India's ONGC accelerates global investment strategy as competition heats up at home

A platform is shown in the Bombay High area off Mumbai, India. Long a mainstay of Indian oil production, the Bombay High area has seen 4 consecutive years of decline. Sliding domestic oil production has spurred state oil company Oil & Natural Gas Corp. to accelerate a strategy of finding and producing oil abroad. Photo courtesy of ONGC.

• The Sagar Samrat jack up, recently upgraded and refurbished at India's Cochin shipyard, is shown on location in the Bombay High area off Mumbai. State oil company Oil & Natural Gas Corp. is stepping up offshore exploration in a bid to stem India's accelerating oil production decline. Photo courtesy of ONGC. [35,570 bytes]

India's biggest state oil company, Oil & Natural Gas Corp. (ONGC), is accelerating a global investment strategy in response to increasing domestic competition spurred by demonopolization and deregulation.

ONGC is gradually losing whatever domestic competitive advantage it had enjoyed during a half-century of socialist protectionism practiced by the governments of the post-independence era.

Even as governmental controls over the petroleum sector are being progressively dismantled, the giant state-owned company is accelerating its strategy of international investment in exploration and production. The aim is to join the diminishing ranks of multinational majors-among them the (also shrinking) number of state-owned firms-that seek to gain a competitive edge in an increasingly competitive global petroleum industry.

A decade ago, the Indian state company set up an international upstream arm, ONGC Videsh, to compete in the E&P sector abroad. But, until recently, its successes were virtually nonexistent (OGJ, Aug. 10, 1998, p. 24). It currently has exploration assets in Algeria, Australia, and Sudan, and has undertaken upstream projects in Nigeria, Tunisia, Egypt, Yemen, and the North Sea.

Among the latest such developments, ONGC has:

• Entered into a venture with India's biggest state-owned downstream company, Indian Oil Corp. (IOC), covering joint exploration and development in other countries.
• Won a tender to operate a world-class natural gas development project off Viet Nam.
• Launched an international push to raise funds for acquisitions and projects in Russia.
• Started negotiations for oil exploration and production projects in Iraq, Iran, Russia, and the Central Asian nations of the FSU. ONGC has recently opened offices in Moscow, Baku, Almaty, and Baghdad.

Even as it expands its foreign E&P investment efforts, ONGC has stepped up efforts to increase oil and gas production in India as it continues to implement new efficiencies and cost-cutting measures.

The fact that the company is starting the new era of unbridled competition on good terms can be gauged by its first half fiscal 1998-99 earnings. It posted a net profit of 12.58 billion rupees ($296 million) during April-September 1998.

This marked an improvement of 11.6% over the net profit notched during the comparable period in fiscal 1997-98. The rise in profit was achieved despite a 2.15% fall in net revenues. During this period, ONGC's net sales stood at 71.52 billion rupees, compared with 73.09 billion rupees in the first half of fiscal 1997-98. Lower interest costs offset the drop in sales, thus boosting net profits.

The good results continued into the third fiscal quarter (October-December 1998), when ONGC posted a 22.5% improvement in profits over the comparable period in fiscal 1997-98. For the first 9 months of fiscal 1998-99, net profits totaled 18.80 billion rupees, 15.04% better than the net profit of 16.34 billion rupees registered during April-December 1997.

In an exclusive interview with Oil & Gas Journal in Mumbai, ONGC Chairman and Managing Director Bikash Chandra Bora assessed the problems his company has been facing and outlined its plans for the near to mid-term.

ONGC-IOC venture

The ONGC-IOC tie-up follows on the heels of an equity swap by the two state firms.

The two companies will pool their expertise in exploring for and developing oil fields in such countries as Myanmar, Bangladesh, Iran, and the former Soviet Union. The country of particular interest in the FSU is oil and gas-rich Turkmenistan.

Regarding the FSU opportunities, the combine has begun to do the groundwork on oil and gas projects in concert with Russian oil giant Lukoil.

"Products from these oil and gas fields could be sold in markets like Mauritius and especially Nepal, which imports large quantities of petroleum products from India," said a top ONGC source.

The two Indian government-owned companies are also planning a tie-up in the power sector, because power could be generated from refinery residues, which IOC currently disposes as waste.

While ONGC is India's biggest oil and gas producer, it has no refineries; IOC has no upstream operations but is India's largest refiner, with about half the nation's crude distillation capacity, and is the nation's principal exporter and importer of petroleum products. Thus the equity swap and subsequent joint venture offer the synergy of an integrated major.

Bora contends that the current oil price climate is ideal to acquire oil fields and drilling rigs abroad: "We can turn the current recessionary conditions to our advantage by acquiring oil properties abroad. There are several good properties lying (shut-in) because the returns from current oil prices would not even meet operational costs." He reckons that a great many shut-in and undeveloped oil field properties are available at a cost of $5-6/bbl or less. After factoring in operating costs, he estimates total net costs at less than $10/bbl.

"Strategically speaking, a lot could devolve to India's advantage by buying up such oil fields abroad, since it would enhance the crude supply available to us," Bora said. "India is a net importer of oil, and the demand is rising by leaps and bounds with each passing year.

Bora doesn't see the global downturn in the oil industry as threatening India's long-range efforts to attract foreign investment to its upstream sector:

"I had discussions with several petroleum and energy company delegates from abroad who attended the recent Petrotech '99 symposium in New Del- hi. They were still optimistic on the deep-sea exploration projects in India, for which they had all the relevant data on Indian conditions.

"For an exploration block, the minimum gestation period is 4-5 years. Since the service costs (are) lower now, it makes perfect sense to venture into these projects.

"At the same time, I must say that a significant development that may have an adverse impact on investments in the Indian oil industry could be the recent privatization efforts initiated by Kuwait and Saudi Arabia."

Viet Nam project

Following a decisive breakthrough in the long-running natural gas price negotiations, an international group including ONGC Videsh has clinched the Nam Con Son gas project off Viet Nam.

The 63 billion rupee ($1.5 billion) project, involving development of 2 tcf of gas from Lan Tay and Lan Do gas fields on Block 06-1, ranks as one of Viet Nam's biggest infrastructure projects.

This will also be the biggest investment by an Indian company outside India. ONGC Videsh is a 55% partner in the consortium, along with partners BP Amoco plc and Statoil AS.

Industry sources in Hanoi said that the Vietnamese government had offered the consortium a price of $1.88/ MMBTU.

This offer has been accepted by the consortium, which will now send a formal response to the Hanoi authorities. The consortium hopes to achieve initial production of 200 MMcfd, starting in 2002.

"ONGC Videsh is now all set to join the big league in its own right," said a senior official in India's petroleum ministry. "The long-awaited deal will spur accords for it in other parts of the world, as well."

Russian venture

ONGC Videsh continues to screen international investment bankers to help it raise more than $1 billion in external commercial borrowings for investments in Russia. In the running are J.P. Morgan, Morgan Stanley, and Chase Manhattan, to be selected to help raise these funds and assess property in Russia. These funds are required for acquiring oil fields in Russia, and to buy equity in that country's national oil companies that are earmarked for disinvestment.

ONGC Videsh is particularly interested in six oil fields in the Russian republic of Udmort, which will require $59 million worth of investments over the next 5 years. These oil fields had originally been awarded to Samson Resources Co., Tulsa, which has since withdrawn.

The company is also interested in acquiring an equity stake in Lukoil.

To fund all these ventures, the company plans to raise term loans overseas, spread over the coming 10 years.

Declining production

"Of late, there has been considerable concern in the country over the fall in the rate of domestic crude production," Bora said. "(Acquiringellipse) oil fields (abroad) would offset the negative growth of (the oil) production rate in India."

But that acquisition mode has not kept ONGC from divesting some of its own marginal oil properties, Bora said, citing the company's recent sale of small-to-medium-sized oil fields to Gujarat State Petroleum Corp.

In addition, he noted, "Recently, Tamil Nadu Minerals Ltd. has shown interest in taking over fields in the Bhuvanagiri region of Tamil Nadu that we have not found worthwhile."

ONGC's domestic crude production has declined in the past fiscal year, dropping 6.2% year-to-year for the latest reporting period, Bora noted.

"The shortfall in our output is due to less than adequate response from thermal enhanced oil recovery schemes in the heavy oil belt of Mehsana, frequent power shutdowns by the Gujarat State Electricity Board, and an increase in the water cut in the Gandhar field.

"In Assam state, crude production was hit by bandhs (general closures), protests, and environmental problems. In Bombay (High) Offshore, production from the Heera field's Phase III was down due to availability of a lesser number of new development wells and less-than-projected production from Well No. B-173A."

But, Bora noted, ONGC's natural gas production for the first 8 months of fiscal 1998-99 is up from the comparable period in fiscal 1997-98.

Reserves, production outlook

The latest outlook for Indian crude oil production and reserves is bleak.

The petroleum ministry's ninth 5-year planning document, covering 1997-2002, concluded that India's crude oil reserves are expected to last only for another 16 years, and could be exhausted even by 2011, assuming just 30% of the country's demand for petroleum products is met from domestic crude oil production.

The situation for natural gas is marginally better. In addition, there also exists some potential for coalbed meth- ane, oil shale, and methane gas hydrates in the country. India's postulated unconventional hydrocarbon resources are estimated at 850 billion cu m (bcm) of coalbed methane, 600 million metric tons of oil shale, and 6,156 trillion cu m of gas hydrates.

Without any additions to existing reserves, crude oil reserves are expected to total about 513 million tons by 2001-02, while production averages 37 million tons/year.

"The accretion to crude oil reserves was negative in each of the first 3 years of the Eighth Plan (1992-97), while in the case of natural gas, the recoverable reserves declined from 735 bcm in (fiscal) 1992-93 to 707 bcm in 1997-98," the document said.

Accordingly, Indian demand for petroleum products in the years to come will increasingly be met by imports.

"Our problem is that we are horribly underexplored," said Jairam Ra- mesh, secretary in the Economic Affairs department of the All-India Congress Committee. "Our prognosticated geological reserves of oil and gas are 26 billion (metric) tons, of which just 25% has been actually established."

Ramesh lamented the fact that India has not yet recognized that natural gas, not oil, appears to be the country's predominant hydrocarbon resource. "This is surprising, since processes to convert natural gas to diesel, our main need, are now commercially available," he added.

Neelam

In an effort to stem the decline in its own Indian fields, ONGC turned to outside consultants for help.

One of the more notorious projects was the problem-ridden Neelam oil field, which Bora characterizes as having undergone a dramatic turnaround: "We had appointed international management consultants McKinsey & Co. to examine the problem of declining output from Neelam. They recommended the formation of an asset management group, which went to work on the oil field in November 1997. In just over a year, there has been a complete turnaround.

"At one point in time, we were even thinking of selling the property, or roping in a joint venture partner to help divide the risks. We had even short-listed seven prospective partners in the venture. But the government took too long to make a final decision; and McKinsey, in the meantime, submitted their report. We decided to test out the new business principles in Neelam. We also roped in DeGoyler & McNaugh- tonellipseto estimate the fair market value of Neelam, ellipsethe oil reserves and the current surface facilities of the field."

Neelam, which started production in 1993, was originally estimated to hold 130 million tons of oil reserves and expected to produce at plateau about 90,000 b/d. But initial crude output was less than half that, and the decline continued before production stabilized at 38,000 b/d.

"The decline in output has since been arrested," Bora said. "In fact, last year's production exceeded expectations. Against an in-house target of 1.817 million tons of crude oil, Neelam produced 1.923 million tons for the fiscal year 1997-98. This (fiscal) year, the field is expected to yield 1.76 million tons, of which 0.88 million tons have already been extracted between April and September (1998). We are quite confident of being able to meet the target."

Bombay High

More problematic for ONGC is the situation at India's mainstay producing area, Bombay High, a cluster of oil fields off Mumbai.

For years, ONGC has coped with claims that it was overproducing the Bombay High fields, damaging the reservoirs in the process.

India's petroleum secretary, T.S. Vijayaraghavan, recently said that he favors cutting back production at Bombay High for 2 years, even if it means a decline in India's crude oil production.

In response to that proposal, Bora told OGJ, "The process of fixing Bombay High would mean the closure of some fields, although this need not give cause for alarm. Bombay High is our nerve center, contributing over 40% of our annual crude production.

"But seeing that world prices of crude are depressed enough at the moment, there would be no problem in requisitioning higher imports for the next 2 years.

"It is possible that, if no remedial measures are taken by the turn of the century, we would be in a different ball game altogether. By the end of the year 2000, India would need to import 80-90% of its oil needs, unless production at Bombay High went up."

ONGC hired Gaffney Cline & Associates to conduct a mid-life review of Bombay High. The study revealed that the field has the potential to produce oil until 2050, or 75 years from the 1976 discovery date. Up through April 1998, Bombay High had produced 2.4 billion bbl of oil and 177 bcm of gas. But production has steadily declined in the last 4 years.

Other activity

Following the successful implementation of the pilot project at Neelam, ONGC is about to launch the second phase of restructuring in the entire western region business center, covering the Gujarat area. The projects in this region will be converted, per McKinsey's recommendations, into assets headed by an asset manager.

This organizational revamp is aimed at improving oil recovery and production, as well as cutting costs of production. For this purpose, multi-disciplinary teams have also been set up with statutory powers.

On the exploration front, basin managers will be appointed to concentrate on exploration activities alone.

ONGC also has taken the plunge into deepwater exploration, recently commencing a second deepwater exploratory drilling program with a 2,500-m well in about 530 m of water in the offshore Krishna Godavari basin, near the central Indian state of Andhra Pradesh. ONGC's first deepwater effort kicked off in the Cauvery basin at a water depth of 770 m, and that well is still under way.

Because of its lack of expertise in deepwater drilling, the state company has tied up with contractor Sedco Forex for assistance, setting aside 2 billion rupees ($47 million) for the latest project. In addition, ONGC recently upgraded its Sagar Vijay drilling rig at the Cochin shipyard for deepwater drilling operations; the rig is now rated to a water depth of 900 m.

"This Krishna Godavari basin site has assumed significance for us, since we had drilled wells in Bombay Offshore and on the east coast where the water depth is less than 200 m," Bora noted.

"In addition, we have identified four prospective offshore sites for deep-sea exploration-in the Cauvery basin, the Krishna Godavari basin, the Kerala-Konkan basin, and the Bombay offshore basin."