As govt opens more areas for oil and gas exploration, ONGC reports new find

State-owned company may get more acreage for exploration as government aims to increase domestic fuel production

ONGC, India’s bellwether oil and gas exploration company, has in the past couple of weeks reported major offshore discoveries. It reported ‘first oil’ production from the KG-DWN-98/2 block off the coast of Bay of Bengal. Days later it announced “two significant natural gas reserves” in the Mahanadi basin block in the Bay of Bengal.

Has spring come early for the state-owned company, or are the discoveries happenstance? In January this year, the Petroleum and Natural Gas Ministry launched the nine round of the Open Acreage Licensing Policy (OLAP) for international bidders. As many as 28 blocks of approximately 1,36,596 sq km are on offer for oil and gas exploration. 

A ministry statement said 10 contracts have been signed for the blocks. Just days later, ONGC made the announcement about its discoveries that can be read two ways. It took the company more than two decades to make a sizable strike. The company has India’s largest proven reserves discovered over six decades, but two thirds of those come largely from Mumbai High, a string of wells it has had since the seventies. ONGC’s current deep water project has been flagged as a potential for the past couple of years. An HDFC Securities report of 2022 noted "an additional output of 1.75 MMSCMD gas is expected soon and it could lead to production growth". (MMSCMD is Million Metric Standard Cubic Meters per Day.)

The other way of looking at the discoveries is that the company has made good after restrictions on areas where it could explore were lifted. Hardeep Puri, the petroleum and natural gas minister, has said that hitherto reserved “no-go” areas have been now made accessible for oil explorers.

Experts however are not impressed. They have reasons. The 45000 barrels per day the new KG DN field will produce when in full operations is about the same as the progressive loss from Mumbai High. "ONGC needs to report one such field every two to three years to make up for the loss from Mumbai High", said Gagan Dixit, Senior Analyst, Oil and Gas at Elara Research. 

The discovery at Mahanadi offshore is mostly incremental, another analyst said on condition of anonymity. 

This is the reason why though after languishing for years, ONGC’s stock rose 19.25 per cent in the past one month, Goldman Sachs has a sell position on it in January. The reasons are of course beyond the company’s purview: Windfall taxes on crude oil and a domestic gas price cap, both set by the government.

The government holds a 58.89 per cent stake in ONGC and over the past few years it has given contradictory signals about the company’s fate. In FY22, ONGC was advised to ease up on exploration and migrate to the role of a holding company. From there, the government swung to the position where the OLAP contracts signed in January were exclusively by ONGC.

India wants to raise domestic production of oil and gas, explaining the flip-flop in ONGC’s role. Domestic oil production is less than 14 per cent of total and natural gas about 50 per cent. The Petroleum Ministry aims to increase the numbers and has opened up more exploration fields. “Vast offshore acreage of more than 1 million sq. km. has been made available in the recent past for E&P operations which were earlier so-called ‘No-Go’ areas,” said Puri recently.

Only 10 per cent of the Indian sedimentary basin area is under active exploration but more will be opened up, he said. After blocks were awarded under the tenth bid rounds, about 5,60,000 sq. km. will come under exploration by the end of 2024.

The government wants exploration to happen under the Indian flag. Reliance Industries Limited, India’s other mega oil company and which is privately owned, is not keen to move in. Decades of policy flip-flops and a tough geological terrain mean investments are hard to come. ONGC is very hopeful that the deep-water KG-DWN-98/2 project will be completed by June 2024 and then show a gradual ramping up to reach planned peak production of 45,000 barrels of oil per day and 10 MMSCMD of gas.

The situation is compounded as ONGC has not been able to ramp up its investments substantially. The annual investment numbers (actuals) have not moved in the past five years. To make up the shortfall, the company has tied up with international oil majors. Yet compared to the share price of puny Oil India, another state-owned company, ONGC shares are nearly half of that as of January this year. ONGC is largely debt free but its sales growth is weak, like the flow of oil and gas from its fields. Over a five-year period, sales have risen by 11.21 percent.

“One hopes the discoveries of ONGC will galvanise a better performance in the years ahead,” said Sumit Bose, a former independent director on the company’s board.

The company has a healthy interest coverage ratio of 19.67 and there is no upside. Return on assets is 11.03 per cent, rather tepid. This is not surprising as the milch cows of the oil explorer are all pretty old. 

Comparisons with Mumbai High at this stage are not on. ONGC needs to hit the exploration button with more vigour.