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ONGC is a cash-cow for Indian government

ONGC has tremendous potential to serve the nation and reward its shareholders, both in dividends and value appreciation

Recently, it may be recalled that when the government wanted to divest from Coal India Ltd by a buy-back arrangement, there was a huge public outcry, essentially from its employees, who threatened to go on a strike. At this point of time, the government was desperate to get enough cash to cover the current account deficit. Ultimately, they planned and executed a simpler method of getting the required cash, by ensuring Coal India paid out a large dividend. Which they did, by giving away Rs29 as interim dividend on a share with a face value of Rs10!

 

In fact, dividends from Coal India amounted to Rs5,695 crore in 2011-12, which moved higher to Rs7,959 crore in 2012-13 and to Rs16,486 crore in 2013-14!

 

ONGC, however, did not fall in the same league as Coal India, in terms of total pay-out. It remained almost steady at Rs5,775 crore in 2011-12 and moved on to Rs5,627 crore in 2012-13 and has, in fact, declined to Rs2,961 crore in 2013-14. The final dividend for 2013-14 is likely to be announced a few months from now. All these because, in the case of ONGC, the operations are very different from mining for coal, as, many times, a prospective well that may initially show signs of being a potential supplier may turn out to be a non-viable proposition. Actuals vary, but a ball-park estimate of $200 million to drill exploratory wells will not be off the mark!

 

In a strategic move, ONGC Videsh Ltd, the overseas arm of ONGC paid

$561 million (Rs3,470 crore) for a 12% stake in Brazil, taking their holdings to 27% while Royal Dutch Shell held 73% in the deep water offshore block

BC-10 located in Campos basin. Work is progressing, satisfactorily so far.

 

Back in India, ONGC, continues its investigations to obtain coal bed methane in Jharkhand and West Bengal. It has resumed drilling in West Bengal and out of 11 wells, five have been taken in partnership with Oil India (which has 25% stake).

 

In the KG basin, ONGC has plans to spend some $9 billion by 2017-18. However, this area has recently become problematic, in as much as 11 of its oil and gas discoveries sit close to Reliance Industries Ltd (RIL)'s KG-D-6 block and Gujarat State Petroleum's Deen Dayan gas fields. This block is divided into a Northern Discovery Area (NDA) and a Southern Discovery Area (SDA), and, according to NK Verma, director - technical (exploration) of ONGC, they are looking at the possibility of producing 2.5 to 3 million tonnes of oil per annum and 9 to 10 cubic metres of gas per day. Present estimates are 92.30 million tonnes of oil and 97.568 billion cubic metres of in-place gas reserves spread over seven fields

 

ONGC was lucky enough to have bought 90% interest in block KG-DWN-98/2 from Cairn in 2005 and it still holds the balance of 10%.

 

In the recent past, ONGC officials felt that reservoir continuity could be one reason why RIL may be actually drawing up from their pool. Since this sort of mix-up can occur when blocks are located close to each other, and actual reservoirs are miles below the earth. In order to resolve this issue, technical teams from Reliance and ONGC are working to find out if there is actually a connectivity of the reservoir in the east coast gas producing block. If there is no consensus, an independent expert will have to be appointed to examine the data, which may eventually lead to prorata allocation of volume, once the connectivity of the reservoir is established.

 

RIL and ONGC have inked a memorandum of understanding (MOU) on this to settle the issue.

 

In the long run, it is imperative that a Regulator is appointed to deal with such matters as this will be binding on all parties concerned, considering the fact that so many areas will be offered for exploration in due course, with NELP X around the corner.

 

Apart from its overseas aspirations, ONGC has been successful in striking gas in Madhya Pradesh in Nohta, in Damoh district, in 2012. In fact, in course of the next two years, ONGC has reported discovering gas in all four wells in Damoh, Jabera-Katni near Jabalpur. Since the discovery is considered significant, according to Mr Verma, Director Technical, the company plans to drill five more appraiser wells in the block to assess the potential. Initial test reports indicate that the hydrocarbon resources have been found to be concealed under nearly 2 km thick hard rock cover, involving challenging work where extraction may not be easy. Yet, the engineers are working on this difficult terrain.

 

In the meantime, it is gratifying to note that ONGC has signed a pact with Mitsui of Japan for oil and gas exploration in India and 3rd countries. This agreement would pave way for opportunities such as setting up a regasification terminal at Mangalore or any other mutually identified locations, including marketing of regasified LNG.

 

So, in the long run, ONGC has tremendous potential to serve the nation and reward its shareholders, both in dividends and value appreciation.

 

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)

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