Tax regime, friendly ties make Russia attractive for us: ONGC Videsh MD

In a Q&A, N K Verma dwells on OVL's roadmap, Vankor acquisition and global energy scenario

Despite low international crude oil prices, 2016-17 was a historic year for state-run ONGC Videsh Ltd (OVL) with the company recording its highest ever production. OVL managing director N K Verma speaks about the company’s future roadmap, high-profile Vankor acquisition and global energy scenario, in an exclusive interview with Shine Jacob and Jyoti Mukul.

1. Static production of OVL has been a cause of concern but there has been a jump in production in 2016-17. What was the reason for this?

We have added a significant element in our portfolio last year in the form of Vankorneft. We have acquired 26 per cent in two tranches; the major jump in production has happened because of that. From 8.92 million tonne of oil and oil equivalent gas in the previous fiscal 2015-16, we have jumped to12.57 MT in 2016-17. This was mainly on account of the 15 per cent stake for the full year and partly due to the remaining 11 per cent stake that we concluded in October 2016. Full impact will be felt in 2017-18, when we have set a production target of 14.3 MT.

Because of Vankor, we will be having an incremental production of more than 5 MT. Though we have lost one block in Sudan last year, we could manage the loss. As for Block 2 B in Sudan, we are in the process of handing over to the Government of Sudan.

2. Your total income dropped from Rs 22,637 crore in FY 12 to a mere Rs 12,772 crore in FY 16. Will the increased production help in improving your financial performance?

The bad financial performance was because of the decline in global oil prices from mid of 2014 which saw historic low in January 2016. Because of impact of that our revenue has decreased, though there was an increase in production. Because of this lower price regime, in consultation with our consortium partners, we have optimized our capital expenditure and operating expenditure numbers. As a result of that we could manage an operating profit of around Rs 1,800 crore in 2015-16. Because of accounting requirements, we had revalued the assets and took an impairment of about Rs 3000 crore in 2015-16. That is why, last year we reported negative net profit. This year, we are hoping that we will be positive. We see total income also rising in 2016-17 as production has jumped.

3. What are you doing with Vankor products? Is it logistically viable for Indian companies to bring it here? 

For Vankor, we have a contract arrangement in place. As per that, the crude oil is flowing towards Eastern Siberian pipeline network (ESPO). As compared to Middle East, freight cost is on the higher side. But if we are bringing crude from Venezuela and Colombia, then we can bring it from here also provided it fits in to the requirement of respective refineries in India.

4. In 2015-16, around 30 per cent of OVL’s production came from Russia. How do you see the criticism that India is relying too much on one country?

It is a relative statement. Companies and countries have got strategic tie ups in international market. Russia is one of the most resource rich countries, and we have a friendly relationship at the government level too with strategic value in other domain areas like defence, nuclear energy, steel and power besides oil & gas.

Right now, if we try to see equity oil, where are the maximum reserves available?  In the entire Middle East, no equity oil is available, its predominantly service contract only. In Latin America and Africa offshore, there is high cost oil, which may not be feasible at current oil prices.  Then what remains is the CIS, amongst which Russia is the biggest. In production and reserves terms, it is comparable to Saudi Arabia.  In addition to this, production cost is much less compared to many other territories. It also has a balanced kind of taxation regime. There we may not have windfall gains, but losses are also optimised.  Optimised taxation regime, low cost of production, very high reserves and friendly relationship make Russia attractive for us. 

In Vankor, by paying approximately $2 billion we have acquired 26 per cent. This gives us a production of more than 5 MT per annum of oil with fully developed fields. The acquisition cost comes to as low as $3.5 per barrel making it one of the most economically attractive deals for OVL.

 5. What is the status of Imperial?

We did a study and drilled four pilot wells to test new technology for tight reservoirs. Those wells were really successful in spite of technology challenges under sanctions regime. We are producing from those wells. In the meantime, oil prices got depressed, further impacting the economics. So, we are working out how to translate that technology initiative to a profitable commercial venture. Meanwhile, we are requesting the Russian government to give some concessions in taxes.  Though they have granted some discounts for the tight reservoirs but some caveats in terms of production thresholds and permeability limits are built-in to their concessions. Hence we are requesting them to remove some of these barriers to realize the benefits of the given concessions.

Perhaps, if the higher oil prices remained, by now, we could have drilled more wells. When we conceptualized this wells in 2013-14, the price was around $100 a barrel. We are hoping that things will improve. Fields much worse than Imperial are profitably producing in India. But we have a lot of challenges there, for example we are operating in minus 40 degree temperature, something that does gives us a very important operational experience.  But economics is not in our favour because of tight reservoirs as we need to drill horizontal wells and need to frack it in multistages.  Because of sanctions we had to implement this with Russian partners and local inputs. Even then, two wells are very successfully drilled, which gave good production, which was a very positive outcome. However, we are not aggressively investing because of not so favorable economic situation at present.  In fact, we have taken initiative to develop a gas processing plant there with an investment of about $45 million to prevent a severe environmental penalty for flaring the gas. The plant will help us in producing oil & gas without flaring, making the economics slightly better.  

6. What is the global scenario as far as acquisitions are concerned?

Last three years was really the lowest point of oil price cycle and not so good for upstream industry. All exploration and production operators have been struggling to maintain their profitability and sustained growth. Revenues are half or less than that for most of them, though Middle Eastern companies with lower cost of production are better placed. It has resulted in a sluggish M&A scenario, except for some mega deals. Those were also based dominantly on equity swapping rather than cash out M&As. In given scenario, this may continue for some time unless supply-demand balance is reversed.  

At the same time, there is a disruptive pressure from renewables and environmental considerations. That also we have to factor into. Once surplus inventory is consumed, prices may revive. Overall sentiments are positive.