Upstream firms need to learn how to grow with low oil prices: ONGC chairman

Oil and gas companies can benefit from taking a contrarian view, says ONGC's D K Sarraf

Whether it was the takeover of Gujarat State Petroleum Corporation's (GSPC's) Krishna Godavari block or the gas migration dispute with Reliance Industries Ltd (RIL), the Oil and Natural Gas Corporation (ONGC) dominated news headlines last financial year. In an interview with Jyoti Mukul and Shine Jacob, its chairman and managing director D K SARRAF talks about the low oil prices and the need to adopt a contrarian view. Edited Excerpts:

As the biggest domestic player in the oil sector, what is your view on oil prices and how do you plan to tackle them?

Though it is very difficult to predict future oil prices, expectations are that prices in the near term would continue to be within the $50-55 per barrel range. E&P (exploration and production) companies need to learn not only to survive but also to grow in a low-price environment. At the same time, such low prices have thrown open various opportunities. One such opportunity is for those companies that can adopt a contrarian view. For them, it is a good opportunity to carry out the development of existing discoveries, as oil field services and equipment are available at cheaper prices, and at the same time, goods vendors and goods contractors are available to execute the development projects at a low cost and without delays. Also, this is an opportunity to carry out low-risk exploration projects to accumulate more reserves. ONGC has adopted this approach.

At the same time, E&P companies are now learning how to increase operational efficiencies and reduce costs. Shale oil producers in the US have proven this by converting the erstwhile "uneconomical" oil into a viable resource. For example, ONGC has also increased its efficiency in drilling, which accounts for more than 55 per cent of its total capital expenditure. Its drilling speed, in terms of metres drilled per rig-month, has increased by 25 per cent in 2016-17 as compared to that in 2015-16. However, to grow in this market scenario, this needs to be repeated year-after-year.

How does ONGC plan to monetise its fields?

ONGC has already started monetising its discoveries on a fast track. For example, out of 13 discoveries made by us during 2016-17 in onshore areas, we monetised eight discoveries during the year itself. These discoveries have a production potential of 0.218 million tonnes of oil and gas and have 3.4 million tonnes of oil and gas producible reserves.

Regarding past discoveries, those containing 95 per cent of total producible oil and gas reserves discovered by us till date are either currently producing or their development activities, which would be completed in the next 2-3 years, are in progress. We have recently completed a study of another 115 discoveries and put a time frame for starting development for each. Development activities in 25 of these discoveries will start in 2017, while development activities for the remaining 90 will commence between 2017 and 2018.

In 2016-17, a major highlight for ONGC was the takeover of GSPC’s Deendayal Upadhyay field. What are your future plans for the field?

We are yet to receive government approval. However, it may be coming anytime. Once we get the approvals, we plan to complete the transaction as soon as possible. Detailed plans have already been made to monetise and further develop the DDW field to the fullest extent. We also plan to integrate this block with Cluster 1 of our block KG-DWN-98/2, where we had a dispute with RIL about our gas being produced by them in connected fields. Here, we have some unconnected fields as well but since the gas reserves in such fields are not very large, we cannot justify capital expenditure for producing from these unconnected fields. Setting up separate infrastructure for such fields may not be economically viable. Gas from the unconnected fields will be produced utilising GSPC’s infrastructure — gas processing platform, pipeline to shore and onshore gas terminal. Thus, unviable gas has been converted into viable gas. We also intend to utilise these facilities for monetising some of our HP-HT (high pressure, high temperature) discoveries in nearby areas.  

What are your views on the open acreage policy?

It is going to be a game-changer. First of all, instead of the government specifying to the E&P companies where to explore and exploit hydrocarbons, companies would now be able to carve out their own blocks. The backbone of this policy – the National Data Repository – has already been launched. This contains a huge database, including processed seismic data, well logs, and reports on India’s hydrocarbon basins. Further, ONGC and OIL (Oil India Limited) have been assigned the task of coordinating the acquisition of seismic data in unexplored areas, which would further become a part of this depository. Secondly, the open acreage bidding round is based on revenue sharing in place of the erstwhile production sharing model. Since it ensures less interference by the government, revenue sharing is going to be far more investor friendly as compared to the production sharing model.

RIL-BP have announced an investment plan for their KG block. How do you view this?

It is a very positive step. This would increase domestic gas production, which would substitute imported LNG. It would encourage further investment in the oil and gas sector as well as in the region. But they would perhaps expect deregulation of gas prices and marketing.

What is the status of your dispute with RIL on gas migration?

Currently, the arbitration is between RIL and the government. The Shah Committee’s recommendation that compensation for the migrated gas should be paid by Reliance to the government has been accepted by the latter. ONGC has no role in this.

Is there any plan for joint development with RIL?

Those connected fields would perhaps have almost been produced.

There is a lot of talk about consolidation among oil PSUs. Will it be beneficial for ONGC to acquire Hindustan Petroleum Corporation Limited (HPCL)?

There appears to be neither any decision by the government nor has ONGC decided anything yet. However, integration between upstream and downstream firms is good from the point of view of both because horizontally integrated companies are financially more stable. Internationally, the value that an integrated company gets is higher in terms of PE multiple or return to investors. If something like this happens, it will be good for the sector.

Any such acquisition can be completed in a few months once a decision is taken. For the process to start, there needs to be a firm decision by the seller and buyer.

What is the status of ONGC Videsh Ltd’s (OVL's) Vankor Russia acquisition?

We hold a 26 per cent stake that we acquired during 2016-17 in two tranches of 15 and 11 per cent. It made a profit of about Rs 750 crore during the first year itself, though the acquisition was only for a part of the year.

Why has the global scenario for oil and gas deals slowed down?

OVL has been looking for new opportunities but they have to be good in the context of today’s price. Currently, deals are difficult as the expectations of the seller are higher than what the buyer is generally ready to pay. Further, transactions in exploration areas are difficult as very few companies are taking exploration risk.