ONGC: coping with competition

Print edition : April 11, 1998

The conferment of Navaratna status on the ONGC was accompanied by promises of greater autonomy and flexibility, but there are no signs yet of policy and financial support being given to the company to re-establish self-reliance as the basic feature of its mission.

THE Oil and Natural Gas Corporation Ltd (ONGC), one of the Navaratna public sector companies, is India's national oil exploration and production company. It was established in 1956 as the Oil and Natural Gas Commission as an immediate consequence of the Industrial Policy Resolution of 1956, which laid the basis for industrial development in free India with emphasis on public sector-led growth.

Inspired by the spirit of self-reliance and backed by government policies, the ONGC enabled India to break the shackles of the international oil majors whose exploration and production goals in India were determined by their global interests rather than by any interest in finding, developing and producing from oilfields in India.

In India, oil was first discovered in Digboi, Assam, in the late 19th century. In 1921, the United Kingdom-based Burmah Oil Company took over the Assam Oil Company, which controlled the oilfields and the only refinery in India, which was situated in the area. In 1931, about 2.5 lakh tonnes of oil was produced from the fields there. After Independence, multinational companies such as Royal Dutch Shell, Standard Oil and Burmah Oil were invited to explore for oil but they insisted that there was no oil available outside the Assam tracts.

The processing platform at the Neelam offshore oilfield, near Bombay High. The ONGC accounts for more than 90 per cent of India's crude oil production and about 95 per cent of its natural gas production.-COURTESY: ONGC

The ONGC's first discovery was in the Cambay basin in 1958. In 1960 it struck oil in Ankleshwar in Gujarat. Through the 1960s, the ONGC made a string of oil discoveries in Assam. The then Union Minister for Natural Resources K.D. Malaviya, who also headed the ONGC, provided the political clout to counter the foreign oil companies. In the early 1960s when Caltex, Burmah Shell and Standard-Vaccum Oil Company stated that they would rather invest in oil refining, Malaviya insisted that since the profits were concentrated in the crude supply chain, India's priority should be the establishment of indigenous oil production.

The ONGC also ventured overseas fairly early. In the 1950s it participated in oil exploration in the Persian Gulf. This led to the discovery of the giant Raksh and Rustam fields off the coast of Iran. It also ventured to Tanzania where the Songo Songo gas field was discovered. In fact, foreign oil companies refused to process the crude that was the ONGC's share in the venture in the Persian Gulf. The ONGC acquired the status of a corporation in 1993.

An important aspect of the ONGC programme was the use of Soviet and Romanian assistance in oil exploration projects. An agreement with the Soviet Union for an offshore seismic survey enabled the collection of data from the Gulf of Cambay, the Arabian Sea and the east coast. Oil was struck in Bombay High in February 1974. Production from Bombay High stabilised in 1976-77 and increased rapidly until 1983-84, but has declined since then.

Between 1980 and 1986, the Government offered foreign and private companies geographical blocks in India for exploration, but this did not draw a favourable response in three rounds of bidding. In 1992, the Government offered a more attractive option to foreign and private companies. The result was the controversial production-sharing contracts with private companies in 1994.

The New Exploration and Licensing Policy (NELP), announced in March 1997, stipulated that the ONGC and Oil India Ltd (OIL), which earlier had first rights to production from blocks discovered by them, would have to bid with other private companies for oil and gas production rights. In effect, it abolished the principle that state presence was mandatory in oil exploration and production. Under the NELP, companies were offered international prices for crude produced from new projects instead of prices fixed under the Administered Prices Mechanism (APM).

Ironically, many multinational companies that were hostile to India's efforts at indigenous development of the petroleum industry after Independence have been attracted by the Government's controversial liberalised policy framework for oil exploration since 1991.

The jack-up rig of Sagar Jyothi in Bombay High. The cost of crude oil produced by the ONGC is only about 40 per cent of that of imported crude.-COURTESY: ONGC

TWO major aspects of government policy threaten to undermine the basic character of the ONGC as the country's national oil exploration and production company. The first relates to the terms under which foreign and private companies are allowed to exploit oilfields that were discovered and developed by the ONGC. The most controversial of these is the ONGC's contract with a consortium comprising Enron Oil and Gas India Ltd and Reliance Industries Ltd for the production of oil and gas from the Panna-Mukta (Gujarat offshore) fields. Ravva, in the Krishna-Godavari offshore basin (Frontline, July 29, 1994), was offered to a consortium led by Videocon and Marubeni of Japan. Although the ONGC had a 40 per cent stake in these unincorporated joint ventures, there have been allegations that the ONGC has not been compensated for the investment that it has made in these projects.

In fact, the joint venture for producing crude oil from the Panna-Mukta oilfields came under investigation by the Central Bureau of Investigation (CBI) following a public interest petition filed in the Delhi High Court (Frontline, March 20, 1998). In December 1996, the Comptroller and Auditor-General (CAG) observed that the terms of the joint venture between the ONGC and the consortium did not compensate the ONGC for the costs (nearly Rs. 700 crores) that it had incurred in prospecting.

The second aspect of the policy is the dismantling of the APM for oil which will allow oil prices in India to be put on a free float along with international prices. The Government has initiated a phased dismantling of the APM, which would be complete by the year 2001-2002. The terms of the NELP will enable the ONGC to realise international prices for oil produced from new fields. However, there have been no major fresh discoveries since Bombay High; and whatever was discovered by the company was passed on to private companies.

While the terms of the production-sharing contracts under the liberal policy regime have caused financial losses to the ONGC, moves towards the dismantling of the APM threaten to undermine its national character, although the ONGC will stand to benefit financially from such a move. The dismantling of the APM is likely to lead to higher oil prices. While this may boost the ONGC's profits, it will have a negative impact on the economy in general. The delinking of the ONGC's commercial interest from the strategic national objective of a self-reliant oil industry is likely to be a major consequence of such a move. Of course, the improved profitability of the company will enable the Government to increase substantially its realisation from disinvestment, if and when it happens in the future.

The Government announced recently that public sector oil companies could opt for a market-determined pricing mechanism or for a floor price. ONGC Chairman B.C. Bora told newspersons in New Delhi on April 1 that considering the current low level of international oil prices, the ONGC would opt for the retention price.

Bora also sought a "level playing field" in the matter of levy of customs duty on goods and services that are used in oil and gas exploration and production. Whereas private companies are exempted from paying customs duty, the ONGC pays Rs.450-500 crores as duty.

ALTHOUGH the conferment of the Navaratna status has been accompanied by promises of greater autonomy and increased flexibility for the company, there are no signs that policy and financial support is being given to the ONGC to re-establish self-reliance as the basic feature of the ONGC's mission. Such support has acquired urgency because the demand for petroleum is projected to double in the Ninth Plan period - from 607 million tonnes in 1996-97 to 1,100 million tonnes in the year 2001. Moreover, producible reserves have remained stagnant: reserves were at 739 million tonnes in 1995-96 - the same level that they were at in 1989-90. Experts have argued that the ONGC needs to improve its reserves-production ratio to offer a safe margin in the long term. Accretion to reserves will, however, require new finds, and making new finds will need substantial investments.

ONGC Chairman B.C. Bora.-KAMAL NARANG

The ONGC produces more than 90 per cent of India's crude oil production and about 95 per cent of its natural gas. (OIL, operating mostly from fields in Assam, produces most of the remaining oil and natural gas.) The ONGC made a net profit of Rs.2,034 crores in 1996-97, the highest among all public or private sector companies in India. (RIL, India's largest private sector company, made a net profit of Rs.1,323 crores in 1996-97.) In 1997-98, the ONGC's net profit increased further to Rs.2,425 crores, buoyed by higher natural gas prices.

THE ONGC's finest hour so far came in the mid-1970s when oil was discovered at Bombay High. Production from the wells there enabled India to face up to the second global oil crisis of the early 1980s and enabled the country to withstand a balance of payments crisis. In the mid-1980s, production from Bombay High enabled indigenous production to meet about 70 per cent of India's oil requirements; now the country is self-sufficient on this front to the extent of about 50 per cent.

Although the ONGC operates under rather more unfavourable conditions in India as compared to companies that operate in oilfields in West Asia, the cost of crude oil produced by the ONGC is only about 40 per cent of that of imported crude. Critics of the Government's petroleum policy have said that the Government's failure to transfer funds from the Oil Industry Development Board (OIDB) has hampered the search for new fields and the development of oilfields already discovered by the ONGC. The critics blame this for the stagnation in crude output.

By the end of the 1996-97 financial year, a cess on oil had created a cumulative accumulation of nearly Rs.29,000 crores in the OIDB account. About Rs.902 crores had been transferred to the domestic oil industry until 1991-92; since then no transfers were made to the oil companies. However, the oil pool account has itself been in deficit because successive governments have used funds from the account to finance revenue expenditure, and the oil companies have not received funds to invest in exploration projects. This pushed the ONGC into joint ventures with private and foreign companies for oil production from fields that it had discovered and developed. The terms of some of these joint ventures have been criticised as being commercially disastrous for the ONGC.

IN recent years, production problems in the offshore wells in Bombay High and Neelam (southwest of Bombay High) and in wells in eastern India have adversely affected the ONGC's crude output. Crude production fell from 31.64 million tonnes in 1995-96 to 29 million tonnes in 1996-97 and further to 27.73 million tonnes in 1997-98. An expert committee appointed by the ONGC to suggest remedial measures to arrest the fall in production confirmed that the decline was caused by the "flogging" of Bombay High oil wells. It advised the ONGC to cut production in the short term to safeguard oil reservoirs.

The ONGC's consultant, Vam Poolen Associates, suggested a 25 per cent cut in production to rehabilitate Bombay High. Cutting output by this magnitude will result in a serious shortfall in crude oil availability - by at least five million tonnes. Critics say that the ONGC is paying the price for not having paid attention to protecting the long-term health of the wells in Bombay High. They also say that the ONGC had overestimated the oil reserves in the Neelam field.

In an attempt to break out of the tight situation in India, the ONGC and its international wing, ONGC Videsh, have acquired large exploration acreage in Kazakhstan. The Kazakh national oil company, Munaygaz, has offered the ONGC a large oil refinery for revamping and management. The ONGC has also been urging the formation of a "loose consortium" of Indian public sector oil companies for such projects. The Indian Oil Corporation Ltd and the ONGC have reached an agreement to explore, develop, produce, refine, market and distribute petroleum products on a global basis.

The ONGC, which has not drilled below 200 metres offshore until now, plans to venture into deeper waters. It has been awarded three deep-water sites in the Cauvery, Krishna-Godavari and Kerala-Konkan basins. Although the ONGC's critics have said that the company does not have the technology for deep-water drilling, the Sunderrajan Committee's report has observed that technology in the oil industry is fairly well diffused. This implies that induction of new technology is marked by incremental refinements rather than dramatic jumps. Thus, its standing as an active player for a long time could well enable the ONGC to access new technologies.

The ONGC plans to invest Rs. 19,000 crores in expansion and diversification programmes, including in projects abroad, by 2001-2002. Bora has called for a four-pronged strategy for the future. First, to focus more closely on the major basins in which the company is operating; second, to explore "frontier areas" for new finds; third, acquire acreages for exploration overseas; and fourth, to improve oil recovery methods to increase productivity. He has also said that the Navaratna package will provide "greater flexibility and freedom to make investment decisions" and enable the company to grow into a global giant.

Since February 1997 the ONGC has implemented the Organisation Transformation Project in association with McKinsey and Company. Bora has said that the project will enable the ONGC to prepare itself for the opening up of the oil exploration and production business.

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