A Drilling Exercise For Ongc Videsh

In the last ten years, ONGC Videsh Ltd (OVL) has not discovered any oil reserves. Yet in the next one year, this wholly-owned subsidiary of Oil and Natural Gas Corporation (ONGC) wants to acquire 40 million barrels or 6 million metric tonne (MMT) of equity oil overseas.

For this, it is casting its net wide. It will explore in Iraq, Sudan, Algeria, Khazakistan, Azerbaijan, and Australia and make oil field acquisitions in Russia, Sudan and the United States.

Any oil company that wants to grow must find new reserves equal to its produce last year. It first tries to strike oil at home. But the balance must come from outside and that is why OVL exists, explains Atul Chandra, managing director, OVL.

 

In that case, it would be an understatement to say OVL has a challenging mandate. ONGCs crude oil production is declining in 1996-97, it was 29.21 MMT against 31.89 MMT in 1995-96. Nor has it made any noteworthy discovery at home in the last decade it has been mostly producing basins. And under the New Exploration Licensing Policy (NELP) announced in February 1997, ONGC has to compete with private companies for exploration licences in the country.

Despite the odds, Chandra, who took charge at ONGC Videsh in December 1995, is eager to revive this moribund subsidiary: I am restructuring the board for quick decision making, he says. On the new initiatives taken by OVL, he says, There is always a risk element associated with exploration. That is why we will also make acquisitions. We have got offers from some countries and are evaluating them. In some cases, we are awaiting clearances.

OVLs only recent breakthrough is an offshore gas discovery in Vietnam in 1989 which will come to fruition soon. OVL has a 55 per cent share in 2 trillion cubic feet of gas and is currently negotiating its price. It is a non-operating partner in this venture, the two operators being British Petroleum and Stat Oil of Norway. The Vietnam venture seems to be crucial to the companys revival. The Vietnam property has a value not reflected in the balance sheet. Once terms are finalised, the balance sheet will start looking robust.

Chandra is also trying to restructure the companys portfolio to generate surpluses for instance, he plans to farm out stakes in overseas acquisitions to generate cash.

Buoying Chandras hopes is the fact that ONGC has pumped in funds to increase OVLs equity base from Rs 30 crore to Rs 100 crore. An equity of Rs 30 crore is enough for a non-operator. But if we have to actively start exploration and acquisitions, a broader equity base is required, Chandra explains. The funds infusion is also expected to help OVL step into the black this year from a loss of Rs 59 crore last fiscal.

Chandra may think he has it all worked out, but others in ONGC are not so sure. Says an employee, A finance company can get away with methods such as restructuring the portfolio, but a commercial company cant. The only way OVL can post a profit is if its projects yield revenues and reserves. Asks another, This company has been operating for 30 years with manpower and technical support from the countrys leading oil company. What does it have to show for itself?

Nobody can deny that OVLs record is uninspiring. ONGCs subsidiary struck early when it discovered the Raksh Rostum oil field in Iran in the sixties. Then known as Hydrocarbons India Ltd (HIL), the company got a 16.5 per cent share in the 3.5 MMT oil field. But it had to leave lock, stock and barrel in 1979 when Iran nationalised its oil fields. Then HIL made a few half-hearted forays into Thailand and Malaysia.

By 1985, HIL had become almost redundant with most offshore ventures being handled by ONGCs business development division. HIL was then given a new thrust; the first step rechristening the organisation ONGC Videsh. But it failed to live up to its name. A retired senior executive of OVL complains, OVL was treated like a stepchild. The overseas division in ONGC got all the plum projects. OVL ended up being just a posting for those who wanted to move to Delhi or those who were biding their time before retirement.

In 1995, OVL signed two MoUs with British Gas for drilling projects in Yemen and Egypt, but drew a blank. These are risky ventures. Unfortunately, we made no commercial discoveries, says an unperturbed Chandra. Three years ago, OVL signed an MoU with Turkey, last October it signed an MoU with the Chinese National Petroleum Company and recently it secured an exploration licence in Khazakistan. But all these projects are yet to take off.

Like its giant parent, many of OVLs problems stem from its public sector status. A Bhattacharya, economic advisor, ministry of petroleum and natural gas, says OVL needs greater autonomy: This is the oil game, not a business in readymade shirts. Here decisions are taken within a week, sometimes, within minutes. Unfortunately, OVL is very slow.

For instance, last year OVL was still negotiating for a stake in a Khazakistan oil field when the UK-based company Lasmo came in from nowhere and clinched the deal across the table in moments.

Chandra admits, The delay in the implementation of the Navaratna package could prove costly. It is the biggest bottleneck for OVL right now. In January last year, the Working Group on Petroleum had suggested to the Planning Commission that OVL be given joint sector status with 50 per cent government ownership and the rest with foreign oil companies. Foreign companies will have an interest in allowing OVL to participate wherever they have business interests in the world. But the issue has not yet come up for discussion, says Bhattacharya.

Not everyone is sure that greater empowerment will solve all the problems. As an expert says, OVL is not sharply focused and commercially minded. It is an inward looking company that cannot hold its own against giants such as Enron and British Petroleum internationally.