 "D K Sarraf")
ONGC Videsh Ltd (OVL), the foreign arm of state-run Oil and Natural Gas Corp, saw a 44 per cent jump in net profit to Rs 3,929 crore last year despite a 17 per cent drop in production. The impressive performance in an otherwise difficult global environment is largely on the back of high global prices. In an interview with Jyoti Mukul, Managing Director D K Sarraf says the company is set to create better value for its parent. Edited excerpts:
The last few years have not been good for the company in terms of production. How do you see the coming year?
In 2012-13, OVL produced 7.26 million tonnes of oil and oil equivalent (mtoe) gas, which was less compared with the 8.75 mtoe produced in 2011-12. But the worst is over for OVL and hereon, there will be upside with full production from Sudan already resumed. Production has already started from South Sudan, which would, in the coming months, reach the normal level.
Production from blocks A1 and A3 in Myanmar will also start in July with OVL’s share of production is estimated at 0.4 billion cubic metres (BCM) gas in 2013-14, which could peak to a level of about 0.9 BCM per annum in the second quarter of of FY15. The new phase of development of the BC 10 block in Brazil will be completed by October 2013. This would contribute an incremental production of about 35,000 barrels per day out of which OVL’s share is 15 per cent. After the start of test production from the Carabobo 1 block in Venezuela in December 2012, ramping up in production is expected this year.
We plan to increase our production to 20 mtoe in 2017-18 and 60 mtoe by 2029-30. Today, production from abroad contributes about 15 per cent to ONGC’s output; and with this, overseas production would contribute 46 per cent to the group’s total output by 2029-30. The international business will be the growth vehicle. For this, we will require lot of resources in terms of manpower, money and also decision making support from the government.
Is OVL looking at listing?
It would be a commercial and strategic decision of the owner, ONGC, on whether to list OVL and when. OVL’s production was coming down over the last two years but as I just said, the worst is over. We have to make a few more good acquisitions and create further value for OVL. It’s perhaps more sensible for ONGC to list OVL after more value has been created.
The company recently concluded its bond issue. Will you be again going for a bond offering?
Our $800-million (Rs 4,500 crore today) inaugural bond offering was the largest “Reg-S only” issuance by any Indian company. The cost of 2.574 per cent for five-year bonds and 3.756 per cent for 10-year bonds was the lowest cost achieved by any Indian company. We were able to do this because it was guaranteed by our parent, ONGC. The funds will be used for our Azerbaijan deal that we closed on March 28 by paying $883.5 million. It was the first ever overseas bond issue by ONGC/OVL in more than 25 years. We had raised Rs 2,340 crore via bonds in FY10, but those were rupee bonds in the Indian market.
We are yet to finalise our strategy on further acquisitions. We have several options. We may use the internal funds available with ONGC. We may go for syndicated loans, which are available for up to five to seven years. We may again go to the overseas bond market for some part, depending on how major are the acquisition transactions. Bond funds are available even for 30 years and can be perpetual. We have also other sources of financing available.
We may partly fund the Kazakh deal through bonds. We have finalised definitive agreements for the acquisition of 8.40 per cent participating interest of ConocoPhillips in the North Caspian Sea production sharing agreement (NCS PSA) that includes the Kashagan Field in Kazakhstan.
The company is again making big acquisitions, but your Imperial buy has been criticised. What are you doing to deal with the problems there?
The reserves-in-place for Imperial, which we estimated do exist, are in impermeable locations, i.e.tight reserves. We have been able to find analogies with shale oil, where fracking technology and horizontal drilling have been used. Shale-like structures are present in Imperial. We are in discussion with some international companies, which have these technologies, to customise the technologies to Imperial’s fields. A tender is already under process. Pilot wells will be drilled and once they are successful, we will decide on applying the technology full-scale. To ensure their undiluted commitment, we may offer to them a share in the profits as well. The tender is expected to be finalised by June-end.
Will the increase in the cost of production be justified by the price?
The problem is not global crude oil price, but the netback price retained by the producer after paying Russian taxes (mineral extraction tax and export duty) and the transportation tariff paid to the state’s pipeline company. On a crude oil price of $100 per barrel, we retain about $20 only. We are awaiting an approval of concessional fiscal regime by the Russian Parliament to make the production of “difficult” crude oil possible; we expect a favourable consideration from them.
Why have you taken up the Bangladesh blocks when that country does not allow export?
We have knowledge of the geology of Bangladesh offshore. Operations in Bangladesh can be integrated with our operations in the eastern offshore basin. We bid on profit petroleum sharing basis.
But these are exploration blocks.
We can create value out of exploration. In fact, that is the way we can change fortune of the company. Right now, we are at the exploration stage; but gas can be utilised in power, petrochemical and fertiliser sectors of Bangladesh. Perhaps, the Bangladesh government’s priority is to supply gas to power plants because the country has acute power shortage. The draft PSC (production-sharing contract) fixes the price at which the producer would sell gas.
