ONGC Videsh Limited (OVL) is India’s second largest E&P
company in India- both in terms of oil production and oil and gas reserve
holdings. A wholly-owned subsidiary of Oil and Natural Gas Corporation Limited (ONGC),
the flagship national oil company of India, OVL is projected to more than double
its production of oil and oil equivalent of gas in the next five years. In doing
so, the company will set about its acquisitions through a healthy mix of
exploratory and producing assets across the globe. In a freewheeling interaction
with Neeraj Dhankher, OVL’s Managing Director, D.K. Sarraf talks
about the company’s roadmap and acquisition strategy. Excerpts:
Please throw light on OVL’s production profile as on today
Though OVL was incorporated in 1965, we first started
production of hydrocarbons in 2002-03, when it started gas production from
Block-6.1 in Vietnam in January, 2003. Later, during the same year in March, we
acquired 20% stake in producing Greater Nile Oil Project in Sudan. From a modest
start of 0.253 MMTOE of oil and oil equivalent of gas (OEG) in 2002-03, our
production rose to 9.45 MMTOE in 2010-11.
In 2011-12, our production declined and stood at 8.753
MMTOE of oil and OEG due to geo-political difficulties faced in Syria and Sudan
for part of the year.
Our production in 2012-13 is likely to be still lower
mainly because of continuing difficulties in Sudan and Syria, and also somewhat
due to aging fields. The satisfaction is that some of our other assets which are
under-development will start producing in 2013-14. These include blocks-A1 and
A3 in Myanmar where we would produce gas. Similarly, the Carabobo oil field in
Venezuela will also start producing during the next fiscal. This would see our
production looking up.
In addition, we recently made an announcement for our
proposed acquisition of 2.72% stake in one of the world’s largest producing
fields – Azeri-Chirag-Gunashli (ACG) in Azerbaijan from Hess Corporation, a US
energy company along with 2.36% of Baku-Tbilisi-Ceyhan (BTC) crude oil pipeline
for US$1 billion. So our production is expected to improve in the coming years.
We are also looking at more acquisitions.
How does the company arrange funds for managing its E&P operations? How is capex worked out?
Our capex comprises of maintenance/ committed capex which
is for surveys, exploratory & development drilling, addition of facilities etc.
in our existing exploratory, development and producing assets. This we estimate
on a yearly basis keeping in view our work program. However, the major capex is
for acquisition of new oil and gas properties. Acquisition is an uncertain
business; it is hard to predict how many acquisitions we would be able to
conclude during the coming year. So we keep the acquisition capex as flexible.
It depends on how much success we get in our acquisition efforts.
Most of the capex in existing assets is financed by ongoing
revenue generation i.e. these are self-funded. However, the new acquisitions are
financed partly from cash flows generated by existing producing assets and
borrowings from ONGC and the market. We are the 100% subsidiary of ONGC, the
national oil company of India, a company with highest profit in India, which is
also a debt-free company with significant cash reserves.
What is the acquisition roadmap and strategy for OVL for the future? What are the areas that you are looking to explore?
Recently ONGC finalized the group’s long-term strategic
plan – called the Perspective Plan-2030 which is the basis of our acquisition
strategy. As per the Plan, OVL has been given lot of responsibility for ONGC
group’s growth. As per the Plan, OVL’s current production of 8.753 MMTOE of oil
and OEG is planned to be increased to 20 MMTOE by 2017-18 and up to 60 MMTOE by
The production would be added by new exploration assets as
well as producing assets. While exploration blocks gives more value addition
because acquisition cost is lower, but it takes longer to reach the production
stage and is risky. In case of producing assets, one has to pay more, but
production can be added in near-term and is more certain. We intend to continue
to have an optimal mix of exploration and production. For our short term target
(2017-18), we will stress more on producing assets. At the same time, to achieve
our long term target (2029-30), we are emphasising on acquiring exploration
We have identified certain focus areas for acquisitions.
These include the oil sands of Canada, shale gas in USA which can be brought to
India as LNG and heavy oil in Latin American counties. We believe that these are
the places where world’s most of tradable reserves are available. In addition,
there are multiple LNG opportunities in East Africa, Australia and the Arctic.
Being an E&P company, our focus is just not only on LNG terminals, but on
upstream natural gas fields also - so we produce gas, convert it to LNG and then
transport LNG to India.
Most of the major recent hydrocarbon discoveries have been
in deep-water, like Brazil, Mozambique, Angola, Nigeria, the KG basin of India,
to name a few. So we also plan to look at opportunities in deep-water in coming
years. To start with, we would like to be a non-operator in deep-waters.
Then, we are also looking at opportunities in old brown
fields, where decline has already set in. Our parent company, ONGC has
extensive expertise in managing and adding value to such fields, demonstrated by
maintaining the production of Mumbai offshore fields even after more than three
decades of production. We plan to leverage ONGC’s expertise in this area in our
quest for acquiring depleting fields, especially those in offshore.
We would like to have presence in exploration in the Arctic
region as well.
What are the challenges faced by OVL today in conducting its E&P business?
Firstly, M&A game is becoming increasingly competitive,
since in most of the cases it is ‘seller’s’ market. Then, due to volatile oil
prices, valuation is difficult. Further, during operations, the safety and
environment norms have also become, and that for good reasons, more stringent.
And then, there is a wave of resource nationalism. The E&P business by nature is
risky; the risks are increasing with time.
What are the financial problems faced by OVL in Russia?
In Russia, we have two producing properties. Sakhalin-I has
PSC regime, where we purchased 20% participating interest in 2002, with Exxon
Mobil as the operator. Operations in this field have been very successful with
respect to production, project management and hence financial returns. There is
stability due to the PSC regime. Then, in 2008, we acquired Imperial Energy.
However, the fiscal regime in this case is Royalty and Taxation (R/T) regime.
The difficulty here is that while there are significant oil reserves, they are
held in very tight reservoirs. We are not able to produce these in absence of a
technology which would be viable given the existing fiscal regime. It means that
even when oil price is US$100 per barrel, our netback realization is less than
US$20 a barrel, after payment of taxes in Russia and oil transportation tariff
to the Russian state entity. So the option for us is to either get a technology
which produces at US$20 a barrel, or fiscal regime needs a change. So we are
working on both fronts i.e. identification of the required technology and
efforts are also being made to persuade the Russian government for optimizing
the fiscal regime. We have had partial success in both.
There was a big hue and cry over OVL’s exploration activities in Block-127 in the South China Sea, with the Chinese government conveying its unhappiness over the Indian presence in the region. What was the real issue?
In Vietnam we had acquired two blocks-Blocks 127 & 128. In
Block-127, we drilled a well but did not find success. So it was surrendered. In
case of Block-128, we could not commence drilling operations as the sea bed was
very hard due to which we were not able to anchor the floating rig. So we needed
a different technology for anchoring, which we got. However, it would increase
drilling costs. Re-evaluation of economics showed that the block may not be
economically viable with increased costs. This was informed to the Vietnamese
authorities, which suggested that they would make available additional geological
data from the near-by areas and asked us to hold on to the block for another two
years and conduct a fresh view after that period. As far as we are concerned,
the block was given to us by the Vietnam government, which confirmed their right
over the area. I do not know where the reference of China comes from?
There is a perception that India lags behind China when it comes to bidding for large scale E&P projects across the globe. Do you think we are short on financial resources, technology, political environment or strategy as compared to the Chinese?
There is no comparison and also not fair to contrast. Their
policy and strategies are altogether completely different. The type of returns
they look at is also different. OVL approaches any project as a commercial
company, while they have a country perspective. Their system also supports them
to take a country’s macro-view – they have financial support and offer an inter-sectorial
package. Here, if OVL gets sovereign funding support and systems are put in
place for inter-sectorial package, including services and infrastructure also,
then things could be different. I do not think that we lack either of financial
resources, technology, political environment as compared to the Chinese; our
strategies could be different. And, we not only compete with Chinese, we
cooperate with them as well; for example, we acquired producing assets in Syria
and Colombia along with Chinese companies; we partner with them even in Sudan.
What suggestions would you give on improving the decision making process for E&P acquisitions?
We have an excellent and robust system of decision making
on acquisitions. We form an in-house team for each opportunity we examine. It
comprises regional, technical, financial experts. We engage consultants to give
us independent advice on various domain areas of expertise – technical, legal,
financial and tax & accounting. Once the proposal is fully gone through
internally, it is examined by a Project Appraisal Committee (PAC) of the Board,
comprising of the independent directors, Government nominee on our Board and
functional directors. The recommendations of the PAC go to our Board for
approval, if it is within its empowerment, else it recommends the proposal to
ONGC’s Board in case it is within ONGC’s empowerment. In case of large value
proposals, the approval of the Government is sought, first at the level of a
Committee of Secretary and then at the level of a Cabinet Committee. Though
final approval goes through various stages, it works quite fast. With regard to
empowerment of our board, we have requested the Government for enhancing the
How would you rate OVL’s performance over the years?
In 2001, we had only one asset and no production. Today, we
have 30 assets in 15 countries, 10 of which are producing and five are
discovered. It is not easy to develop an E&P company from the scratch. The
figures speak for themselves.
(InfralineEnergy thanks D K Sarraf, MD, OVL 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.)