Once a prized asset, is oil giant ONGC nearing the end of the road?

The oil it drills is expensive, the company does not have a clear road map for the future despite its Energy Strategy 2040

Subhomoy Bhattacharjee New Delhi

8 min read Last Updated : May 12 2021 | 5:22 PM IST

At the risk of sounding preposterous, would it have been a better shot to let HPCL buy ONGC instead? The enterprise value of the acquirer, at Rs 98,904 crore, is just a third more than of the acquired, as on March 2020. ONGC was valued nearly four times more than HPCL in February 2018, when it paid out Rs 36,915 crore for the deal to the government of India.

At least ONGC would not have been saddled with the Rs 35,000 crore debt it took from seven banks, servicing which has cleaned up its cash reserves. This is not a story of ONGC versus its own subsidiary. But these comparisons inevitably float in, when the oil ministry seems to be coming around to accept it is the end of the road for India’s oldest government-run oil company, at one time its most prized asset.

All the other state-owned oil companies are refinery-plus players. They have built up an additional niche too. IndianOil has hitched its stars to the hydrogen economy, BPCL has a valuable oil marketing set up and is in any case headed for sale. Even ONGC’s subsidiaries have clear leadership roles. HPCL has diversified into city gas distribution; Petronet LNG is India’s largest gas importer and ONGC Videsh scours for opportunities abroad to pick up stakes in both oil and gas finds. MRPL is a profitable refinery. But the addition of all of these does not make ONGC a darling of the market. Its share value at Rs 111.5 is languishing at less than half of its subsidiary HPCL's at Rs 250. Its returns have underperformed the Sensex for more than a year.

So when the ministry decides to retain not more than four public sector companies in any sector, is it a given that ONGC will make the list? And, in its present shape?

Oil itself is the problem

ONGC faces a simple problem. The oil it is bringing up is far costlier than what most countries are willing to sell from their wells. Analysts peg the per barrel cost at ONGC well head at $50, which is incredibly high by global standards. Even when India had a forex constraint, the oil was costly to dig out. It makes very little sense now.

According to reports, the ministry has advised ONGC to sell stakes in producing oil fields such as to Ratna R-Series as part of efforts to monetise existing infrastructure to raise cash flows. The unkindest cut is telling the company to not only get foreign partners in KG basin gas fields but also hive off drilling and other services into a separate firm in order to raise production. ONGC’s basic expertise is to do exploration. If it cannot do that well, as the oil ministry letter indicates, it cuts the rationale for the company to survive.

The letter was signed by Amar Nath, joint secretary in the ministry of petroleum and natural gas. He also sits on the board of ONGC as one of the two government nominees, representing its 60.56 per cent shareholding interest in the company. That he had to send such a mail which got leaked in the press, makes one wonder how effectively the board of the company is functioning. The board of course, does not have a full time chairman. Subhash Kumar, Director (finance) is holding the additional charge of chairman and managing director of the company. It has been over a year since the Public Enterprises Selection Board advertised for the post, the exercise is not over yet.

Kumar is also the link between the ONGC board and its subsidiary HPCL. When he sits on the ONGC board he lords it over Mukesh Kumar Surana, the chairman of HPCL. In the HPCL board meetings it is Surana who takes the chair. There is no other listed company in the public or the private sector in India where this arrangement exists.

No clear direction

The difficult adjustments show the problem that ONGC faces. It is a company without a clear road map for the future despite its board adopting Energy Strategy 2040, two years ago. The ministry itself is not sold on it. It has a rich past though. The company was born before the high noon of oil sector nationalisation in West Asia, and became India’s flag bearer for energy security. Mumbai High Field or formerly Bombay High was of course its best strike in 1974. But since then by FY21 as India has become the third largest oil consumer in the world, the demand supply equation has changed. As it showed this summer, India can afford to switch between producer nations to drive a good bargain. ONGC’s salience has sharply come down, accounting for less than 16 per cent of the economy’s total needs.

In its rejoinder to the media stories, ONGC therefore correctly noted it wants to move up higher in the value chain to concentrate on areas where the expected risk-reward payoff offers better business opportunities for growth. These are aromatic petrochemicals, diversification into gas based power plants and finally into renewables. Except in the first, the company is not a leader in any of the sectors or even the number two. At the current scale of expansion it does not seem to have the ambition to be so.

It would have made eminent sense if there was money to back up those ambitions, like earning three times the current revenue distributed across exploration, refining, marketing and other business. Yet at Rs 32,000 crore of capex projected for FY22, the number will just recover the levels it had reached in FY16. For comparisons, Sinopec China has an exploration budget more than four times of ONGC. The company does not have the money to blow up in high risk wells. But all of India’s new finds are high risk ones. The Indian subcontinent is not only geologically dry for both oil and gas, it makes the little pockets of discoveries impossibly costly, when the world is sitting on massive un-utilised reserves. It is not clear what shall be the role of ONGC as an explorer if it does not have the money to explore. It is one of the reasons why its share price languishes.

And last Friday, at a meeting with the ONGC bosses, petroleum secretary, Tarun Kapoor reminded the company there will be an additional cost to load. For each find, it has to figure out offsetting ways to reduce its carbon footprint. For instance from IndianOil’s Koyali refinery it has begun capturing carbon for sequestration in some of the wells. It shall have to do more of those. Kapoor said he wants to know from each organization's deadlines by which they shall be “completely sustainable and carbon neutral”.

The corporation’s latest excitement is about the Bengal basin, but as Supriyo Kumar Das, assistant professor of Presidency University, Kolkata told the ONGC bosses the basin is a Category-II basin. Those are technologically demanding, with high risk and low returns. Geologically the region shows there is biogenic gas, a tell tale evidence that deeper in the earth there are stores of natural gas. ONGC will have to dig a lot of deep water wells in an effort to strike rich. The government, going by Nath’s letter, does not think the corporation can do so. The Asokenagar well, the first discovery in the Bengal basin will take years of investment before it reaches production. With existing reserves already unviable—this week ADB announced it will cut off investments in gas, the costs for ONGC have just gotten steeper.

Finally gas!

Even here, the company despite a promising start a few decades ago, has lost leadership. It is constrained by low administered prices and acknowledges this problem publicly. In a note to the stock exchanges it says “Despite uneconomical gas prices, ONGC has been aggressively pursuing its deepwater projects in East Coast and a couple of shallow water projects in West Coast…There are certain issues around structure where decisive steps can be evaluated only once the industry is completely under GST regime”.

Essentially then to face the literally cut throat world of oil business, ONGC sets out to sail, leaderless. Indian PSUs have always faced this Achilles heel. The companies have no long term leadership team to defend their turf. In the absence of a clear business case for the future, this could be lethal.

It might be better if the company were to instead just import gas or even oil. Petronet LNG already does so. Its other subsidiary ONGC Videsh already has a product pipeline that is 32.34 per cent of ONGC’s domestic production in FY19. It would have grown since then. ONGC as a trading company could realise more value than digging up dry wells.

Table: Where Indian companies stand in S&P Top 250 Global Energy Rankings