Growing into a global player

Interview with Subir Raha, Chairman, Oil and Natural Gas Corporation.

"A reasonably good year," was how a Rs.12,175-crore net profit in the financial year 2004-05 was termed by Subir Raha, Chairman and Managing Director of the Oil and Natural Gas Corporation (ONGC). The profit is up from Rs.8,664 crores in the previous year. ONGC, for the third year in a row, has been able to maintain an increasing rate in crude production. Mangalore Refinery and Petrochemicals Limited (MRPL), a subsidiary, posted a net profit of Rs.850 crores in 2004-05, compared to Rs.459 crores in 2003-04, an increase of 85 per cent. MRPL, which was a chronically sick company, was taken over by the ONGC in March 2003 and transformed into a profit-making unit in just nine months. Another subsidiary, ONGC Videsh Limited (OVL), acquired five properties abroad for exploration in the last financial year. It operates in 14 properties in 12 countries. For India, which has only 0.4 per cent of the world' oil and gas reserves but 15 per cent of world's population, these figures are comforting indeed.

Subir Raha is obviously pleased not only with the performance of the ONGC but also those of the MRPL and the OVL. He is the Chairman of the two subsidiaries.

Raha took over as Chairman and Managing Director of the public sector oil major in May 2001. The ONGC's market capitalisation then was $4 billion. It stands at $28 billion now. It is considered the most valuable company in India.

Fifty-six-year old Subir Raha graduated in Electronics and Telecommunication Engineering from Jadavpur University in 1969. He was adjudged the best all-round graduate of the year in the faculty of Engineering and Technology and the best all-round graduate of the year in the university. He completed his Master of Business Administration with distinction from the University of Leeds, United Kingdom, in 1985. Before taking over the reins at the ONGC, he was the Director (human resource) on the Board of Indian Oil Corporation Limited with concurrent charge of business development, information technology and corporate communications.

In an interview to T.S. Subramanian at Nazira, Assam, he described as "a very exciting find" the ONGC's discovery of huge reserve of gas in the deep waters block called Vashishta in the Krishna-Godavari basin off the Andhra Pradesh coast. Excerpts:

The ONGC will be celebrating its golden jubilee in August. How do you assess its performance?

It has been a chequered career. There have been fabulous achievements and there have been serious disappointments. But overall, in the past five decades, the ONGC has performed a unique role in India. Let us take technology. Fifty years ago, we really had no capability in exploration, production and processing of oil and gas. There were universities that taught geosciences and chemical processes. We did have a small operation in northeastern India. Burmah Oil, which became Oil India, was here. There again, the technical capability came essentially from expatriates. But today, we are recognised globally as an operator. The word "operator" is a specific term in our industry, it means that a company has the full capability to explore, produce and process hydrocarbons.

Let us look at human resource: if you look at the scale of knowledge that we have developed over generations, all the exploration and production companies in India are manned by people who were trained by the ONGC. In different countries there are managers, engineers and scientists at various levels who have been nurtured by the ONGC. This is not a tangible benefit that you can put in a balance sheet. But it makes a tremendous difference to a company. Every year, we take in 350 fresh graduates or post-graduates. Over 15 to 20 years, they will be recognised as some of the best professionals in the world.

If I am not misconstrued as being immodest, if India today is recognised globally as a significant player in the oil and gas business, it is almost entirely owing to the work of the ONGC. It is not just because of market capitalisation or profits. There are many companies in India that are much bigger than us. There are also companies such as British Petroleum, Shell or ExxonMobil that are 10 times bigger in size than we are. In the context of oil and gas if you go anywhere in the world today and mention the ONGC, it is recognised as a serious player.

At the same time, we have had failures on many counts. Four years ago, McKinsey was a consultant to the ONGC's restructuring [plan]. They officially wrote to the government that the ONGC may close down in three to five years because many things happened, especially in the 1990s, which went against its interests or growth. It will not make sense today to go back to those controversies except that we must remember those lessons. Those in the company and outside should remember them so that we don't get into the same situations again.

You have found a huge gas deposit of nearly three trillion cubic feet in deep waters in the Vashishta block in the Krishna-Godavari offshore basin. When will you start producing that gas? Since Reliance Industries has found another big gas deposit in the adjoining block, will you think of jointly producing gas with it?

Vashishta is a very exciting find. We are drilling an appraisal well there. One has just been completed. It will be sometime towards the end of 2005 that we will begin work on the detailed development plan. This will be quite a complex project because conceptually what we are planning is that the output from several adjoining blocks will be developed into one integrated network. So we are talking about a fairly large area in different depths and going by the complexity and technological challenges, I do hope that the first gas from Vashishta will be produced in 2007.

In the meantime, we will continue the development of other finds in relatively shallower waters in the Krishna-Godavari basin. Technically, there is a case for optimising costs by sharing the development of many of our facilities with Reliance. This is an opportunity we both, the ONGC and Reliance, are looking at.

There are positive indications of finding oil and gas in the well you are drilling in the Sunderbans off the West Bengal coast. Earlier, you had drilled about 40 wells in the Bengal basin, which turned out to be dry.

That is the nature of our business. Why Sunderbans? If you come close home to Tamil Nadu itself, we have drilled a fairly large number of wells in the Cauvery asset in the 1960s and 1970s. Then we took a break to reassess (the situation). One thing you must realise is that even if the well goes dry, we get an important benefit because the seismic and other surveys give us a picture of what the structure looks like. This is very, very important.

In Tamil Nadu, we began in the early 1960s and our first success came in the 1990s. We are now finding more and more fields there. The same thing is true of the Sunderbans or anywhere else. We just spudded the well in the Sunderbans on March 22. We will reach the targeted depth sometime towards the end of May. Drilling is a costly proposition. Investment in drilling is based on anticipation. Based on the data we have, we should find hydrocarbons. Otherwise, why should one drill a well? So we are hopeful in the Sunderbans like every other well that is spud.

Did you place too much hope on the deep water exploration project "Sagar Samriddhi"? Eleven wells that you drilled in the deep waters turned out to be dry. You struck gas only in Vashishta. So will you reassess areas such as Kutch, Saurashtra and Kerala-Konkan where you have already drilled in deep waters?

This kind of question does come up often and it is quite natural to look at the numbers. It is true that 11 wells went dry. But this is exploration business. We are not making soap, textiles or aluminium ingots. In any given process, you know what the inputs are and if you do so, you will get steel, glass, soap, or 20 cars rolling out or so many metres of cloth. Exploration is not that kind of business.

It is a very chancy business?

Exploration is a risky business. It is unique. When you, therefore, talk of exploration we accept that certain wells will go dry. In fact, when you look at the global average, whether for onshore, shallow waters or deep waters, if you do one in two, one in three (wells), you are doing very well. In deep waters, the global average is 1:7 or 1:10. It took almost 200 dry wells before North Sea oil was established. The same thing for Gulf of Mexico. I am not saying this to justify that wells should go dry. I am only saying that exploration is a different business and the difference lies in analysing. When we invest $1 billion or $2 billion, we know that there will be certain wells that will be dry and that we will not be able to complete certain wells because of complications. But we also expect that we will get some wells that will be successful and that is where the investment, the risk, everything gets paid off. That is how this industry works. We will certainly go back to the west coast deep waters, right from Kutch to Kerala-Konkan.

Let me also make one point clear, which seems to come up: that in so and so basin, the ONGC drilled 46 wells but found nothing; somebody else moves [in] and finds something. The point is that these 46 wells were drilled by the ONGC 15 or 20 years ago. Technically, what we did at that point of time provided the physical data, which has led to success now. We have no regrets on this. It is only in recent years that the media are covering exploration and production in greater detail.

It is a good turn.

It is a good turn. We need awareness and concern. At the same time, we need to build a clear picture that this is a different kind of business; that you cannot judge exploration and production by what we know of standard manufacturing processes.

There is a feeling that the corporate restructuring campaign (CRC) in the ONGC that led to its regions being divided into assets has not paid off and that it has led to the creation of many power centres. Do you agree with that view?

Actually, the CRC is based on an earlier project called Organisation Transformation Project - OTP. The OTP was developed by Mckinsey over a four-year period. Pilot [studies] were carried out, especially in Neelam and then in Gujarat with significant success. What we did was that we took the OTP and fine-tuned it into the CRC and rolled it for our company in one shot. It was a major risk but then we did that.

The success of restructuring (will be revealed) when you talk to a large cross-section of people in the organisation. I am deliberately saying "large cross-section" because in any change-process, there will be vested interests who will be affected. If you talk to a few people here and there, the sample will not be reliable. I am confident that if you talk to a large cross-section of people all over India and overseas, you will find an overwhelming response that the CRC has made a difference and it has made a difference for the better.

You talked about too many power centres. (What I am saying) is not rhetoric: is it better to have a single power centre or too many power centres?

You mean decentralisation?

That is right. What is empowerment? Empowerment is a very popular management jargon today. Everyone talks about it. Even the government talks about it. Empowerment by definition means creation of "more and more power centres".

I am sure the results we are recording today in every area - operations, health, safety, environment, financial and systems would not have been possible without the CRC.

By the end of 2005, the ONGC will be producing gas from the Sakhalin-1 block in Russia. ExxonMobil, which is the operator, does not give us the right of way. How will you transport the gas? Three countries are close to Sakhalin - Japan, China and North Korea. To whom will the ONGC sell the gas?

The initial gas production is scheduled to begin in the next few months this year. It will be sold locally in Russia itself. Estimates have been tied up for that. For the full-fledged gas that will come after two years, negotiations are going on whether to sell the gas to China or Japan or any neighbouring countries. As of now, Japan has not shown any inclination to buy the Sakhalin gas.

Why?

Because they are getting LNG [liquefied natural gas] for which they have already made huge investments in gas fields overseas, in liquefaction plants, in shipping, in re-gasification and so on. So a complete value-chain has been built up. If I remember correctly, Japan has about 30 LNG terminals. India and China have just commissioned their first LNG terminals.

Secondly, there was a lot of diplomatic interaction whether the Russian gas pipeline should come to China or Japan. Last year, it was to go to Japan. Since Japan has established an energy value-chain, it is perhaps not keen to buy gas from Sakhalin-1.

ExxonMobil is the operator. We are working on what is the best disposal for gas.

As far as oil is concerned, initial production will begin next year. Oil will be shipped out. We are looking at the economics.

You have plans to bring gas from Myanmar to India. The proposed pipeline will traverse Bangladesh and Tripura in Indian territory and then again through Bangladesh before reaching Kolkata. This pipeline route will present logistical problems as the pipeline will have to cross swollen rivers such as the Meghna and the Ganga and hills in Tripura. Instead of this cumbersome route, will you lay a pipeline close to the shore from Bangladesh to Kolkata to transport the gas that Cairn Energy discovered off Bangladesh's coast? This would involve a swap deal: we buy gas from Bangladesh and Bangladesh buys gas from Myanmar.

Theoretically, there are several options. We can have a pipeline from Myanmar to India through Indian territory alone. We can have a pipeline that crosses Bangladesh territory. When we talk of a shallow water pipeline, we have to remember that every country, including Bangladesh, has a maritime boundary or economic zone. So whether we cross Bangladesh over land or shallow waters, it will mean the same thing: it has to go through Bangladesh territory. Deep waters is another theoretical aspect.

Each option has its own cost and technological challenge. In today's technology, the question of deep-water pipeline does not arise because we have very deep canyons, and crossing them will not be easy.

Similarly, you should not forget that two of the mightiest rivers of the world, the Brahmaputra and the Ganga, have their sediments flowing in shallow waters. Crossing that itself will be a major technological challenge.

For instance, we just discussed drilling in the Sunderbans. It is a technological challenge because it is extremely shallow waters with huge sediments. It took us nearly two years to contract a rig fit for the purpose.

If you come through Bangladesh overland, logistics is not really a difficult issue because all rivers have rail and road crossings. So there are different options. We have to take a final view based on economic and diplomatic considerations.

A story in The New York Times (February 18, 2005) said that India had joined China in an increasingly "naked grab" at oil and natural gas blocks in the world. But we have lost to China in bidding for blocks in Angola and Iran. Will you consider having a strategic alliance with China in jointly bidding for blocks?

It is a possibility. For over a century, the United States has been busy grabbing oil and gas properties all over the world. We are only trying to follow in their footsteps - India and China. I don't see why the U.S. should be so concerned about ONGC Videsh going out and buying property. Grabbing as a phenomenon is not a monopoly of the U.S. or the United Kingdom. The point is that we are talking about a globalised market. When you do so, there are resources and demands that are geographically dispersed. Within a globalised context, it is important to see what is the best match between geographical dispersion of supply and demand, which everyone does. The World Trade Organisation is all about that.

Coming to the China National Petroleum Corporation, we have been competing (with it) on every transaction. There are areas where we could reach an understanding because business is business and we all realise that the best way is where we can minimise costs and maximise profits. So I do hope that we will be able to go forward.

The ONGC has made its recommendations to the Committee of Synergy on Energy. There are reports that it has suggested merger of the ONGC, Hindustan Petroleum Corporation Limited, Bharat Petroleum Corporation Limited and a part of the Gas Authority of India Limited (GAIL). Is it not true that after mega-mergers of oil companies abroad, their Research and Development efforts and exploration has suffered?

First, I do not think it is a correct statement that global mega-mergers have had any adverse impact on R&D. If any statement is made to that effect, to the best of my knowledge, it is baseless. In fact, the global paradigm has been one of consolidation. If you go back in history, Rockefeller made his money from Standard Oil, New Jersey. The U.S. Anti-Class Law was brought in to break the Standard Oil group. A few decades after it happened, it was again in the U.S. that the consolidation process began. Today, you don't have Seven Sisters any more because most of them have merged with one another. You have global players such as BP, Amoco, Arco and Castrol. You have ChevronTexaco. They are leading in R&D, and innovation due to consolidation, they have been able to reduce transaction costs drastically, transfer pricing and reduce overheads. They have been able to meet shareholders' expectations better than their competitors or competing industries. They have been able to deploy their resources effectively in new technologies, R&D.

The challenge today before everyone, including the ONGC, is deep-water exploration. Deep waters is where we talk of big money, big risks, big technology and hopefully, big rewards. To give you an estimate of the scale of numbers, drilling a well in Gujarat may cost Rs.5 crores. Drilling a well in Mumbai High may cost Rs.20 crores. Drilling one deep-water well will cost between Rs.140 crores to Rs.150 crores. Assuming the global success ratio of 1:3, for every Rs.500 crores you may invest, you may get success on Rs.150 crores and you have to write off Rs.350 crores. That is our business.

Today, you have accelerated deep-water exploration happening in the Gulf of Mexico, offshore Brazil, offshore west coast Africa, offshore China and offshore India. These developments would not have been financed or risked without consolidation. To that extent, if any statement is made that consolidation has gone against progressive R&D, I repeat that it is a baseless statement, not borne by facts.

Coming to the Committee (on Synergy in Energy), it has been constituted because there are many theories, proposals and suggestions. Everyone has his own views. We have our company's interests at heart. The committee's function is to listen to different viewpoints and hopefully work out an optimal solution that needs to be followed by us in India because we are the only market in the world where oil companies do not operate on an independent basis. It is in consumers' interests that benefits of cost reduction, efficiency and effective competition are passed on to the customers.

You have renamed Karaikal Asset as Cauvery Asset. This has fuelled a fear among the people of Karaikal that the ONGC's activities there may be shifted to Mayiladuthurai, which is the Lok Sabha constituency represented by Union Petroleum and Natural Gas Minister Mani Shankar Aiyar. It may be an unfounded fear. But is there a political undertone to the renaming?

We renamed Karaikal Asset as Cauvery Asset. I must concede that this was a suggestion from the Minister. We implemented that because we have Assam Asset and Tripura Asset and so on, and we felt that it was better to call it Cauvery Asset. What we call Rajahmundry Asset was Krishna-Godavari Asset.

As far as the township in Karaikal is concerned, we have been having a major problem with the supply of drinking water. We tried to solve it. But we have not taken any decision to shift the township. Cauvery Asset, we feel, has a good potential and we are focussing on how to find more oil and gas there and improve our performance.