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India was once the place to be, now things are not so rosy, Sudhir Vasudeva, CMD, ONGC

18 Oct 2012

Under his leadership, the Oil and Natural Gas Corporation (ONGC) has grown in leaps and bounds. It is today the only Indian energy major to feature in Fortune’s Most Admired List 2012. The company’s growth path seems to be uncluttered. For the first time, ONGC has come out with a Perspective Plan-2030 which outlines the production and financial targets to be achieved, both in the short and the long term. The man in the hot seat, Chairman Sudhir Vasudeva, speaks to Neeraj Dhankher on the stiff challenges faced by the company and how he plans to overcome them. Excerpts:

How will the diesel price hike (by INR 5 per litre) affect your share of upstream contribution for under-recoveries in 2012-13? What burden-sharing formula do you propose?

The subsidy burden which was projected by media and some analysts initially for 2012-13 was INR 187,000 crore. At that rate, after the diesel price hike, the burden is expected to come down by INR 20,000 crore, to INR 167,000 crore. Now rupee has also appreciated against dollar which will have a bearing on our contribution. Taking all this into account, our under-recovery burden this fiscal is projected to be the same as last year, i.e. around INR 138,000 to 140,000 crore as per investors, in which case we may end up paying almost the same amount which we paid last year.

One thing lacking currently in the system is that we come to know about the contribution in under-recoveries only after the quarter is over. The government had constituted the BK Chaturvedi Committee and Kirit Parekh Committee, which had made very exhaustive recommendations on the same. However, because of other compulsions, the government could not implement the recommendations made by these committees.

Why, according to you, is the participation of foreign companies in bidding rounds in the New Exploration and Licencing Policy (NELP) on the wane?

First, there are competing opportunities elsewhere. East Africa has opened up recently, while there are opportunities galore in Brazil, Canada and Venezuela. So people have to decide if they want to come to India or go to those places. Issues such as size of reservoir, fiscal regime and the ease of doing business are some of the considerations based on which investment decisions are taken. In India, there are many issues, coupled with policy paralysis. Two years back India was the place to be, but suddenly things are not that rosy. But being an optimist, I feel things will change for the better. And if you look at the kind of actions and decisions being taken in the last few weeks, there is every reason to be more optimistic.

ONGC’s plans to revamp aging fields seem to be not going as per plan. What the reason behind Assam Renewal Project getting delayed?

We are getting nearly 73 per cent of our entire production from our 15 fields which are now between 37 to 51 years old. Mumbai High is 37 years old; while Ankleshwar and Ahmedabad fields were put on production in 1960s. The Enhanced Oil Recovery (EOR) and Improved Oil Recovery (IOR) schemes being implemented at a cost of INR 330,00 crore have helped us in maintaining production levels from such aging fields. More schemes are likely to follow soon.

The 22 IOR/EOR schemes will give 160 mmt of oil and oil equivalent, out of which 72 mmt has already been produced and another 90 mmt will be produced between now and 2030. The future schemes will also help in arresting the decline or downfall in production. We may not be able to show increase in production, but we will be able to maintain production.

With regard to the Assam Renewal Project, initially there were some glitches, but they have now been sorted out. In Assam, it is logistically difficult and working environment is also not very conducive. There were also some contractual issues which have now been taken care of. The project is on track and should be completed around March 2014.

The government is known to be pushing for a takeover of ONGC’s Assam assets by Oil India Ltd (OIL). It is felt that OIL is better placed to handle assets in the North-East as it has a firm base in Upper Assam. Is this so?

When Mr R.S. Pandey was the petroleum secretary, a lot of comparison was done with regard to working of OIL and ONGC. However, the ground realities are completely different. Comparing ONGC and OIL is not an apple to apple comparison. OIL is producing only 3.5 mmt, and 85 per cent of their production comes from new fields, while in our case about 85per cent of production is from old fields. Our fields are much deeper. Talks keep happening but there is no comparison between the two companies, be it production, financial resources or manpower.

The audit watchdog, Comptroller and Auditor General (CAG) has slammed ONGC for shoddy exploration and targets, both for production as well as drilling. What are your comments?

I do not want to engage in any debate with the issues regarding the observations of CAG. What I want to submit is that out of 10.9 billion tonne of reserves accredited so far in our country, 8.2 billion tonne have been accredited by ONGC. That speaks volumes about our performance and commitment. Six out of the country’s seven producing basins have been discovered by ONGC. We have a presence in all corners of the country, and are today producing 70 per cent of country’s oil and 50per cent of gas. Before KG-D6 gas find, we were producing almost 84 per cent of country’s oil and gas. We have our own credentials. This is just a perception which depends on what kind of yardstick you have. Ground realities are quite different. We are aware of what is not good in ONGC and we are constantly working at improving it.

ONGC is reported to have surplus cash worth more than INR 18,000 crore. But a lot of this is reported to be lying waste in banks and has not been used wisely by ONGC. What are your comments?

First of all, this INR 18,000 crore of spare cash that we have, is not liquid. Out of this, around INR 9,200 crore is lying in site restoration fund which is meant for abandonment of fields. We are supposed to keep this money in banks and every year we work out what will be the cost of abandoning the fields. But this INR 9,200 crore is generating interest. So the corpus is increasing. Then, we also have about INR 3,500 crore of unsecured liabilities which we are going to tie up with annuity. So about INR 12,000 crore is lying like this and we are then left with only INR 6,000 crore. We have made a presentation to the finance minister where we have shown that there will be a draw down from the surplus available with us in the five year plan. So we will not generate more cash but will draw down from cash reserves.

Is borrowing an option, to fuel ONGC’s E&P operations in the future?

We will be looking at borrowings if there is a need. Today we are a debt free company. Our net worth is INR 111,000 crore, while the entire ONGC group has a net worth of INR 135,000 crore. If we need to raise debt, we will be able to do so from the market.

How much of crude and gas production is expected from existing and new fields in the next few years?

The production target for this year is 27.54 million metric tonne (mmt) of oil and 25.73 bcm of gas. It is about 1.6 per cent more than what we produced last year. The discoveries which are going to be monetized this year are the marginal fields. All these are at various stages of implementation. Some of these fields have started contributing, like B-22, B-46 and B-193 fields. So by 2013-14, our production will be around 3 to 3.5 MMT more than what it would be in 2012-13.

We made another discovery this year in western offshore basin. While carrying out drilling in D1 Field, we discovered a new pool of reserves. Earlier the D1 was known to have IOIP (Initial Oil In-place) to the order of 600 million barrel (82.20 mmt). After the discovery of the new pool, its total IOIP is expected to be in excess of One Billon Barrel (140 mmt), thereby making it the third largest field in Western Offshore after Mumbai high and Heera.  By 2013-14, we will are likely to increase production from this field to the level of 60,000 barrels a day.

What is the status of work on ONGC Petro-additions Ltd’s (OPaL) is mega petrochemical complex at Dahej in Gujarat?

There has been no cost overrun on the project and the cost remains at INR 21,396 crore, which has been frozen and approved by the board. The project is nearly 60 per cent complete and should be completed by January 2014.

ONGC has made a foray into the LNG business. What kind of opportunities are you looking at?

See, more than deep pockets, we have a large heart. We plan to get into everything concerning LNG, right from sourcing, transportation and setting up re-gasification plant. It depends on the kind of opportunities. We are keenly looking for opportunities in the entire value chain of LNG if it makes commercial sense.

ONGC has recently come out with its Perspective Plan-2030. What are the reasons for coming out with a new plan at this juncture and what will be your priorities?

The only perspective plan made before Perspective Plan-2030 was when Col. Wahi was the Chairman. That time, ground realities were completely different. ONGC was not a company but a Commission. There was no NELP, no competition and no subsidy burden under APM mechanism. Even OVL had only one property at Vietnam. The requirements were different so perspective plan was also different. The Perspective Plan-2030 is based on the fundamental premise that if we have a dominant Indian presence, to retain that we have to grow at a rate of 4 per cent, so that we can increase our contribution in the country’s oil and gas consumption from 20per cent to 30per cent by 2030. Oil and gas demand is expected to grow at the rate of 3per cent, so we have to grow at 4per cent. In our kitty today, 85per cent of production comes from domestic resources and 15per cent from our overseas E&P arm, OVL. This will have to change. We target to produce 130 MMT by 2030, of which 70 MMT will come from domestic sources and 60 MMT from outside.

Today we are producing 52 mmt from ONGC and other joint ventures. The ratio of domestic and overseas is expected to be 55:45. This is a compulsion we are faced with. It is not that we are losing focus on E&P, but our growth vehicle has to be OVL.

Do you feel shale gas can turn out to be a game changer in India as it did in the US?

ONGC was the first to do pioneering work in shale gas in India. We hired Schlumberger and its expert subsidiary TerraTek. We drilled four wells in Damodar valley which confirmed the presence of shale gas. So we are up on a learning curve. Shale gas requires two things -- horizontal well drilling and hydro fracturing. We routinely do both. But that doesn’t make us complacent. We have tied up with ConocoPhillips which is one of the US majors having lot of experience in shale gas and deepwater blocks. Both of us are studying the potential of shale gas in India. Besides India, wherever they have opportunities or operating fields of shale gas, they will provide us an opportunity of joining them. By November 2012 we will have a fair idea on the areas on which we may cooperate in shale gas exploration.

Future of shale gas in India will depend on how the shale gas policy pans out. But concerns are many. In shale gas, the number of wells to be drilled is large as productivity of each well is low. The large tract of land available in the US may not be available in any other country. Similarly, hydro fracturing requires enormous quantity. Other concerns like disposal of used water, affect of drilling on seismic activity and pollution of water table have also been raised.

In countries like France, they have stopped shale gas exploration altogether due to various concerns, while in the US, efforts are being made to demonstrate that it is possible to take care of all these problems. Further, when it comes to development of shale gas, there are two issues- availability of infrastructure for evacuation of gas and infrastructure for drilling.

Then there is the all important issue of pricing. In USA, the reason why people are moving from shale gas to shale oil is that in Henry Hub the price is only $2. So it is not becoming viable. Between now and 2020, USA will produce 5 million barrel of liquids more, from 7 to 12 million barrels. It is not only likely to become self sufficient but a net exporter of hydrocarbons. USA today has got 450 TCF of conventional gas and 875 TCF of shale gas. In case of India, the first step is to assess the reserves correctly.

Given the decline in participation of foreign players in bidding rounds, do you feel India needs to replace NELP with the Open Acreage Licensing Policy (OLAP)?

OLAP is only possible if you have accessibility to all the right data. For that, National Data Repository has to be created. That is now being done. Once the data depository is in place, it will lead to better participation of foreign players. Today, in India, there is no choice while participating in the bidding round. The DGH decides which blocks they want to offer. Many times the same blocks are recirculated.  Unless there is more knowledge on the block, or there is a change in fiscal regime which can improve the block’s viability, who would want to bid? In case of OLAP, bidders will have the freedom to bid for all 26 sedimentary basins based on data available.

Do you feel there is a need to change the PSC fiscal regime in India? You have already submitted your comments to the Rangarajan Committee on the same.

It isn’t that we do not agree with the current profit sharing mechanism in the existing PSC regime. But if it can be made better then why not? Idea is how to make things better to draw more people. So the proposal submitted by us is a win-win for both the government as well as the contractors. Of all the comments received from different entities, the Rangarajan Committee in its wisdom will pick up whatever is the best in all of that and come out with the best of the best.

(InfralineEnergy thanks Sudhir Vasudeva, CMD, ONGC for sharing his valuable insights with our readers. The column 'In-Conversation', is a platform to engage experts from various sectors to share their views on the different transformations happening in the Indian energy sector.)