|"We are willing to spend
Rs 9,800 crore every year, for the next five-to-seven years,
to gain access to oil reserves"
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
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.
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
| HAIL DEREGULATION
Despite a fall in crude production,
ONGC's profits are booming because of pricing reasons.
Crude Oil (Million Tonnes)
(Billion Cubic Meters)
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.''
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
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.
| HOW ONGC COMPARES
To be a global player, ONGC will need global
||Finding Cost ($/Barrel)
||Lifting Cost ($/Barrel)
||Replacement by Production Ratio
||Return on Net Exploration & Production Assets
|Royal Dutch Shell
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
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.
|The company now has a fully-owned subsidiary
called ONGC Videsh, charged with the task of expanding India's
access to oilfields worldwide
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.
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
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.