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Raghuvir Srinivasan

AFTER an extended spell of inactivity, action is now hotting up in the upstream oil and gas sector. And the two main protagonists — Oil and Natural Gas Corporation (ONGC) and Reliance Industries — are talking big numbers, both in terms of investment and targeted accretion to reserves.

While Reliance's focus now is on developing its gas find in the deep waters of Krishna-Godavari and monetising the reserves that it has found there, ONGC has a more ambitious target of doubling its established reserves of oil and oil equivalent gas (O+OEG) to 12-billion tonnes in the next 20 years. And the public sector behemoth is mobilising large resources — financial, technical and managerial — to achieve this stated objective. Of course, subsidiary ONGC Videsh (OVL) is quietly at work acquiring equity oil abroad, in places such as Russia, Sudan and Vietnam.

What is driving the gush of activity now? There are basically two factors — one, the freeing of the oil sector and, two, the Reliance gas strike in the KG basin that has revived interest in exploration of the sedimentary basins in India. Of the 26 sedimentary basins in India, only six are being exploited today, leaving large scope for those willing to assume the risks of exploration.

ONGC's freedom to price its crude supplies at market levels came at an opportune time when global crude oil prices were ruling at extraordinarily high levels. This resulted in bumper earnings for ONGC and the consequent increase in cash flows. Now, this surplus cash has to be profitably deployed in business, which is not the case at the moment. It is a telling comment on ONGC's investment plans or the absence of it that in 2002-03 as much as 4 per cent of its total income, approximately Rs 1,400 crore, came from interest earnings. This clearly indicates that the company is weighed down by its cash surplus that has to be gainfully deployed. ot surprising then that ONGC is now on overdrive, investing in exploration of new fields, redevelopment of existing ones including Mumbai High and in modernising its equipment such as drilling rigs.

Recently, the company announced a hard thrust into deep-water exploration planning to spend up to Rs 12 crore- a-day with the ultimate aim of adding 4-billion tonnes of oil. Even assuming a recovery ratio of just 25 per cent, which is on the lower side, the net accretion to ONGC's reserves would be about a billion tonnes of oil.

Large supply gap

ONGC's investment plans come not a day too soon. With domestic crude oil production hovering around the 30-million-tonnes per annum mark and consumption growing rapidly, import dependence is at uncomfortably high levels. For instance, against a demand of about 107 million tonnes in 2002-03, total domestic oil production was 33 million tonnes or just about 30 per cent of demand.

ONGC accounts for bulk of the domestic output at 26 million tonnes and private and joint venture fields produce another 4 million tonnes while Oil India accounts for the remaining 3 million tonnes.

The Mumbai High field remains the biggest producing property in the country but the worrisome aspect is that it is entering into plateau phase with yields falling. ONGC is now concentrating on re-development of this field, investing Rs 8,800 crore in drilling new development wells and increasing the number of service wells to maintain the structure of the field intact. The whole exercise, including redevelopment of some onshore fields, is expected to yield additional oil of 88-million tonnes over the next decade and more. The offshore redevelopment programme has already yielded an additional 3.53 million tonnes of oil by the end of March 2003.

This apart, the company is investing in acquiring the latest technologies to increase recovery from the existing fields, the objective being to push recovery rate from the present 28 per cent to 40 per cent over the next few years. Coupled with the foray into deep waters, the entire programme should hopefully help ONGC raise its output to higher levels.

Meanwhile, subsidiary OVL has tasted success in recent times in its efforts to add equity oil abroad, the most notable one being the Greater Nile block at Sudan from which ONGC will get 3 million tonnes of oil per annum. It has also invested about $1.7 billion in the Sakhalin I field in Russia that has estimated reserves of 1.15 billion tonnes of oil and 20 trillion cubic feet of gas.

Yet, despite all these efforts, what stands out in the domestic oil sector story is the poor success rate in fields awarded till now under the New Exploration Licensing Policy (NELP) that boasts of some excellent investor-friendly features. Foreign participation, especially from multinational biggies such as Shell and ExxonMobil, is non-existent even as some small players such as Cairn Energy and Niko Resources have dared to invest and tasted success. By far, the biggest success story under the NELP till now is the gas find by Reliance in the deep waters of the KG basin.

Though it will be a couple of more years at least by the time this reserve is monetised, the find has energised the others. ONGC already had a licence in a nearby field and indeed, had even struck gas there earlier than Reliance but the effort was not carried forward following doubts over the financial feasibility of exploiting the reserve. However, last week, ONGC announced that it was exploring in an adjacent deep-water field and hoped to strike gas as the structure was the same as that of the Reliance field.

Another player who owns acreage in the vicinity is Cairn Energy, which is now trying to sell off its interest in the field to ONGC with the two unable to agree over the valuation. Oil field acquisitions are not mature game yet in India as seen by the dispute, subsequently settled, over the operatorship of Panna-Mukta fields where Enron sold its stake to British Gas. Reliance had earlier acquired operatorship over three exploration blocks from Tullow Oil of the UK and is set to acquire two more from the latter. The game is set to mature gradually as smaller operators who have bagged the licence sell out promising fields to the bigger players. ONGC and Reliance can logically be expected to be at the forefront of this game.

Integration, the way to go

There are very few big oil companies worldwide that are only into exploration and production. Giants such as Royal Dutch/Shell, ExxonMobil, ChevronTexaco and BPAmoco are all present across the value chain from oil production to downstream products and even into power generation. With the opening up of the sector, this is the way to go in India as well.

ONGC has already taken the first step in this direction with the acquisition of control over Mangalore Refinery that will give it a downstream presence. It also has secured permission to set up retail outlets and it is already a small player in the LPG segment of the industry. Similarly, Indian Oil Corporation has forayed into petrochemicals through its project to produce paraxylene and PTA at its Panipat refinery. The company has also jointly bid with ONGC for exploration blocks under the NELP. The advantage in integration is that cash flows are smoothed out over business cycles helping the company tide over difficulties caused by falling oil prices. That is exactly how the big multinationals survived the precipitous price drop of the late 1990s when oil fell to $10 a barrel.

There is no fully integrated player in India at this point in time. Reliance Industries comes close with its presence in E&P, refining, petrochemicals and power but its weakest link right now is the absence of a retail network. Reliance and ONGC, along with Indian Oil, stand the best chance of emerging as truly integrated global oil players from the country in the long run.

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