." With no incremental earnings in the form of volumes growth, the large capex will add significantly to the capital employed, bringing down the overall return ratios.''

While this year could be the best in terms of profits and return on capital employed because of the high crude prices, it is unlikely to sustain over a long period of time

Take a closer look at actual volumes. The fact is, ONGC's domestic crude output has either been declining or stagnant over the last few years. From a peak of 31.6 million metric tonnes in 1995-96, its production dipped to 26.6 million tonnes (about 0.5 million barrels per day) in 2000-01, before slipping further to 26.3 million tonnes in 2001-02.

India's so-called core sector, remember, has been in recession. Raha, however, blames lack of investment for the decline. "Some investments decisions, such as that of Bombay High, were delayed by as much as five-to-six years," he elaborates, "because of various reasons-be it the foreign exchange crisis of the early 1990s, or the government's dithering over disinvesting the company in the mid-1990s, or the difference of opinion among experts over the technical details."

Could He Have A Point?

Well, the turnaround of 2001-02 has been sustained this financial year, with latest figures indicating that ONGC's crude output has risen 9 per cent in this year's first half, compared to the same period last year. Raha is confident of turning this into a full-fledged recovery. How? For one, he points to ONGC's two-step Redevelopment Plan for Bombay High, which currently accounts for more than half of ONGC's output. Phase-1, launched in January 2001, cost Rs 2,929 crore. And Phase-2, launched in October 2001, cost Rs 5,200 crore.

The goal: to improve Bombay High's recovery factor. "The first would increase the recovery factor by 4 per cent, yielding an additional 76 million metric tonnes of oil, and oil equivalent of gas, and the second by 45.6 million metric tonnes by 2020,'' he says.

You heard that right: by 2020. That's another 18 years. To get an idea of what the numbers mean in quantitative terms, India's annual consumption is roughly 100 million tonnes (which translates to 2 million barrels per day), over 70 per cent of which is imported.

Clearly, squeezing a few more drops out of Bombay High isn't going to get ONGC very far.

"After all," says a Mumbai-based analyst. "Bombay High is a mature oil field, discovered way back in February 1974, and has been flogged over the years. It is at the end of its lifecycle curve.''

No matter. Oil must be got, whatever the effort, and Raha is in no mood to scale down the targets. "We believe that in the current five-year plan (2002-07)," says Raha, "we can increase our net crude oil production and oil equivalent of gas by nearly 10 per cent.'' His larger goal is to double ONGC's accessible reserves to 12 billion tonnes by 2020. That's some 90 billion barrels, the quantity Iran is thought to have. India's own reserves are estimated to be less than half of that figure. So just what on earth is Raha talking about?

The Drilling Fields

The answer is elementary, dear Watson. At least to ONGC. Nobody ever asked it to restrict its efforts to India. And as anyone who's been following the news carefully will attest, part of the excitement ONGC has generated comes from its overseas plans.

The company now has a fully-owned subsidiary called ONGC Videsh, charged with the task of expanding India's access to oil fields worldwide.

ONGC is putting Rs 8,330 crore ($1.7 billion) into Russia's Sakhalin-1 project, believed to hold some 307 million tonnes of condensate and 485 billion cubic feet of gas. It has also acquired 49 per cent equity in two oil and gas exploration blocks in Libya. Negotiations are on for a deal for investments of Rs 3,430 crore ($700 million) in a Sudanese field. It has acquired an interest in Vietnam's Nam Con Son offshore basin, along with Vietnam's national firm, Statoil, and British Petroleum (BP).

As Raha sees it, it's mainly a matter of investment, and the company is willing to spend a decent Rs 9,800 crore every year, for the next five-to-seven years, to gain access to oil reserves. Much of the activity will happen in India, of course. ONGC is busy prospecting in frontier waters off the coast of Kutch and Mumbai, apart from the Cauvery and Krishna-Godavari basins. Of the 47 exploration blocks offered by the government under the 1997 New Exploration and Licencing policy (NELP), ONGC has bagged a good 24.

Some years ago, these efforts would have been brushed off as being overambitious. But a 'globalising' oil sector is a different prospect altogether. The phasing out of administered prices is part of the process, though even today, ONGC gets only 40 per cent of the market price or its gas (it gets Rs 2,850 per million cubic metre).

Operating freely, as a corporate player, in the domestic market is another ONGC ambition. This is what explains ONGC's recent acquisition of the Birla group's stake (37.39 per cent at Rs 59.39 crore) in the 9-million-tonne Mangalore Refinery and Petrochemicals Limited (MRPL). With some 600 petrol-filling stations planned, ONGC will soon be a retailer too.

That would make it a full vertically integrated oil company. More importantly, it diversifies the company's risks. "It is like having a balanced portfolio with the risks evenly spread out," contends Rajeev Thakur, analyst at credit rating agency ICRA. When crude prices spurt, ONGC gains from upstream activity, and when they crash, its refining margins go up. "It is win-win for ONGC,'' says Thakur.

Win-Win-Really?

Just one minor detail. The real world doesn't always proceed as planned. So, even as the stock's bull run continues, it is worth bearing a few things in mind.

Apart from Bombay High, ONGC really has no other major oilfield. It's not a good sign that India's 1997 New Exploration and Licensing Policy (NELP) did not draw a trail of oil explorers to the country. So, as Agarwal of Motilal Securities points out: "Despite so much spend, we don't see any meaningful volume growth happening till at least 2006 in the domestic market. If production remains stagnant, profits will be completely dependent on price.''

Ah, price. This is what it boils down to. Will crude rule high? What if there's a sharp flare-up followed by a calm and steady flood of oil, as some American strategists hope. On the other hand, what if these strategists get it frightfully wrong-a flare-up that ignites so much trouble that prices stay forever high? The odds might be shifting perilously back and forth, given the prevailing geopolitical uncertainties.