|ONGC's Raha: Running a well-oiled organisation
and exploring new avenues
been rated as Asia's best oil & gas company by Global Finance,
a us-based magazine. It's been ranked as the second biggest exploration
and production company in the world by Platts Energy Business
Technology Survey 2004. And it ranks 454th by revenues and 95th
by profits on the Fortune 500 list. If that sounds like the introduction
to a hagiographical corporate story, sample this: the state-owned
Oil and Natural Gas Corporation (ONGC), the company in question,
is India's most valuable company by market capitalisation (Rs
1,40,000 crore), net worth (Rs 46,500 crore) and net profit (Rs
12,983 crore). Now, for the no-brainer: it topped the list of
Business Today's 500 most valuable companies in 2004-05 and, for
good measure, has maintained that position this year, too. QED!
And Subir Raha, the 57-year-old Chairman
and MD of the company, is spreading his wings further. He's already
leveraged his company's steroid-charged profits to lock up resources
in Ivory Coast, Sudan, Russia, Vietnam, Australia and eight other
countries, and ramped up capacity at home. The next step: enter
into businesses that have hitherto been considered out of bounds
for the company. On the anvil are projects for underground coal
gasification, coal bed methane (CBM) mining and setting up LNG
complexes, special economic zones (SEZs), power plants and petrochemical
ONGC's top brass obviously hasn't read the
book on core competencies, and even if it has, clearly doesn't
think much about its contents. But there's a method in this madness;
all the diverse strokes of these apparently unrelated activities
do conjure up a coherent bigger picture. "We already have
the necessary technology and domain expertise to enter into all
these fields. We only have to modify them for our needs,"
says Raha, adding that all of ONGC's expansion plans leverage
its strengths in the hydrocarbon sector. For instance, the company
has 10 years experience in Gujarat for the underground gasification
of crude. The same technology can be used for underground coal
gasification, he explains. "Commercial production of CBM,
the first time it's being done in India, will take off in early
2007 and underground coal gasification, in 2009,'' he informs.
All the CBM projects are located in and around Bokaro, Jharkhand.
| The Chinese Bogeyman
| China National
Petroleum Corporation (CNPC), China's largest oil and gas
producer, is fast becoming a bogeyman for ONGC Videsh Ltd
(OVL). Every time OVL has faced off with CNPC over a lucrative
oil asset, it has found itself pipped to the post by its Chinese
The latest chapter in this running saga of lost bids was
played out at the auction of Canadian oil company, PetroKazakhstan,
which is the third largest oil producer in Kazakhastan.
OVL, which bid in partnership with steel baron Lakshmi Niwas
Mittal, submitted the highest offer of $3.98 billion (Rs
17,910 crore). But CNPC was allowed to revise its bid to
$4.18 billion (Rs 18,810 crore), allegedly after the auction
had officially closed, and, thus, walked away with the prize.
"The goalposts are being changed after the match has
begun," Petroleum Minister Mani Shankar Aiyar told
reporters in New Delhi. The government even made half-hearted
attempts to persuade the Kazakhstan government to reopen
the bid, but it was too late. The horse had already bolted.
The same story was played out in October 2004, when OVL
signed an agreement with Shell to buy its 50 per cent stake
in Angola Block 18. But a generous offer of credit and aid
by the Chinese government forced Sanganol, Angola's national
oil company, which had a virtual veto over the deal as the
sole concessionaire for hydrocarbon exploration and production
in that country, to opt for CNPC. And in September this
year, the Chinese company again trumped OVL's attempt to
buy Canadian company Encana Corp's 75,000 barrels per day
oil wells and pipeline in Ecuador.
So, how does OVL explain these consistent losses? "They
had as much to do with the aggressive bids placed by the
Chinese as with leverage provided by their government,"
says Subir Raha, CMD, ONGC.
Currently, the OVL board has powers to clear bids of only
up to Rs 300 crore, a pittance in the multi-billion dollar
global oil market sweepstakes. Anything beyond this has
to be cleared by an Empowered Group of Secretaries and the
Cabinet Committee on Economic Affairs. That's a sure-fire
recipe for disaster in the fast-moving world of global business
deals. The need of the hour is simple: give ONGC and OVL
Again, his justification for investing in
four SEZs-near the Kakinada refinery (owned by MRPL, an ONGC subsidiary,
and ILFs), Mangalore refinery (owned by MRPL), Rajasthan refinery
(owned by MRPL, Cairn Energy and the Government of Rajasthan)
and Dahej in Gujarat-makes eminent business sense. "By becoming
a co-promoter of these SEZs, ONGC will drastically slash project
costs because of free import of goods, and will also get to select
plots and locations according to its own sweet will," says
Raha. Latecomers, he adds, will have to pay a premium for the
land and may still be denied their desired location. The development
of infrastructure will be left to partners with the requisite
experience. The cost, Rs 20-25 crore, is just a miniscule blob
on the company's balance sheet.
The long-term goal of reinventing ONGC into
a vertically integrated company present along the entire hydrocarbon
value chain seems to be taking shape, too. It acquired a 51 per
cent stake in the then loss-making Mangalore Refineries &
Petrochemicals Limited (MRPL), which was on the verge of being
referred to the Board for Industrial and Financial Reconstruction,
for Rs 660 crore in March 2003 and turned it around. During the
year ended March 31, 2005, it processed 11.85 million tonnes of
crude, a capacity utilisation of 122 per cent and earned a net
profit of Rs 880 crore. Raha has big plans for the company in
which ONGC now owns a 71.6 per cent stake: an expansion of capacity
to 15 mmt in the next 2-3 years and then, to 30 mmt by the next
four years. This will entail setting up a greenfield refinery
in Mangalore. The obvious benefits: ONGC can sell crude to MRPL
at arm's length prices and then sell the end products through
its own petrol pumps, 50 more of which are expected to be rolled
out by next year. This arrangement is expected to add another
massive dose of steroids to its profit and loss account.
| Five Things Going For The Company
Since most analysts believe that oil prices will remain at
the current high levels for the next couple of years, the
company's profitability will continue to remain high.
ZERO MARKET RISK: Since there
will always be a market for its products-crude and gas-it
will continue to enjoy the confidence of investors and shareholders.
STRONG BALANCE SHEET: ONGC
is cash rich and debt free. This will allow it to implement
ambitious plans and also absorb any short-term setbacks.
NEW INITIATIVES: Its move
to enter into downstream sectors such as refining and marketing
and other areas like coal gasification and power will contribute
to its top and bottom lines.
GAS PRICING: Once gas prices
are freed from government controls-and everyone is unanimous
that it will definitely hap pen-ONGC will add a few thousand
crores to its bottom line.
"Integration along the hydrocarbon value
chain is not a matter of choice for a company with global footprint;
it is an imperative-we have to squeeze every available paise out
of every molecule of crude," says Raha, an electronics and
telecommunications engineer from Kolkata's Jadavpur University
and an MBA from Leeds University, UK. But there are other, more
important reasons for the company's downstream foray. No exploration
and production company, he says, can depend solely on a single
cycle for survival anymore. "We have to become a part of
the crude cycle, the refining cycle and the product cycle to tide
over any downturn in any one of them."
Such de-risking is sine qua non for maintaining
cash flows, and hence, for future investments in its core exploration
and production business. Raha uses the term "cash flows"
in its broadest possible sense; it includes raising tens of billions
of dollars from abroad, since the Indian capital market still
lacks the capacity and depth to generate such humungous amounts.
"Forget equity. Why should anyone give us loans if we don't
demonstrate our ability to pay back them back. Hence, it's important
to have a presence in the downstream sector," he argues.
ONGC's main priorty: securing sustained growth.
The gameplan: monetise ONGC's main assets-over 1 billion tonnes
of recoverable oil and gas; and "assetise" its huge
cash flows. How? "We are milking our in-place reserves to
increase production. The cash generated from this is being aggressively
invested in hydrocarbon assets in different geographies across
the world. We are also placing a major thrust on upgrading technology
and machinery, thus, moving up the knowledge ladder. And thirdly,
coming back to the original argument, we are entering new businesses
where we have synergy," he explains with a flourish.
In line with this third objective, the company
is actively engaged in the development of gas hydrates (ice-like
crystalline solids found on sea beds which contain rich veins
of methane gas). It also plans to set up two captive wind power
farms in Gujarat and Karnataka. This, say analysts, will release
more oil and gas for sale, save significant costs and help protect
| Five Things That Could Go Wrong
| FEW STRIKES: Despite
massive investments by the company, ONGC may fail to make
new strikes, given the risky nature of its business, both
in shallow and deep-water blocks.
OVL's FAILURE: Production
and exploration activities can face a setback in ONGC's
overseas acquisitions because of political instability in
countries such as Sudan and Vietnam, where it has made large
FIRE IN BOMBAY HIGH: Any accident
at Bombay High could cost ONGC dear because it accounts
for around 60 per cent of the company's total crude production.
FALL IN CRUDE PRICES: Any
sudden fall in international prices will not only drastically
reduce its profitability but also reduce its investments
in exploration and production activities.
GOVERNMENT'S INTERFERENCE: Governmental
interference in its day-to-day activities or politicians
using it as a cash cow to meet revenue shortfalls could
hamper ONGC's fortunes.
However, even as ONGC bets big on these diversifications,
which Raha insists are not far removed from its core activities,
it is redoubling efforts in its bread and butter exploration and
development activities and on acquiring equity in foreign hydrocarbon
reserves. The company is spending nearly $1 million (Rs 4.5 crore)
every day on exploration and production. The projected capital
expenditure: Rs 12,700 crore in 2005-06 and Rs 14,300 crore the
next fiscal. ONGC has put up 27 shallow water rigs and three deep
water ones as part of this initiative. "We now have the best
technology available in the world, technology that is used by
Shell, BP-Amoco, Exxon-Mobil and others. Schlumberger and Paradigm
Geophysical, again the best in the business, do our data analysis.
But data interpretation is done in-house by our own team of experts,"
he says, adding that he's confident of a deep-water strike in
the near future. "We have some leads, which makes us very
optimistic about strikes in our deep-water project," he says,
but refuses to discuss any further details.
But all this can only be termed educated
crystal ball gazing. The truth is that ONGC's domestic record
is, at best, mixed. It has 25 oil and gas finds to its credit
over the last four years. It's record in 2004-05: zilch. The company's
100 per cent subsidiary, OVL, however, has been a success. From
a company with only one property in Vietnam in 2001, OVL-which
has invested nearly $4.3 billion (Rs 19,350 crore) worldwide-today
has 18 oil properties in 13 countries, making it India's largest
multinational. Its latest conquest: a second offshore exploration
block in Vietnam's Phu Khanh Basin; the estimated in-house reserves
here are a staggering 190 million tonnes. The icing on the cake:
it is also the operator for this block. This means OVL will actually
run the operations at this block. This is different from most
of its other foreign investments where it only gets a share of
the crude which is extracted by some other party. Elsewhere, it
is already counting the dividends from its crude production activities.
Its investment in Sudan gives it 75,000 barrels of oil per day,
while production from Sakhalin I in Russia, which will begin to
flow from the first quarter of 2006, is expected to net it 50,000
barrels of oil per day. These successes are already evident in
its financials. OVL earned a profit of Rs 761 crore on sales of
Rs 6,026 crore in 2004-05. It even declared a maiden dividend
of 35 per cent, resulting in a payout of Rs 105 crore.
the company in a sector where India has a long-term competitive
ONGC is fast becoming a global oil and gas player with
footprints already in 13 countries. While it may still not
have the size of a Exxon Mobil or Shell, it has all the
makings of a future vertically integrated oil and gas multinational.
Does the company have what it takes to succeed in the
Yes, the company has already put in place processes, rules
and the initiatives to become a long-term player.
Should you invest in the company (sector)?
Yes, company expects that oil prices will firm up in winter,
thus improving realisations. Further, it will soon enter
the aviation turbine fuel segment, thus, adding to the revenue
But critics continue to carp about ONGC's
domestic record, pointing to its poor strike rate within the country.
The company has yet to make a major discovery after the Bombay
High find in 1974, despite making major investments in this field.
They also point to the fact that despite prospecting in the Krishna-Godavari
basin for years it drew a blank there (its private sector rival,
Reliance Industries, made the initial find of 14 trillion cubic
feet of gas in the basin). It was more of the same in Barmer district
of Rajasthan, where Canadian company Cairn Energy made the big
oil and gas find (5 million tonnes of oil and oil equivalent per
year over the next 10 years). "It will take some time for
ONGC to really ramp up its production," feels Deepak Mahurkar,
Senior Consultant, Oil & Gas, PricewaterhouseCoopers. "One
of the reasons for ONGC's poor show could well be the absence
of a central data analysis centre, where data from all over is
crunched," says an analyst. "It hampers the company's
agility when it comes to quick decisions."
And despite OVL's successes, its record is
not entirely without blemish. Its attempts at acquiring oil equity
abroad have repeatedly been trumped by China National Petroleum
Corporation, China's largest oil and gas producer (see The Chinese
Bogeyman). There's another major issue: is OVL paying too much
for its overseas assets? It paid $2.7 billion (Rs 12,150 crore)
for a 20 per cent stake in Sakhalin-1. Exxon Mobil, which has
a 30 per cent stake in the project, is believed to have paid a
much lower price. "This will be one criterion on which ONGC's
performance will be judged in future," says an analyst.
Critics also point to the fact that the ONGC
board has too much on its plate these days. "It won't be
a bad idea to have an independent, professional board for MRPL.
This is not to say that the current board is not doing a good
job. But an independent board, focussed exclusively on MRPL, will
be in a position to structure the business in an optimal manner,"
says a consultant.
The biggest threat to ONGC's future, however,
comes from the government itself. "If it starts interfering
in its day-to-day functioning or even treats it as a milch cow,
ONGC's performance is bound to plummet," says the analyst.
Raha understands that only too well. He has successfully fought
off interference from his ministerial boss, Mani Shankar Aiyar,
and other senior oil ministry officials for some months now. And
as long as the company's top and bottom lines keep surging, these
will remain entertaining, but inconsequential, side shows to the
main growth story. Investors will raise a toast to that.