D K Sarraf has been at ONGC VIDESH's (OVL) helm for the last 14 months. His tenure so far has been challenging as the company faced its first drop in output due to geo-political problems in Sudan and Syria. He is hopeful of a recovery from next year as new fields are expected to start production. Ending a lull, the company is back in an acquisition mode after recent stake buy in an Azerbaijan field and is eyeing assets in the US and Canada. Sarraf speaks to Ajay Modi on the impact of geo-politics on business, the new challenges and company's plans.
Of late, geopolitical developments have been impacting the oil and gas business in some overseas countries. How do you see things panning out in future?
Oil and gas prospects are generally available only in difficult territories - either in terms of environment or geo-politics. If they are not difficult on either, they will be difficult on competition with low returns. Geo-politics has been and will continue to play an important role in oil and gas exploration and exploitation. It needs to be handled on a case to case basis, and there is no general prescription to deal with the same. This ultimately zeroes down to political risk which is factored into while evaluation of any opportunity.
Has acquiring assets become more difficult in past one year due to competition?
Acquiring oil and gas assets has been competitive for many years and I would not say that something has changed in the past one year. In fact, in the recent times, many opportunities for acquisition have come up due to the strategic portfolio shift of many western companies which are now concentrating on geographies like North America. However, the expectations of the sellers in terms of desired price have become higher.
ONGC has set a Perspective Plan 2030. What role will OVL play in it?
OVL produces little less than 9 million tonnes of oil and gas in FY12. Our vision is to produce 20 million tonnes by 2017-18 and 60 million tonnes by 2030. If we are able to achieve the same, OVL’s contribution would be 46% of ONGC group production by 2030, against existing 15%.
Production had decreased last fiscal mainly due to problems in Sudan and Syria. This year the problems are still continuing leading to further decline in production. In addition, some fields are on a declining phase. Consequently, we could produce 3.488 million tonnes in the first six months which is lower by over 23%. However, going forward, production would start looking up from the existing assets from 2013-14 as production would start from the blocks A-1 & A-3 in Myanmar, Carabobo Project in Venezuela and the second phase of Block BC-10 in Brazil. Also, our recently-acquired 2.72% stake in ACG fields in Azerbaijan will add to the number.
How is OVL’s financial health? Any plans to list the company?
OVL’s financial health continues to be robust. We have been having profit after tax of more than Rs 2,500 crore during last 2-3 years. Our profits for the first half of the current fiscal are also at Rs 1,649 crore. The Debt-Equity Ratio has decreased from 10 in 2003-04 to less than 1 now. We have been financing about 70% of our investments from internal resources. At the same time, being a wholly-owned subsidiary of ONGC, we get more strength from the financials of ONGC. ONGC has been the highest profit making company of India and continues to be debt free. We get full financial support from ONGC. So far as listing of OVL is concerned, this is a decision to be taken by ONGC.
What I believe is, it makes more sense for ONGC is to support OVL like at present, create more value and only then list it to get maximum out of divestment.
Tell us about the progress in restoring output in South Sudan?
Production at 50,000 barrels per day is almost normal in North Sudan. But most of it is getting consumed in their domestic refineries and little is being exported. Once we resume production from South, most of it will be available for export. Production from South is expected to be restored in next 3 to 6 months.
Is OVL looking at North America and Canada?
Very large hydrocarbon resources are available in North America. Canada is among top nations in terms of oil resources. These resources are accessible to investors, unlike certain West Asian countries where only crude oil can be bought but oil reserves can’t be owned. Canada is very transparent and investor friendly country.
With increase in production of shale gas, US now has exportable gas surplus. Due to over-supply, gas prices are towards their historical lows. Gas import terminal facilities created in the past are being converted to export facilities. There are immense opportunities in the US for participating in its upstream business. US has a good network of pipelines. However, the challenge here is that India does not have a free trade agreement with the US. Therefore, export of gas from US to India requires approvals by US authorities on a case by case basis. Several applications are under consideration with the US government. We wish to have an integrated presence in the US where we may produce gas, transport it to shore through pipelines and have it converted into LNG for export to India.
Are you also look at investing in a terminal in US?
Yes, we are. Also, one can invest in a terminal or preferably book capacity in an upcoming terminal.
What are the other geographies that excite OVL in addition to US and North America?
In addition to other parts of Africa, East Africa has good opportunities in Mozambique and Kenya. Brazil, Venezuela, Colombia etc. in Latin America are interesting. Central Asian countries and Russia also provide good opportunities. Several new areas of interest are emerging.
Tell us about OVL’s plans of acquisitions?
We are looking to make couple of big-size acquisitions. Last three years there had not been any major acquisitions but now the ball has been set rolling with the purchase of stake in ACG fields in Az erbaijan and BTC pipeline recently. Some more would put us back on track.
What challenges you may face in your vision?
We have a vision to produce 60 million tonne by 2030, but it is easier said than done. By 2030, most of the existing fields would be depleted. So, we have the challenge of creating afresh producing capacity of most of 60 million tonnes. For acquisitions of this magnitude, we need to streamline the organization systems, personnel and organise finance. Challenge remains on deciding which areas to focus, how to select a partner, manage geo-politics, and so on. We have already addressed some of these issues while others are getting sorted out. Other than normal business uncertainties, the oil and gas sector has uncertainties of geology, crude oil price, regulatory regime, etc. There are different schools of thought related to oil price and there is no right answer to oil price in future and deciding on crude oil price for valuation becomes difficult.