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ONGC's Trysts with Privatisation, Explained

Nov 14, 2021 9:04 AM 5 min read

GoI's privatisation drive is coming for the Oil And Natural Gas Corporation (ONGC).

The Ministry of Petroleum (MoP) has reportedly asked the state-run oil explorer to consider selling a 60% stake in its Mumbai High and Bassein and Satellite (B&S) oil and gas fields.

The suggestion to sell a majority stake to private companies is apparently "not a binding order".

It is also not a new idea.

What is ONGC? What Does ONGC Do?

ONGC is a "Maharatna" i.e. A Union Government-owned enterprise. The New-Delhi-based PSU operates under the aegis of the MoP and produces 70-80% of India's crude oil and about the same share of the country's natural gas.

The company’s history can be traced back to 1955, when GoI announced its intentions to develop India's oil and natural gas resources. To this end, an "Oil and Natural Gas Commission" was constituted and later elevated to a statutory body with a mandate to explore possible crude reserves.

ONGC discovered new sites in Assam, the Cambay basin (Gujarat) and the Eastern coast. In the 1970s, the PSU went offshore with Mumbai High. Post-liberalisation, the "Commission" became a "Corporation" (in 1993, the Union Government first divested 2% of its stake through competitive bidding).


Wait Up… India Has Oil Reserves?

Yes, but not much. The country reportedly holds 4,728,790,000 barrels of proven oil reserves (as of 2016), ranking it 24th in the world and accounting for about 0.3% of total oil reserves globally. To put that into context, if India stopped all crude imports tomorrow and only used its proven reserves (and didn’t tap into strategic reserves), it would have enough oil for less than three years at the current rate of consumption.

Most of the known reserves are located in Gujarat, Assam and Rajasthan, with the latter's Barmer region and the Andaman and Nicobar basin being of particular interest.

FYI: Asia's first oil well was drilled in Digboi, Assam in the 1860s. The town apparently got its name from English engineers, who upon accidentally discovering oil in the region began shouting "Dig boy, dig!"

India's unhealthy dependency to foreign oil (especially from the Middle East) is well-documented and we've talked about this extensively before. It's also an addiction the country is finding difficult to quit, because local reserves are limited and existing wells are ageing. As such, annual domestic crude oil production has fallen at a CAGR of 2.1% between FY20 and FY12.

State-led impetuses like the New Exploration and Licensing Policy in 1997, the Hydrocarbon Exploration and Licensing Policy in 2015 and the Open Acreage Licensing Programme in 2019 have been tales of tall expectations and little realisations. Domestic crude production and reserves have stagnated. Exploration efforts have met little success, with the number of dry wells (i.e. drilled sites where no significant reserves were found) gradually rising over time. Meanwhile, the number of new wells dug has climbed down over the past decade.

Bottom line being, India remains at the mercy of cartels like OPEC, even as it endeavours to accelerate its transition to clean energy. Besides draining the exchequer, this crude Achilles’ heel makes us vulnerable to geopolitical tensions and supply chain stresses, resulting in unflattering situations where we are forced to tap into strategic reserves to offset high prices, (like in July 2021).

FYI: Which are the companies exploring oil wells in India? Some are foreign, like Cairn, BP and Shell. Domestic firms like Reliance and Essar are also engaged in these activities. But the bulk of domestic oil exploration and production is spearheaded by ONGC and Oil India. The former produced 20.2 million tonnes (MT) of crude oil in FY21, down from 20.6 MT and 21.1 MT in FY20 and FY19 respectively.

Investment idea: Upstream oil stocks like ONGC can serve as a userful hedge during periods of rising crude oil prices.  


The Rise and Fall of ONGC

Despite limited successes with respect to exploration and India’s rising reliance on crude imports, ONGC was for a long time the country’s most-profitable company. Over the past two decades, however, it has fallen into dark days.

The entry of private players and the auctioning of fields to non-state entities have hurt ONGC’s margins as it has struggled to stay competitive. Cash reserves have fallen even as debt has accumulated. To aggravate matters, dividend payouts have remained high and as has the fuel subsidy bill.

In FY15, RIL replaced ONGC to become India's most profitable company. Meanwhile, GoI directed the PSU to buy debt-ridden Gujarat State Petroleum Corporation and its stake in the Hindustan Petroleum Corporation Ltd, which pushed the PSU further into the red.


The Road to Reform ONGC

ONGC’s tryst with the private sector is an old one. In 1991, for instance, it took a $450m loan from the World Bank on the condition that discovered oil fields would be developed as JVs with private and foreign players.

ONGC’s tryst with privatisation is not a new development either. Besides its divestment ventures, the PSU is constantly pushed by GoI to sell its fields to private players to offset declining outputs. In 2017, for example, the Directorate General of Hydrocarbons identified 15 fields with a collective reserve of 791.2 MT for handing over to private firms. (This plan didn't see the light of day due to strong opposition from ONGC.)

But two years later, the Cabinet decided to bid out 64 marginal fields of the ONGC. However, the market response was lukewarm at best, leading to the PSU retaining 49 fields. But GoI attached a condition - that the performance of these fields would be strictly monitored for three years.

In April this year, MoP devised a seven-point action plan titled "ONGC Way Forward" to streamline the PSU's operations and raise oil and gas production by one-third by 2023-24. This plan included suggestions to sell stakes in maturing fields, privatising "non-performing" marginal fields and invite foreign participation in gas-rich blocks. Also touted was the suggestion of creating separate entities for drilling, well services, logging, workover services and data-processing entities.

This week’s reports concerning MoP’s renewed calls for privatisation of oil fields is but the latest in a long line of such developments. However, ONGC has a record of sticking to its guns and resisting overt privatisation; its reputation as one of the few PSUs with relatively impressive finances and its status as being critical to India’s energy security give it that much leeway. But with its numbers being more unimpressive of late and New Delhi eager to meet its lofty disinvestment targets, ONGC’s party may not last much longer.


ONGC Going Green

Amidst all this mayhem, an amusing fact: the oil major is looking to expand its renewable capacity.

ONGC has a JV with the National Thermal Power Corporation (NTPC) aimed at setting up offshore wind assets. It also has a dedicated Renewable Energy Cell that coordinates related projects and suggests ways for the company to reduce its carbon footprint.

As of FY20-end, ONGC had about 178 MW of renewable capacity. By 2040, it hopes to reach 10 GW of installed renewable energy capacity.

ONGC Chairman Subhash Kumar has however said the company is not in a "tearing hurry" to realise its green ambitions and that "no significant allocation" had been made in its recent capex plan.

However, the PSU's interest in clean energy mirrors the trend among downstream and upstream oil and gas players across the world towards investing in renewables. Which is a smart business move, whether to go net zero or to prepare for a future sans fossil fuels.

For now, however, crude and coal remain kings. Especially in India.


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