New chairman orders decentralization of India's ONGC

Oct. 1, 2001
Subir Raha, the new chairman of India's Oil & Natural Gas Corp., is pushing a reorganization that will radically change the company.

Although its chairman for less than 5 months, Subir Raha is aggressively pressing for change at Oil & Natural Gas Corp., India's large oil and gas exploration company. ONGC, which has a reputation as a sprawling, bureaucratic organization, has been trying to implement a restructuring program offered 3 years ago by consultants McKinsey & Co. A pilot test of the Organization Transformation Project (OTP) was not well received within ONGC. Raha has modified OTP and insisted that his executives implement it.

OGJ Online correspondent Shirish Nadkarni recently interviewed Raha.

OGJ Online: One understands that ONGC is going in for extensive organizational restructuring on the lines of recommendations made by McKinsey & Co. Is it true that the company is to be carved up into 17 autonomous business units? If so, how will it function?

Raha: We have indeed started organizational restructuring, which we call the corporate rejuvenation campaign. The board has been restructured in that the directors' portfolios have been redefined.

The heart of the rejuvenation campaign is the concept of "virtual corporate." If we have three offshore assets, the asset manager should really have the empowerment to run his assets as if he is the managing director of the company. This is not saying that we are going to be actually incorporating 17 new companies, as was wrongly reported in the media.

The concept is designed to change the mindset of a person from merely being an executive or a manager to being a managing director. In other words, power with accountability. We have already aggressively decentralized financial authority. We have come to a stage where people who had zero financial authority have overnight got large authorization powers. This should inevitably bring in accountability. I do not want an asset manager running back to Delhi for decisions -- unless there are genuinely decisions that should be taken at corporate level. It would be up to him to run his show and deliver results.

OGJ Online: You must be seriously concerned about the declining returns from ONGC's onshore and offshore assets in India: What are you doing about it?

Raha: I don't think we have a situation where we are seen declining returns. What we have is the normal depletion in fields as we keep on producing oil and gas; so we need to enhance recoveries. First, we neutralize the normal, natural depletion rate, and then we go in for enhanced production. We have taken up enhanced oil recovery schemes. ONGC has 15 fields, both offshore and onshore, which contribute 85% of our production. In all of them, we have laid out specific plans for investments to improve recoveries and reservoir management.

In quite a few cases, we have already done the pilots, which are nearing completion. After that, we will move in towards commercial development. If you take Mehsana field as a test case, where EOR is already in progress, we are hopeful of positive results.

We have set strategic targets; and aim to take our global recovery factor from the current level of 28% to 40% over the next 20 years. With the current investments that we are making, we are shooting for a 4-5% increase in all our fields, including Bombay High.

OGJ Online: Bombay High has traditionally been your main producing field, but it has been producing less and less each year. How much can productivity at this field be improved? When is Bombay High expected to run dry?

Raha: Bombay High is a very complex reservoir. At the moment, we have recovery from different fields at different rates. With the present investment of $1.7 billion that we are planning, we should be able to increase the recovery by 4-5% and take the recovery to at least the 32% level.

We are seriously concerned about reservoir management, life cycle planning, and utilization of best-in-class technology. The field is producing reasonably well. Our engineers first drilled two wells, using the extended reach drilling technology under the guidance of our consultants.

Subsequently, they drilled some eight wells on their own -- and the results were fantastic. Our engineers have been able to master the technology quite well.

As far as the life of the asset is concerned, we are looking for at least another 25-30 years, if not more. There are a lot of reserves in Bombay High, but it is a complex reservoir and several technical issues are involved, which we are addressing.

OGJ Online: Your overseas subsidiary, ONGC Videsh Ltd. (OVL), of which you are also chairman, has been investing a lot of money in projects like Sakhalin-I in Russia, as also in Vietnam, Iran, Iraq, Libya, Indonesia, Venezuela, Algeria, etc. When will returns from these investments start coming in?

Raha: Investments have actually been made in only two places, Sakhalin and Vietnam. We have paid $180 million up front for the 20% equity stake in Sakhalin field, in which total investment has been pegged at $1.7 billion; and we are partners with ExxonMobil Corp. and the Russian firm Rosneft. We are pinning a lot of faith in that field, but revenues will start coming in only around 2005.

In Vietnam, we have a 45% equity stake in an offshore gas block in Lan Tay and Lan Do fields off the southern coast, in which we are partners with PetroVietnam, BP PLC, and Statoil. Revenues from these fields should start flowing in from 2002.

So far as the other countries you have mentioned are concerned, we are in discussions and negotiations, and are on the lookout for opportunities.

OGJ Online: Your managing director Atul Chandra was recently quoted as saying that he expected your profits to rise ten-fold from the year 2004, to $53.2 million. Is this a realistic estimate?

Raha: In ONGC, we are talking of doubling our reserves in 20 years, which means we should have 12 billion tonnes by 2020. It is a very ambitious target. In OVL, we have strategic plans that call for bringing in 10 million tonnes oil and gas within 10 years. It is a challenging target.

In Vietnam, we are part of a $1.5 billion project that includes gas production, a 390-km long pipeline and a combined power and fertilizer plant. Nam Con Son field is said to have reserves of 59 billion cu m, and is aiming for first gas in 2002. Once the revenues start coming in from Vietnam, OVL should become significantly profitable.

OGJ Online: Once the administered pricing mechanism is dismantled in April next year, no governmental favors will be shown to ONGC. How do you envisage your company's performance at the time?

Raha: The biggest disadvantage that we are facing at the moment is that the price we are getting from the Indian government for our crude is being capped. We are getting barely 60% of international rates on the basis of a complicated formula that I don't like. But once the administered pricing mechanism goes in April 2002, we will get international prices; and that will be a big plus point for us. I am therefore quite upbeat about that particular official step. I am not saying this only because I expect our revenues to go up. The issue is the times of the easy oil that we have produced over the last 40 years are over. We now have to make much larger investments in deep waters, in frontier basins, in EOR techniques.

OGJ Online: Petroleum minister Ram Naik announced recently that ONGC would go in for forward integration and enter refining. Please define your long-term plans in this segment.

Raha: We have recently commissioned our first refinery -- a small unit of 100,000 tonnes/year capacity, near Rajahmundry in Andhra Pradesh. What is important to us and our stakeholders is that, technically, our refinery allows us to exploit our reserves more efficiently. It is skid-mounted, so we can move it from place to place. There is tremendous saving on transportation cost, since the refinery would be located near the oil reserves in a minor field that we are exploiting.

So, rather than taking the crude long distances for refining and then bringing the petroleum products back by costly methods of transportation, we are producing products at the site of the reserves. The benefit is thus passed on to the customer.

We are also looking at small-scale gas-based power generation. All these are steps in forward integration projects, where we may not necessarily hold equity, but it helps us sell whatever we produce. We may do some of these on our own, and some with suitable partners.

OGJ Online: Since ONGC is government-owned, and the bureaucrats look at it as a major source of revenue for the state, there has traditionally been ministerial interference in ONGC's working. Is this still continuing? And would this not affect your working and bottom-line?

Raha: From my personal experience in two public sector organizations -- right now in ONGC and before that in Indian Oil Corp. (IOC) -- I have not seen ministers or officials interfering in the day-to-day management of the company. Even at the board level situation elsewhere, you have stakeholders who have a place on the board. They may be officials of a ministry or they may be representatives of bankers; they certainly come and speak on behalf of the entities they represent -- and you certainly cannot fault them. In fact, that is entirely the point of board representation. But, very honestly, I have been on public sector company boards for almost 4 years, and have not seen any bureaucratic or ministerial interference in decisions or contracts. People may raise issues and get them clarified -- that is fine, but that does not constitute interference.

OGJ Online: Are there any plans of divestment of government equity in ONGC? Or will it always remain predominantly state-owned, for strategic or perhaps national security reasons?

Raha: For the first part of the question, you have to ask the government. But the government has said in its Vision 2025 report that ONGC, along with IOC and Gas Authority of India Ltd., would be the flagship companies of the state.

In other words, the government would hold a controlling 51% equity stake in each of these companies. So we would remain a government company. Today, if you include IOC's shareholding in ONGC, the government has more than 91%. Therefore, by implication, the divestment would not be more than 40%. But whether the government would want to do it, and when it would want to do it, we have not been told.