GMP 2014-15 Section B

MANAC Qualitative
Analysis (GRIP) Analysis of
ONGC

Ambuj Tripathi (G14065)

Mahendra Nutakki (G14085)
Mayank sood (G14087)
Rajat Mittal (G14099)
Rohit Bhargava (G14103)
Sriram B (G14112)

Oil and Natural Gas Corporation (ONGC) is a Government of India (GoI) owned (69% stake) oil and gas
exploration company. ONGC is also engaged in the petroleum product refining business via its subsidiary
Mangalore Refinery and Petrochemicals Ltd. We have carried out a qualitative analysis of ONGC using
the GRIP framework from the audited financial reports of the company for FY 2013, FY 2012, and FY
2011. For the purpose of our analysis, the GRIP framework has been consolidated for all three years
together as there has not been a significant variation on year-on-year basis in the strategy of the
company and industry dynamics.

1.

Growth

ONGC dominates Indias oil & gas production with more than two-third share of the countrys
production of oil and oil equivalent gas. ONGC is the largest producer of Oil & Natural Gas in India
contributing 69% and 62% of crude oil and natural gas production in India for the fiscal year ended
March 2013, respectively. Total production during FY'13 (including overseas assets) has been 58.71
MMtoe; slightly lower than the production during FY'12 (61.18 MMtoe). The turnover and sales growth
for the company is as follows:
INR millions

31-Mar-13

31-Mar-12

31-Mar-11

31-Mar-10

Net Revenues

16,24,031.73

14,72,849.48

11,76,151.29

10,17,545.67

YoY Growth

10.26%

25.23%

15.59%

Company remains focused on strengthening its core activities i.e., Exploration and Production (E&P) of
oil & gas. At the same time, it has prioritized opening up new growth avenues through exploration of
new sources of energy. However, there has been no resultant increase in sales from both its core
activity and new focus areas.
The company has divided its operations into two business segments based on area of operations
Within India and Outside India. Within India operations have been divided into E&P - Offshore, E&P
Onshore and Refining. The revenues from operations outside India have been declining mainly on
account of lower production from Sudan, South Sudan and Syria; countries badly affected by the geopolitical unrest. Any further unfavorable incident may plummet the production further.

Even though the company claims that it has a reserve replacement ratio of 1.84, production has
declined over the years. The production trends for the company have been tabulated below:
Oil and Gas Production
Crude

Oil

31-Mar-13

31-Mar-12

31-Mar-11

31-Mar-10

30.466

33.13

34.04

32.95

28.253

28.05

28.01

27.98

Production

(MMT)
Natural Gas Production
(BCM)

Out of the total production of 30.46 MMT of crude oil, 74 per cent production came from the ONGC
operated domestic fields, 14 per cent from the overseas assets and balance 12 percent from domestic
joint ventures. As far as natural gas production is concerned majority of production (84 percent) came
from ONGC operated domestic fields and of the remaining, 10 per cent came from overseas assets and 6
per cent from domestic joint ventures. During the April-November 2012 period, production from the
Mumbai High offshore field, which is the biggest contributor to the company's total production, was
below target. The fact that Bombay High is an old field and is subject to natural decline is cause of
concern for ONGC. The mere fact that company has been battling the decline with an array of special
projects designed to extract more oil from the Bombay High reservoir reflects the fact that the company
does not have a significant pipeline in the short term. In-fact, the company has not announced any
major discovery in the last several years.
Further the net realisation on crude oil for ONGC is virtually capped at a particular level but the cost of
production is increasing every year. This can have a significant impact on the profitability of the
company. The current per unit of crude oil realisation has been capped at ~$50-$55 levels for the
company. As it is, the net profit margin of the company has fallen from 19% in FY 2010 to ~15% in FY put
2013. This could fall further if the Government does not put adequate plans in place to decrease subsidy
burden.
PROSPECTIVE PLAN 2030
ONGC prepared a Prospect PLAN 2030 to maintain sustainable growth on a long term basis. The plan
was adopted by the board in 2012 and aimed at doubling production over the next two decades. As the
plan has been put into action recently only, no significant benefits are yet visible. Few salient features of
the plan are as follows:

1) Production of 130 mmtoe of oil and oil equivalent gas (O+OEG) per year and accretion of over
1,300 mmtoe of proven reserves.
2) Grow OVL six-fold to 60 mmtoe of international O+OEG production per year by 2030.
3) More than 20 mmtoe of O+OEG production per year in India coming from new unconventional
sources such as shale gas, CBM, deepwater and HPHT (High Temperature & High Pressure)
reservoirs.
4) Over 6.5GW power generation from nuclear, solar and wind and 9 MTPA of LNG.
5) Scaling up refining capacity to over 20 MMTPA and targeted investments to capture
downstream integration in petrochemicals.
The company has also been focusing new sources of energy such as Shale gas, Coal Bed Methane (CBM),
and Underground Coal Gasification. It has prioritized opening up new growth avenues through
exploration of new sources of energy and meaningful integration in the entire hydrocarbon value chain
along with structured initiatives in deep-water exploration
ONGCs future growth depends on:

New discoveries and commencement of production from fields under exploration and
development

Reduction in subsidy burden in India, pricing deregulation of Refined Petroleum Products by the
Government of India mainly diesel and LPG

Reserves accretion to 1P (Proved) reserves. ONGCs reserves accretion ratio of 1.84 mainly
includes 2P (Probable) & 3P (Possible) reserves evident from flat production profile despite a
high reported accretion ratio

2.

Risks

The exploration business is characterized by inherent uncertainties, geological surprises and

complexities which makes it highly risky business but a very rewarding business. The risks for the
company have been discussed below:
1) Depletion of current fields

More than seventy per cent of ONGC's production comes from matured fields. The company has many
matured fields with a current recovery factor of 25-33%. Bombay High, the most significant field of the
company has little or no chance of new finds in the adjoining area. Higherthan-expected decline rates
in its existing matured assets could impact its production going forward. The company in its FY 2012
annual report claimed that many new and marginal pools are expected to come to production in the
coming 5 years. However, the production has remained constant in the next year.
2) High Costs
Globally exploration and development of complex and frontier plays is challenging and requires capital
and technology intensive engagement. Technology is evolving fast and at the same time investments
need to be mobilized. This results in a high cost of production. The company expects cost of production
from fields to be higher than the current net realised crude price of US$ 47.85/bbl (FY'13) due to tailormade facilities and short life of these fields, coupled with the increased OID Cess. The OID Cess
increased from Rs. 2500/MT to 4,500/MT from March 2012. ONGC also expects a significant increase in
its overall production to come through assets purchased globally via OVL, for which competitive bidding
needs to be carried out. This could further raise costs for the company given the demand for oil and gas
assets globally.
3) Under Recovery Burden
The companys net realizations depend on the upstream subsidy sharing with the Government. The
subsidy burden for the company has increased from Rupees 115,540 million in FY 2010 to Rupees
494,210 million in FY 2013. This huge increase in burden has led to suppressed profitability, however,
deregulation of petrol prices in 2010 and continued monthly increase in diesel since January 2013 is
expected to result in improvement of the situation.

4) Geo-political risks

ONGC has assets in MENA (Middle East and North Africa) countries which face geo-political risks.
Therefore, any unfavourable incident could impact production.

5) Exchange rate volatility

The volatility in exchange rate (depreciation in value of Rupee) may result in higher cost of investments
overseas. The past few years has seen significant volatility in the Rupee. In addition, although the crude
oil prices are expected to be stable post FY 2013, they remained very volatile during the three year
period. Average crude oil price went up from US$ 85.2/bbl during FY 2011 to US$ 114.29/bbl in FY 2012
before dropping to US$ 110.74/bbl in FY 2013. High crude prices couples with a weak rupee may result
in greater subsidy burden for ONGC.
However, there has been a positive change in the attitude of the Government towards fuel subsidy
reforms. The government deregulated petrol prices starting June 2010 and has also allowed partial
consecutive monthly increase in the price of Diesel starting January 2013. However, given the political
sensitivity involving deregulation of Keresone and LPG, no deregulation has been carried out for these
products. If steps as indicated by the government are taken towards partial deregulation of these
products as well, the performance/profitability of the company could be enhanced significantly.
6) Other Risks

The skilled workforce of ONGC is getting aged. One of the biggest risks that ONGC is looking to mitigate
is how to fill the voids of loss of experienced workforce with new and intelligent workforce so that the
production and profitability may increase.
Inherent risks that are significant in nature are associated with oil and gas operations such as ONGC:
spillage, rupture, blowout of wells, earthquakes, Tsunamis, terrorist activities, etc. Although the
company is trying to mitigate these risks at its level, any occurrence of these emergencies leads to a
significant increase in liabilities.

3.

Global Oil and Gas Industry Trends

The global trends for the industry indicate a stable outlook for the future years as the both consumption
and prices are not expected to vary significantly. In addition, as newer discoveries are made and
alternate sources are discovered, the production is not expected vary significantly even though the risk

of political instability looms large over MENA region. These industry trends have been discussed in
detail below:
A) Stable Production and Consumption
The world crude oil production stood at 86.15 million barrels per day (mbpd), registering a 2.2% increase
over the corresponding figure in 2011. Overall global oil consumption grew by 890,000 barrels per day
(bpd).
During 2012 and 2013, the market remained well supplied with liquid hydrocarbons (crude oil including
natural gas liquid). It is projected that 2014 as well market will remain so and will not have wide gaps in
demand and supply affecting oil prices.
The major reason for this well supplied market is that the comfortable price regime for resource holders
and producers has opened up new resources particularly shale oil, heavy oil and tar sands. It is expected
that the non-OPEC production, led by USA and Canada, will meet the global oil demand growth, in turn
exerting pressure on OPEC crude.
B) Stabilizing Crude Oil Prices
Average crude oil prices in FY'13 were at historically high levels for the second year in a row. Brent crude
oil averaged $110.29 per barrel (bbl), slightly lower than the FY'12 average of $114.29/bbl. Having
averaged more than US$120/bbl in the beginning of the fiscal (April'2012), crude witnessed a drop in its
prices mostly precipitated by overriding market perception that the world economy will continue to
remain subdued; this and also the continued optimism about an oversupplied market based on the
consistent improvements in non-OPEC crude oil production, particularly the USA, combined to bring the
prices down. It slumped below US$90/bbl on June 22, 2012. It is expected that several pipeline projects
from the midcontinent to the Gulf Coast refining centers are expected to come on line which will
stabilize prices at $ 110 levels.

C) Natural Gas Production and Consumption Trends

Total natural gas production during 2012 has been 3,364 BCM (9,191 mmscmd); which translates to an
increase of around 1.9% from 3,291 BCM (9,017 mmscmd) in 2011. Global natural gas consumption
increased by 2.2% (3,314 BCM in 2012 against 3,232 BCM in 2011). India's natural gas consumption

declined by 11% due to decrease in domestic production despite about 20% increase in LNG import.
With an import of 20.5 MMT during 2012, India is now the fourth largest importer of LNG in the world.
D) New Discoveries
In recent years, significant conventional and unconventional hydrocarbon discoveries have been made
the world over. Deep-water is emerging as the most prominent play accounting for more than 50% of all
conventional new reserves and these discoveries are much larger than the onshore and shallow water
discoveries. The size of the deep-water discovery and economic threshold of development is forcing E&P
operators globally to focus on such prospects. At present deep-water accounts for about 7% of total
conventional production compared with onshore and shallow water offshore, both at 60% and 33%
respectively. However, only 38% of deep-water discovered reserves are currently producing and more
than 60% have appraisal or discovery status. Once these discoveries are brought on stream, it could
potentially double production to about 6 billion boe by 2020.

India Trends for Oil and Gas Industry

Post the economic recession in 2008-09, the net sales of the entire industry of oil drilling and
exploration came to their lowest in the last few decades. This also had to do with the amount of
inventory maintenance and transportation costs escalating. This also resulted in the overall net sales of
the companies in the industry plummeting by a minimum of 35%, over the previous year. However, the
recovery of the industry was pretty quick too, with the developing countries quickly turning the tide on
the economy, thus improving the demand for the oil and natural gases, as most of the developing
countries are majorly, consumers of the conventional energy forms like oil and natural gas. Key Trends
for the Indian industry during the three year period have been discussed below:
This resulted in the improvement of the numbers of all the critical parameters of all the Oil Drilling and
Exploration Companies, like the total sales, the PAT, the Net profit
A) Consumption, Production and Import Trends
During FY'13, total crude oil production in the country has been 37.86 MMT; 0.6 per cent less than
FY'12 (38.09 MMT) compared to 37.68 MMT. The fall in production has been mainly due to natural
decline in the matured fields of ONGC and Oil India Limited (OIL). Natural gas production during FY'13 in
the country has been 40.68 BCM; 14.5% less than FY'12 (47.56 BCM). ONGC and OIL performed better

than the previous year; however, sharp production decline was observed in the East Coast field,
operated by a private consortium.
Total consumption of petroleum products has been 155.42 MMT; 5.02% more than the previous year
(147.99 MMT). The petroleum products consumption growth rate i.e., 5.02% during the year has been
the highest for the last 5 years. Total crude oil import during FY'13 has been 184.45 MMT; 7.7% higher
than the previous year (FY'12: 171.32 MMT). At the same time 15.07 MMT of petroleum products were
also imported. Net import bill for the crude oil during 2012-13 has been US$ 143.914 billion against US$
139.097 billion during the previous year indicating the high degree of reliance of India on imports to
meet its requirements.
B) Foreign Exchange Fluctuation Risks
The crude import bill has almost doubled in the last 5 years. A lot of this is due to the fact that Rupee
has depreciated resulting into crude oil price reaching close to the record levels last seen in mid-2008.
The import bill for FY2013 increased by 17% mainly on account of depreciation of Rupee against US
Dollar
C) Under recoveries
Rising consumption of petroleum products, exponential increase of crude oil import bill and controlled
pricing of sensitive products - High Speed Diesel (HSD), Liquefied Petroleum Gas (LPG) and Superior
Kerosene Oil (SKO) -resulted into more than 16 per cent increase in under recovery incurred by the
Public Sector Oil Marketing Companies (OMCs) on these products. Total under recovery during the year
has been 1,610 billion against 1,385 billion during FY'12. Out of the total under-recovery of 1,610 billion,
Government of India's share has been 1,000 billion (62.1%), the share of upstream companies (ONGC,
Oil India Ltd & GAIL) has been 601 billion (37.3%) and that of Oil Marketing Companies (OMCs) has been
9 billion.
ONGC shared 494.21 billion towards the reported under-recoveries of OMCs during FY'13 against
`444.66 billion in FY'12 (an increase of 11.1%) as per the instruction(s) of the Government of India (GoI).
This amount translates into 31% of the total under-recovery and 82% of the upstream companies' share.
However, the Government has been moving in the right direction for fuel subsidy reform with an agenda
to reduce fiscal deficit. Few steps in this regard were put in place during FY 2013.

Performance/Profitability

4.

The production level from domestic as well as overseas fields has been declining over the years. Total
production during FY'13 (including overseas assets) has been 58.71 MMtoe of oil and oil equivalent gas;
slightly lower than the production during FY'12 (61.18 MMtoe) mainly on account of lower production
from South Sudan and Syria due to geo-political reasons. Natural decline in domestic matured fields
have also been the reason for lower production.
In addition, new discoveries by the company are not resulting in increase in production. In FY 2013,
ONGC made 35 discoveries in 18 NELP blocks operated; 15 in deep-water, 8 in shallow water and 12 in
onshore areas. This is comparison of 23 claimed discoveries in 2012. However, none of the new
discoveries in existing blocks have resulted in increased production.
Profitability has also been on a declining trend. Gross Profit Ratio has fallen to 38.9% in 2012-13 from
49% in FY2009-10 mainly because of higher subsidy burden and thus lower realization on crude oil sales
and, weak profitability in the refinery business. The average gross price for ONGC's crude oil during
FY'13 has been US$ 110.74/bbl (US$ 117.40/bbl in FY'12). However, as per the instructions of the
Government of India, ONGC gave a discount of US$ 62.89/bbl (US$ 62.69/bbl in FY'12) on crude oil sold
to the OMCs. As a result of which, ONGCs realization from crude oil sales has declined from
$55.94/barrel in 2009-10 to $47.85 in FY13. This has significantly impacted profitability of the company.

Conclusion

5.

High subsidy burden remains a concern amidst weak government finances and high crude oil
prices

ONGCs domestic oil fields are facing slower reserve accretion

Overseas assets and investment in new fields over last 4 years are still in nascent stages of
development

ONGCs dominant market share in domestic markets is expected to result in stable revenue base
over long-term