'Vertical integration is essential'

S. SUBRAMANIUM

Interview with Subir Raha, Chairman and Managing Director, ONGC.

Subir Raha took over as Chairman and Managing Director of Oil and Natural Gas Corporation (ONGC) in May 2001. He is concurrently Chairman of ONGC Videsh Limited.

Under Raha's leadership, ONGC is venturing into new turfs. Besides the exploration and production of crude oil and gas, it is now into their refining and marketing. Thus, it will be engaged in both upstream and downstream activities.

The 54-year-old Raha began his career as a management trainee with the Indian Oil Corporation (IOC) in 1970. After a series of field and staff assignments in several disciplines, he became Director (Human Resources) on the IOC board in June 1998. He held charge of Business Development, Information Technology and Corporate Communications concurrently.

Raha graduated in Electronics and Telecommunication Engineering from Jadavpur University in 1969. He took an MBA with distinction from the University of Leeds, United Kingdom, in 1985. He is also an alumnus of the Administrative Staff College at Henley, U.K. Excerpts from an interview he gave T.S. Subramanian:

You have given the slogan "Well flowing well" for ONGC for the year 2002-2003. What do you mean by this and how do you plan to implement it in the different regions in the country? Does the slogan suggest enhanced oil recovery (EOR) or improved oil recovery (IOR) from the existing wells?

"Well flowing well" is not a slogan. It is a theme for ONGC today. ONGC was formed on August 14, 1956. We celebrate it (August 14) as ONGC Day every year. For ONGC Day 2002, the theme was "Well flowing well". For us, each well is like a factory. How well or how efficiently each well is performing is a sigma of production. If you look at it otherwise, each well is an investment already made. If a well, therefore, does not perform as efficiently as it should, there is an idling of investment. From both the angles, the key issue/challenge we have in production is to see that every well that we have drilled, whether it is for production, improved recovery or water injection, performs to its best capacity in the given circumstances. Of course, when it comes to exploration, the challenge is to find new reserves. So, as a company, from the exploration point of view, if we can keep establishing more reserves than we produce, then we have a positive reserve accretion, which in turn means securitisation of growth.

Similarly, in production, if we maximise the outputs on the investments already made, that is the most efficient way of operating. The third, of course, is financial management. We have to see that the cash flows are healthy and that we make investments prudently and aggressively. Especially in our business - in exploration and production - the investment amounts are very large. Practically, every investment you take up involves hundreds of crores of rupees. Quite a few run into thousands of crores of rupees. So, as I said, it is important to be prudent while making investment decisions. At the same time, if we shy away from the required investments in time, then down the line, in three, five or ten years, there will be a negative impact on the cash flows.

Whether it is IOR or EOR, we are putting in more than Rs.12,000 crores in 15 projects. Of that, Rs.8,200 crores is in two projects in the Mumbai High. If you look at it in isolation, Rs.8,200 crores is a very large sum. But the objective of the project is to establish another 76 million tonnes of producible reserves of oil and gas. If you look at the financial calculations, the investments are giving us very effective returns.

Next are our systems and procedures. They have to be the best in class because we are a knowledge company. Our be-all and end-all is subcontinental geology and we must have technology to extract that knowledge. In physical operations such as surveys, drilling and project management, skills and experience have to be built up over a period of time. We have to ensure that they match the best in class by international standards.

Finally, the people. We have in ONGC a very large pool of talent in all disciplines of our business. So it is important for the management to ensure that talent is nurtured in terms of acquiring new knowledge and capabilities, technology, exposure to international norms of businesses, and so forth. So these are the focus areas.From the decisions we are now working on, both strategic and operational, we are looking at significant increases in discoveries, production and efficiency.

Until now, you were an upstream company. You are now going downstream as well. Are you striking out in too many directions? Is this vertical integration really necessary?

The vertical integration is not only needed, but is essential. There is a pricing cycle for crude. There is a pricing cycle for gas. There is a pricing cycle for refinery margin, marketing margin, petrochemical margin, etc. You begin with the hydrocarbon molecule and you go into all these stages right up to petrochemicals, power and so on. In each case, the international prices operate on different cycles. Now, if you are confined to one sector, upstream or downstream, or petrochemicals, then you are totally vulnerable to that one cycle. When it is up, you make a lot of money. When it is down, you pay out of your pocket. The whole point of integration is that you operate across a number of cycles and then on the average, you are assured of a healthy financial situation. In international business every major oil and gas company is integrated. You can play the game in two ways. Either you integrate and become a major, or become a sectoral company as a niche player. There is no third way. If you look at the international trend, until the mid-1990s every major came up as an integrated company, that too not only in the Western economy but in the Soviet Union and China. They are all integrated companies. Exxon was integrated. Mobil was integrated. From the mid-1990s, integrated companies have merged with one another to get maximum effectiveness. India is perhaps the only major country where the companies are not integrated. Reliance is trying for integration. In the Indian situation, the companies are happily staying as sectoral companies. Over time, you will not be able to sustain your growth as sectoral companies.

The Reliance-Niko consortium has made a big gas discovery in D-6 deep-water block in the Krishna-Godavari (K.G.) offshore basin. ONGC has been drilling in the adjoining block. Even though ONGC has discovered gas with a yield of about one lakh cubic metres there, why has it not discovered any big find there?

All basins in India have been opened up by ONGC. There are basins where we had quick successes, like the Mumbai offshore. But it took us 30 years to find oil and gas in the Cauvery. Now we are finding more and more there. We have opened up the deep-water blocks in India, including the K.G. offshore basin. We have been drilling there. In this business, Reliance has been first-time lucky. It is a good situation.

What are your plans for Mumbai High redevelopment?

Mumbai High redevelopment was launched last year. The project is progressing satisfactorily. We are finding new pools of oil. The production is already up. The important point is that the reservoir management has improved significantly.

In the K.G. offshore, will ONGC, Reliance and other companies go in for integrated development of production facilities of oil/gas because it will be economical to do so?

It is a business proposition. If everybody agrees, why not? We have to see... If there is a proposal and if it helps to reduce the cost for everybody, we are always willing to look at it.

In the Cauvery offshore, there has been no big discovery other than PY-3. Are you interpreting your data there? You did some three-dimensional seismic studies there.

We are reinterpreting the data in a massive way. We are aggressively doing 3-D surveys all over. We have improved our processes and capabilities significantly over the last couple of years. A lot of work is being done in acquiring new data, reinterpreting old data, building new models, etc. Today we are on a par in processing and reinterpretation. The people we have for interpretation are among the best in the world.

There is a feeling that in the western region there has been no market for gas. How is ONGC going to create a market for gas there?

I don't think I am worried about customers for gas at any point of time. A major area of demand for gas is in power generation. If you don't have power sector reforms - we know that there is a potential demand for gas - that demand will not translate into commercial demand. When that happens, we can produce as much oil and gas as we can, and we can market them all over.

Will you bid for acquiring the controlling stake of Hindustan Petroleum Corporation Limited (HPCL) when it comes up for strategic sale? There are reports that ONGC may be allowed to do so through the strategic route?

First of all, the government has to take a decision on whether to allow ONGC to bid or not.

It looks as if it will allow you to do so.If it allows us, we will certainly bid.

Although the indigenous production of crude oil has hit a plateau, how is ONGC financially so sound?

It is true that our production of oil and gas has been at a plateau. But our reserves have gone up this year because the crude pricing has been de-capped. We had a cap of $16 a barrel till March 31, 2002. On April 1, this cap was removed by the government. So we are now in the interim pricing of $22 a barrel. Negotiations are going on with the refineries and once they are concluded, I do hope that our pricing will be somewhere around $25 or so. This is the main reason why the reserves have gone up.

The second reason is that our production also has gone up this year. We will be producing more than a million tonnes of crude extra. On gas, a lot of flaring has been reduced. In the first six months of this financial year, we cut down flaring onshore and offshore by more than 30 per cent, which means we shall be selling more gas. These are the two basic reasons.

The third reason is that we have done a lot of cash planning as well. If you see our Annual Report, you will find we have reduced our corporate tax by almost Rs.700 crores. We have done a lot of work on loan management and the interest has gone down.

There have been improved revenues because of better pricing of crude, higher production of crude, more sales of gas, and less corporate tax payment and reduction in the net interest outgo. These are the four basic reasons why our cash inflows have improved significantly.

How has the "level playing field" introduced by the New Exploration Licensing Policy (NELP) impacted on ONGC? Has the entry of private oil companies from India and abroad to prospect for hydrocarbons made you more competitive? Or has your monopoly been undermined with detrimental effect?

As far as the NELP is concerned, this is probably the best privatisation programme from the government. On three rounds of the NELP, 71 blocks were awarded. ONGC won 37 of the 71 blocks, directly or in association with other public sector undertakings, which goes to show that in an open competitive environment, we can play as well as anybody else.

The second point is whether the NELP is welcome to us. Under the NELP formula, physical stability is assured, as in a pre-set royalty. The government has confirmed that taxes and duties will be stable for the contractual period. Any production from the NELP gives much more revenue than production from the pre-NELP blocks. Contrary to the general impression, we make much less money a barrel on the so-called monopoly... you will find that in the open competition we have acquired more than 50 per cent of the NELP acreage. We have done this on sound techno-commercial judgment.

How has the "corporate rejuvenation campaign" (CRC) revitalised ONGC? In what manner did the creation of Asset and Basin groups lead to a better delivery of results?

People are working closer to the field now. From the headquarters, we have provided very high empowerment. People had the authority to spend only up to Rs.25 lakhs. It has now been increased to Rs.25 crores. A lot of work has been done on building new systems and procedures that go into faster decision-making.

Secondly, thanks to what I have created, each Asset or Basin is a virtual board. We have speedier decision-making on a number of fronts. We have fewer grievances and complaints now. Systems and procedures have been strengthened. If you talk to our vendors and suppliers, they are much more confident and happy.