OVL on an oil slick, struggles with geopolitical and domestic challenges

For ONGC Videsh Ltd (OVL), the 65-year-old overseas subsidiary of state-owned oil exploration major ONGC, the past few years have seen a unique convergence of issues that could add new dimensions of complexity to its core business of overseas exploration and operation in the years ahead.

These new challenges concern both the geo-politics inherent in the global economy and the growing uncertainties in fossil fuel pricing against the global shift towards green energy. Covid-19 has added to these issues. It has not only impacted the demand for fuel but also made the acquisition process slower.

Added to these risks are the economic sanctions imposed by the western world over the last 10 years on Russia, Iran and Venezuela, making induction of technology partners and getting payments difficult for OVL. 

The inconclusiveness on OVL’s Farzad B field in Iran culminated in the Iranian government taking back the block. OVL is trying to retain a foothold by seeking a minimum 30 per cent stake in the block. The Farzad B saga dates back to 2002 when India bagged an exploration service contract under which OVL had 40 per cent equity and Indian Oil and Oil India had 40 per cent and 20 per cent, respectively. After exploration and geological studies, the in-place gas volume was estimated at 22 trillion cubic feet and an exploratory well was drilled some four years later. But accessing equity investment as well as technology became difficult after the UN imposed sanctions against Iran, even as Teheran upped the ante on gas price negotiations.

Similar sanctions in Russia and Venezuela, both OVL partners, made business difficult. For example, in January 2009, OVL acquired Imperial Energy, an upstream oil exploration and production company with assets in the Tomsk region of western Siberia in Russia and brought in Denver-based oilfield services company Liberty Resources to tap tight sand and shale formations in one of the oil fields. Four pilot wells were drilled in these hard-to-recover sand and shale reservoirs. Of these, two yielded good results. But OVL’s subsequent plans to induct American company Liberty as a partner in the exploitation of a shale field in the region were constrained by the US sanctions, which kicked in in 2014.

The Imperial Energy acquisition also highlighted the risk of price volatility while making purchases. OVL acquired the company at an investment of about $2.9 billion when global crude prices were trading at $115-120 a barrel in August 2008, after they had touched a record $147 in July the same year. Within a few months, however, the valuation went awry as global prices fell to $50 a barrel with the kicking in of global economic recession. Parliamentary panel and analysts tracking ONGC started questioning the deal.

Controversy also surrounded the reserve assessment done at the time of the deal. Tight sand and shale formations in Imperial’s Russian assets made production difficult. OVL’s subsidiary LLC Nord Imperial owned the assets — nine exploration blocks and five production licence blocks in the Tomsk region of the western Siberian basin, which contains a number of geologically challenging reservoirs holding about 2.1 billion barrels of in-place oil spread over 12 oilfields.

Now, with countries moving towards reducing carbon emissions and increased awareness about adopting climate friendly fuel and technology, the future of oil itself is in question, which is adding to the price volatility. Companies such as Shell, Exxon Mobil and BP have set 2050 as the target for being net carbon neutral. Reliance Industries Ltd, India’s largest refiner, has a huge non-oil footprint too, setting 2035 as the target for becoming a net zero carbon emitter (which means offsetting the use of coal, oil and gas against the use of green energy such as solar and wind power).

According to the Vienna-based International Energy Agency, the 2050 target requires steps such as halting sale of new internal combustion engine passenger cars by 2035, and phasing out all coal and oil power plants by 2040, which implies lower oil demand and price, production cuts and even lower investment in exploration and production.

The Covid-19 pandemic had added to these risks, leading to not only a global fall in transport fuel demand but also making access difficult. For a globally-linked business such as oil exploration and production, parts of the world closed at some point or the other disrupting both the supply chain and movement of technologists. Italy, for instance, is good at subsea technology, but was among the first to get impacted by Covid-19 after China. Countries such as Spain and the US are the main suppliers of exploration expertise to the world but they, too, had a high number of Covid-19 cases. Since April 2021, Indians, too, had travel restrictions on them, making assessment of new opportunities difficult. Taking a long-term view in such a setting is froth with risks for companies like OVL, even though opportunities for acquisitions are currently available in the Americas, Africa and CIS countries.