Slipping on Oil

Dinesh Kumar Sarraf, the Chairman and MD of Oil and Natural Gas Corporation (ONGC), will be keeping a close eye on the proceedings of the meeting between member-countries of the Organization of Petroleum Exporting Countries (OPEC) and Russia scheduled on November 30 at Vienna. The outcome of the meeting will help him decide the future course of action to chart a turnaround of India's biggest oil producer.

Sarraf's biggest concern since January has been the crash in crude oil prices, which bottomed out to a measly $30 a barrel, from the peak of around $150 per barrel in July 2014. The Veinna conference of OPEC is crucial to ONGC's fortunes as the member countries are expected to reach a consensus on cutting production, which in turn would help them realise a better price for the commodity. Brent crude, meanwhile, hit its highest level since October 9, 2015, reaching $53.14 a barrel on October 10, to settle at 50.37 on October 28.

Sarraf says if crude oil prices get to $60 a barrel, life at ONGC will become comfortable "and this will make many of our discoveries viable". In fact, unlike its global peers, despite the glut in crude supply, ONGC went ahead with its capital expenditure plans to increase capacity. "We have taken a contrarian view of the glut and see this as an opportunity to exploit low-cost equipment and identify available assets abroad with lower valuations to acquire them. In fact, we did more activities in similar expenditures," says Sarraf. In the past three years, ONGC was able to maintain capex of Rs 35,000 crore-36,000 crore.

However, due to a decline of Rs 81,751 crore in its average market cap between October 2015 and September 2016, the company's ranking slipped six notches to No. 9 in the BT 500 ranking from No. 3 last year. But days later, as the news of OPEC member countries agreeing to cut oil production to 33 million barrels per day made the headlines, ONGC's stock was up by 1. 65 per cent and its market cap regained lost ground to touch 2.37 lakh crore.

The cut in production and the subsequent increase in Brent crude prices will not only help ONGC charge a premium on its produce, but would also help it monetise various fields, besides impacting the investments of the company's foreign arm, ONGC Videsh , or OVL. "This is a good time to buy assets, too," says Sarraf.

In September, the company had signed definitive agreements with Russia's national oil company, Rosneft, to acquire an additional 11 per cent stake in its unit, Vankorneft unit, which has a licence to produce hydrocarbons from the Vankor field in Siberia for $930 million. The additional stake will give the Indian oil major access to 3.2 million tonnes of oil equivalent (MMTOE) by 2017. ONGC will own a 26 per cent stake in Vankorneft, including the 15 per cent stake it had acquired earlier in a $1.26-billion deal, which was closed in May this year.

Along with ONGC, a consortium comprising OIL, IndianOil, and BPCL had signed a similar agreement with Rosneft to buy a 23.9 per cent stake in the Vankor oilfield for about $2 billion. Once the September deal is completed, Indian holding in Vankorneft will go up to 49.9 p cent. "Many decent assets are available at favourable valuations. It is all about reaching there at the right time," says a former ONGC chief. The sentiment is shared by Sarraf: "We are evaluating many assets, but it will not be appropriate to share the details before the deals mature."

The Farzad B Block in Iran could prove to be a great asset for the premier explorer. The $5-billion investment plans in KG-DWN 98/2 Cluster 2 block could also benefit it immensely if it can take advantage of the new liberalised Hydrocarbon Exploration Licensing Policy, or HELP. The new policy allows marketing freedom, integrated licensing to mine all types of rocks, and pricing of the gas. This block in KG Basin is expected to reach peak production of 17 MMSCMD, or 75,000 barrels per day of crude oil, by 2020/21. If all goes well for Sarraf and ONGC, monetisation of these projects can start from 2019.

The future looks bright. However, some of its worries remain constant, primarily because of marginal increases in oil and gas output. On October 27, ONGC's Q2 2016/17 results reported 1.84 per cent increase in gas production from 5.702 BCM in the year-ago period to 5.807 BCM. Similarly, it reported 2.8 per cent jump in oil production during the period under consideration.

Bombay High, one of the biggest finds of ONGC till date, on the other hand, produces 37 mtpa oil equivalent, while the RJ-ON-90/1 hydrocarbon block in Rajasthan's Barmer, which is operated by JV partner Cairn India, is doing fairly well. The Mangla field, too, is producing 300,000 barrels per day. ONGC also reported 15 discoveries in the first half of the current fiscal year, including seven new prospects and eight in the new pool.

The company's woes with natural gas pricing remain a concern despite the fact that the prices were corrected four times in the past 18 months. However, ONGC's future finds can be priced better.

Last February, ONGC also benefited from the government's decision to exempt it from reimbursing a part of the losses of downstream oil marketing companies for selling fuel at a discounted rate. This directly improved its net realisation - from $42.39 per-barrel realisation in 2015/16, it is at $51.08 in the first half of 2016/17. "The fundamentals of the company are good. It is horizontally integrated, which gives comfort. Despite the dip in crude oil prices, it is still making profits," says R.S. Sharma, former CMD of ONGC, adding that there is little Sarraf and his team can do to improve the bottom line drastically during the low-price regime. Till Sarraf's plans of building up capacities for ONGC finds some ground, let's keep our hopes alive.

@anileshmahajan