Unfinished business: ONGC facing question marks over future structure, role

This article has been updated with comments from an ONGC representative. Updates added in bold.

Five years after the Rs 110-trillion ONGC acquired a majority stake in oil marketing company HPCL (January 2018), the acquisition process is still on. To all intents and purposes, the two companies remain separate entities, although HPCL is nominally an ONGC subsidiary. The incomplete process continues to hobble India’s premier oil exploration company. As of September 2022, ONGC’s net debt is at about Rs 1.06 trillion. Of this, ONGC had to borrow Rs 35,000 crore from seven banks.
 

This is an unnecessary overhang, since the company has not been on an investment spree. Meanwhile, ONGC, which accounts for 72-73 per cent of India’s domestic oil production, has to push ahead with exploration as India’s flag bearer national oil company. Effectively, it would seem exploration of new reserves is supposed to be handled by the joint ventures the company has entered into in the past two years. It has tied up with ExxonMobil, with Total (2022) and with Chevron while it moves to reorient its corporate structure.
 

With ExxonMobil, ONGC signed an agreement in 2022 for “deepwater exploration in Indian East and West coasts”. With French multinational TotalEnergies, it is “to establish a holistic framework between the two for exchange of each other’s technical strengths in deep-water offshore, especially Mahanadi & Andaman”, signed in March 2023. And with Chevron New Ventures PTE Limited, a subsidiary of Chevron Corporation, it signed an agreement in September 2022 “to assess exploration potential in India”.
 

In February this year, ONGC told investors that it plans to merge its refining subsidiary Mangalore Refinery and Petrochemicals Ltd (MRPL) with HPCL to leverage most of ONGC’s refinery business under one vertical. This again will not be easy since MRPL, HPCL and ONGC are all listed entities. There is a long process of informing the market regulatory, the Securities and Exchange Board of India, getting the shareholders on board, offering exit options and so on.
 

There are more complexities. The petroleum ministry, which is the majority owner of ONGC, has yet to decide on the government formula to retain only four companies as state-owned in any sector. It has been three years since Finance Minister Nirmala Sitharaman announced her plan to ask every ministry to draw up such a list. The idea is that the remaining ones should be totally privatised. While other ministries have not come out with their lists either, the fact is that compared with any other ministry, except finance, the list the petroleum ministry has to put out will be significant. No other ministry has so many critical companies under its belt.
 

In fact, there are too many moving parts in the ONGC drama. That includes its corner office. In December last year, the government appointed former BPCL CMD Arun Kumar Singh as the chairman of ONGC with a term of three years. This is a good measure since the company has been without a boss for almost two years since early 2021 with one director after another moving on. “The board of the company is being revamped by reducing the number of directors from the current six and setting up one for corporate affairs. The revamp is being curated by McKinsey essentially to make the company a holdco (holding company),” said a top government official.
 

But again, Singh has been appointed only as the chairman of the company and not as managing director. The last full-time chairman of ONGC, Shashi Shanker, held both posts and so did all of his predecessors. Singh’s appointment has not only surprised the market, but it has also left investors wondering whether the split of the roles of chairman and that of managing director will mean two power centres in the company. Some observers have also suggested that the government wishes the company to exist as a holdco while the work of discovering oil and gas is handled by the foreign partners.
 

This latter possibility is strong not least because India hasn’t been able to expand the share of its domestic crude production as part of its total consumption. It has been the persisting soft belly of India’s economic management potential.
 

Thanks to the lack of leadership and efforts like buying HPCL, ONGC faces a basic problem. The oil it is bringing up is far costlier than what most countries are willing to sell from their wells. Analysts peg the per barrel cost at ONGC’s well head at $50, which is incredibly high by global standards of $15-20 a barrel.
 

At one stage, the petroleum ministry had advised ONGC to sell stakes in producing oilfields such as to Ratna R-Series off the Mumbai coast as part of efforts to monetise existing infrastructure to raise cash flows. The company was to not only get foreign partners in the KG basin gas fields in the Bay of Bengal but also hive off drilling and other services into a separate firm. It has moved in that direction. Sushma Rawat, director of explorations at ONGC said, "What we are looking forward to in collaborations is substantial value additions by the partners. ONGC is open to giving equity stake in difficult fields to de-risk deep water / difficult ventures and bring capital in areas which are technology and capital intensive. The company is willing to collaborate with any entity who possesses technology and risk appetite. In some areas, we can have service providers, and in some other areas, we may have technology partners and include financial partners".
 

In line with the same thought process, the foreign companies therefore are to be the real explorers. Incidentally, the government of India is pushing a proposal in the United Nations to expand the range of a country’s exclusive economic zone to about 200 km offshore from the current 20. This could bring more zones under the purview of exploration for the foreign entrepreneurs.
 

Once those companies succeed, the question of profit-sharing arrangements with the government will arise. It will make sense in those circumstances to have ONGC as a holdco, to manage the government's interest, foregoing its role as an explorer but managing the existing wells. HDFC Securities analyst Harshad Katkar had a buy recommendation on ONGC purely because of “an increase in crude price realization and…lower expenses and exploration costs”. Ms Rawat agreed that "Two critical issues in future will be investor interest protection and fiscal change for investment and collaborations in deep-water areas".
 

This may be a rational move for the company going forward. Just look at the other state-owned players in the sector. They are all refinery plus players. They have built up an additional niche, too. IndianOil has hitched its stars to the hydrogen economy, BPCL has a valuable oil marketing set-up and is in any case headed for sale. Even ONGC’s subsidiaries have clear leadership roles. HPCL has diversified into city gas distribution; Petronet LNG is India’s largest gas importer and ONGC Videsh scours for opportunities abroad to pick up stakes in both oil and gas finds.
 

This will offer the company a clear road map for the future. The last board of ONGC had adopted an Energy Strategy 2040 in 2019. It may be time to revisit that strategy.