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`We have to be an integrated oil company'

Raghuvir Srinivasan

Mr Subir Raha, CMD, ONGC

OIL and Natural Gas Corporation (ONGC) is all abuzz these days. From a staid PSU that was content pumping out the oil that it already had, ONGC has turned aggressive in pursuit of fresh finds, both in India and abroad. Piloting this effort is its Chairman and Managing Director, Mr Subir Raha, who has set an ambitious target of doubling reserves in the next two decades. In this interview to Business Line in New Delhi recently, Mr Raha shares his vision for ONGC and his strategy to achieve that.

Excerpts from the interview:

Last year was one of your best in recent times. Do you think such a performance is sustainable?

It was the first year we could charge market price for our crude and it so happened that the market price was on the higher side. The freedom to charge market price brings in the risk that when the price goes down, the turnover goes down as well.

The main point is that last year we recorded a net profit that was almost 30 per cent of the turnover. Now, sustaining this ratio, to my mind, is the major challenge. On a turnover of $7 billion we had a net profit of $2 billion, now if the turnover falls to $5 billion, can we maintain a 30 per cent net profit ratio? That is the challenge. Now, it cannot be done exactly to the same number; worldwide, every E&P company offers the same risk and reward situation. In our case there is a third dimension — as a PSU and also because our production comes from fields that are nomination blocks, the fiscal regime is at the discretion of the Government. Last year the cess was doubled from $2.5 a barrel to $5. Now this is a specific charge, not ad valorem. Then, we were told to pay an interim dividend. These are issues that are not factored into the management's game plan.

We are no different from any other E&P company in that we have freedom to charge market prices and have to face price volatility. But what makes us vulnerable is the fiscal regime in which we operate has built-in uncertainties. Now that is a matter for concern.

But have you taken this up with the Government?

The bottomline is that last year on a Rs 35,000-crore turnover the gross take of the Government was almost Rs 19,000 crore — Rs 16,000 crore to the Centre and Rs 3,000 crore to the States. The Rs 16,000 crore consisted of cess, royalty, income-tax and dividend, while for the States it is royalty and sales tax. Therefore, it stands to reason that it is in the Government's interest also to see that ONGC remains viable and makes more money so that in turn it can get more from us.

The total disinvestment proceeds in the last 10 years has been a little less than Rs 30,000 crore; in a single year ONGC has given the Government Rs 16,000 crore.

With the advent of market prices, volatility will also become a feature. Is there a way in which such volatility can be hedged by ONGC?

Well, there can be no strategy for this. At $7 billion, we are small fry compared to multinationals which are $150-200 billion in size. Depending on prices, a global major can decide on portfolios such as retaining, selling or buying fields, cut down refinery runs and so on. Now, we don't have a portfolio with that kind of flexibility. As a national company we cannot shut down our fields and as a good company we cannot also over-produce from our fields. We really have no leeway.

With Mumbai High hitting a plateau, you really need a big find now to take the next leap forward. What is your take on this?

Well, Mumbai High is on a plateau phase but the plateau is on an upward swing. We are now producing more at Mumbai High than what we did in the past five years. In any field, there's a natural depletion process. From time to time, we have to invest in redevelopment. If you look at the fields we have in production, 115 of them, the average recovery from them is now 28 per cent. What we have now planned is to take the recovery rate to 40 per cent. With the current investment of Rs 8,200 crore, it will go up to 32 per cent. The next stage will take us to a recovery rate of 35 per cent and we will derive the benefits over 15-30 years. In effect, we are trying to take out more oil from the existing reserves.

Second, we have proven recoverable reserves today of 1.1 billion tonnes of oil and oil equivalent gas and established reserves of 6 billion tonnes. We established this reserves in 45 years of our existence. Our strategic plan is to establish the second 6 billion tonnes of reserves in 20 years' time. Of this, we expect 4 billion tonnes from deep waters and 2 billion from on-shore and new basins. Of the 26 sedimentary basins in India, only six are being exploited today. And of the balance, some are of high prospectivity and we are embarking on an exploratory campaign and hope to find oil there. So, we are looking at significant upside.

But what is your strategy to achieve this?

Basically through our exploratory efforts. We are working on several fronts. One, we are trying to close all technology gaps. Second, we are modernising the equipment. We are spending almost Rs 3,500 crore on this programme. Third, the sheer amount of resources, the number of survey teams and exploratory drilling rigs (onshore and offshore), I don't think we ever had this kind of mobilisation in the past 20 years or more. Today, there are two issues facing us. We have 1.1 billion tonnes of assets (oil) lying under the ground — how do you monetise it? Second, we have $1.1 billion of cash lying in the bank — how do you convert that into assets? If we don't convert this money into asset, we are only earning interest and paying tax on that to boot. So we are trying to move fast in our efforts to add to our reserves.

You have acquired management control over MRPL, got licence to set up retail outlets... what is your vision for ONGC?

We have to be an integrated oil company. Every major global oil company is an integrated player. I'm not being arrogant, but oil and gas is big business where the big boys play. You can survive in this business only if you are integrated, otherwise you will be out. You can ask me how ONGC survived all these years? Well, thanks to administered pricing and controls, we survived and grew.

Today we have to be in the global market on its rules and that would mean, if you are not integrated, you are dead. In 1998 when oil prices crashed, all sectoral E&P companies went bust and most of them were sold lock, stock, and barrel. And those companies were almost the same size as ONGC. The big ones survived because they are into E&P, refining, transportation, power and petrochemicals.

Second, because you are integrated you can resort to transfer pricing and minimise conversion costs. Third is the demand-supply situation. Globally, crude is tradeable and gas is becoming so.

All majors usually operate in such a way that two-thirds consist of own crude, refinery, petrochemicals and one-third is hired. If the demand goes up, you add capacity and vice versa. A sectoral company does not have that flexibility.

What is your ultimate plan for MRPL? Is merger with ONGC a possibility after you acquire the whole stake?

We have not taken a final decision. There are pluses and minuses. Obviously, there is a huge tax benefit if we merge and we do respect money, Rs 100 crore is Rs 100 crore. But there are other issues as well, such as integration of the human resource, which needs to be looked at carefully. At this point in time, we have not taken a view on the merger as such. We are concerned about the HPCL holding because it is up for privatisation. We had conceded certain rights to HPCL in the shareholders' agreement as a sister PSU. Obviously, those rights going to anybody else is a matter of concern.

Are you satisfied with the quantum of revision in gas prices recently?

Some of the decisions are really welcome, like in JV production where ONGC was subsidising customers. ONGC will gain almost Rs 900 crore that it was subsidising for gas production from JV fields.

Second, the gas pool account was paid for by ONGC but the benefit went to Gail, Oil India and the Government. That is now restricted to Rs 100 crore or the actual, whichever is lower. That should save us about Rs 100-150 crore though the question still remains as to why ONGC should subsidise the others.

Third, any new gas or additional gas from existing fields will be sold at market price. As far as the increase in gas prices is concerned, well, any increase is welcome but I wish it were nearer to what we felt is the minimum requirement.

And that is...

Well, as per our own costing, we need a price that exceeds Rs 4,000 per thousand cubic metre.

Article E-Mail :: Comment :: Syndication

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