The ONGC Videsh Limited (OVL), the overseas arm of the Oil and Natural Gas Corporation Limited, with a global footprint in 17 countries is contributing significantly to India’s energy security needs. The PSU has been facing a hit on its profitability due to a slump in crude oil prices and the challenging global scenario. However, despite all the challenges, the OVL under the visionary leadership of Petroleum and Natural Gas Minister Dharmendra Pradhan and the company Chairman and Managing Director, NK Verma, recorded its highest ever production in 2016-17. In an exclusive interview to Bureaucracy Today, NK Verma while expressing full confidence in the operations and finances of the company, talks in detail about his vision, the challenges the OVL is facing and the transformative steps taken by the PSU under his leadership. The technocrat also throws light on the impact of the recent slump in the crude oil prices on the profitability of the OVL and what makes Russia so attractive for the PSU to do business.
Please tell us about the recent major achievements of ONGC Videsh Limited (OVL) under your leadership.
We (OVL) achieved an epochal milestone in the 2016-17 financial year. The OVL produced 12.803 MMT of Oil and Oil Equivalent Gas, the highest ever output achieved by ONGC Videsh in its history. This was achieved largely due to the seamless closure of the Vankorneft transaction, wherein we closed the additional 11% stake acquisition in October last year, This was after our initial 15% acquisition earlier in May. We strive to achieve even higher targets, and we are aiming to produce more than 14 MMTOE in the current fiscal.
Another event that ONGC Videsh can justifiably be proud of is the encouraging discovery made at Well Mariposa-1 in CPO-5 Block in Colombia. It is a significant exploratory success where every step of the way, in-house resources and team effort acted as the catalyst in the successful drilling and completion of this exploratory well. It opens up new prospects in the region where we have other acreages within our ambit, and it also opens up new horizons for more such successes for the future. We are also currently drilling in the North Caspian in the quest to find hydrocarbons and hope to achieve success.
The international E&P environment is deeply stressed today since production cuts, bankruptcies, project deferrals, and investment uncertainty dog the industry. But we take quiet satisfaction in the fact that as far as ONGC Videsh is concerned, we did not lower our targets despite the plummeting oil prices. If anything, we have considered this to be an opportunity both to consolidate and grow inorganically as is evident from our recent Vankorneft acquisition, a deal that commenced and reached conclusion in a deeply volatile and uncertain industry environment.
What is your vision for the company?
ONGC Videsh has achieved phenomenal growth over this millennium, from 0.25 MMT in 2003 to 12.8 MMT last fiscal; and we are aiming at 14 MMTOE in the ongoing fiscal. From here, the story can only get better. The OVL has the asset base, It has the proven technical competence. It has the pan-global footprints, and the OVL has demonstrated the capabilities of an international company. Our focus now should be to leapfrog the growth chart and evolve the OVL into an international E&P major. ONGC Videsh will have a premier role in the growth of the ONGC Group in the coming years to boost oil and gas production, and for the nation it strives to achieve the Hon’ble Prime Minister’s vision of reducing oil imports by 10% by 2022. As the ONGC aspires to produce 130 MMT of oil by 2030, 60 MMTOE is projected to come from ONGC Videsh. Although steep growth is required to meet the target, we believe it is eminently achievable. But for this growth to be achieved, ONGC Videsh has to take a quantum leap in the scale of its operations, and evolve into a truly integrated oil and gas major. Internationally, we need to be present in all segments of the value chain. So this would be my vision for the company: To be an integrated energy company working ceaselessly for the energy security of the country.
What has been the impact of the recent slump in international crude oil prices on the profitability of the OVL?
The first point to understand here is that balance sheet erosion is an industry-wide phenomenon, and no company, whether an oil major, an oil-producing NOC, or a pure upstream E&P player, has escaped the same. The precipitous oil price decline started in June 2014 and deepened further in 2015, to finally culminate at its lowest point in more than a decade in January 2016. The decline has had the maximal impact on balance sheets. Despite the highly stressed and volatile environment, ONGC Videsh performed commendably by generating an operating profit in the 2015-16 fiscal. Our EBIDTA was about USD 1,074 Mn but as a responsible corporate entity, the OVL chose to write down the value in three of its assets post the oil price decline. We incurred a net loss which was a function of the impairments taken by us on these assets. However, excluding exceptional items pertaining to the impairment provision of around USD 720 million, the OVL earned a profit before exceptional items and a tax of USD 114 Mn in financial year 2015-16.. However, even in this highly stressed and volatile environment, ONGC Videsh performed commendably by moving back into the black in 2016-17. We can take justifiable pride in the fact that our concerted efforts led to company moving back into profit the last fiscal.
What are the challenges that the OVL is facing and what are the strategies to overcome them?
The challenges continue to be daunting. The spectre of low oil prices continues to haunt the industry for three years since the decline registered on the radar of the commodities landscape. If anything, this has driven home the realization that we are living in increasingly tumultuous times, and the old paradigms of business no longer hold true in a rapidly evolving landscape. On the one hand the world is facing the startling reality of the increasing irrelevance of the OPEC in influencing oil prices and on the other trillions of dollars are being transferred from oil producing countries to oil consuming countries. The benefits for India in terms of foreign exchange reserves and the balance of payments position have been reiterated by experts in multiple fora and are well documented and understood. Clearly since the dawn of the oil age, the geo-economic balance of power has been shifting. Changes in automotive technology, the fight against climate change and the explosion in renewable alternatives are dampening the world’s appetite for crude. Speculation in the E&P industry has shifted from the so-called ‘peak oil’ to ‘peak demand’ when the reserves considered valuable assets today wind up being left in the ground. Riding on the more availability and global mobility of LNG, countries are moving towards the gas-based economy to harness the greening effect of gas usage.
The OVL is seized of these challenges, and it is taking a close look at its business seeking optimization at every stage. ONGC Videsh’s bouquet of assets is a prudent mix of operated, non-operated and jointly-managed assets. We have also achieved a judicious mix of exploratory, development and producing assets in our portfolio, spread across the gamut of offshore and onshore, deep-water, tight oil and conventional oil, etc. To that extent, our portfolio has the level of diversification that we strive for. Having said that, we also strive for an optimum level of geographical diversification. With that in mind, the focus areas of the OVL are Africa, Russia and Latin America. As an E&P company first and foremost, the OVL maintains its focus on E&P acquisitions, while keeping a close eye on the non-conventional sector. Fossil fuels, built on the platform of mobility, provide the requisite logistical fungibility that is essential for energy security from overseas operations. Non-conventional energy is the growth area for the future and the OVL is looking at options to diversify into it.
The OVL is often criticized for relying too much on Russia. In fact, in 2015-16, around 30 percent of the OVL’s production came from that country. So what makes Russia so attractive for the OVL?
Since the sixties, Russia has always been close to the ONGC’s heart with its active support in the evolution of India’s E&P industry, which was reinforced with the ONGC Videsh’s entry into Sakhalin-I. At the turn of the millennium, ONGC Videsh made its first major foray into the world-class E&P project field with its acquisition of 20% stake in the Sakhalin-1 project. A deal was valued at $1.2 billion and the total cost of its acquisition crossed $2 billion by all accounts. In 2001, it was the first major overseas venture of this magnitude by an Indian company not only for the Indian oil & gas industry, but for entire corporate India. Our strategic relationship with Russia, and its national oil company, Rosneft, has only strengthened over the years, and finally culminated in our acquisition of a 15% stake, followed by an additional 11% stake, in Vankorneft, the licence holder of the prestigious Vankor field in Western Siberia. The Vankor is the Rosneft's (and Russia's) second largest field in terms of production and accounts for 4% of Russian crude oil output.
The present transaction only strengthens ONGC Videsh’s stated strategic objective of adding high quality international assets to its existing E&P portfolio. This acquisition also has significant strategic importance to India, both in terms of augmentation of its energy security and adding a new dimension to the relationship between the Rosneft and ONGC Videsh besides further strengthening the cooperation between the two countries.
As far as the exposure to Russia is concerned, let us examine what the options are for a resource-seeking NOC such as ours. The whole world comprises opportunities and risks. In some countries there is a very low geological risk, but a very high surface risk, while in some other countries the situation is stable, but they have a high geological risk. Then some countries are balanced. It is a mixture that is very difficult to fully optimize.
For example, North America provides a very stable fiscal and legal regime, but now with the advent of shale oil and the dynamics of costs and operational efficiency and all attendant operational challenges, companies are having problems. The geological risk is not high, but the operation cost is very high. In Mozambique, on the other hand, we are sitting on humongous reserves in placid offshore waters, but the surface challenges on infrastructure, plus the evolving regulatory and legal regimes, provide their own set of dynamics that require a calibrated approach. Much of Africa has these challenges of virgin and evolving regulatory regimes, which can actually translate into high-risk barrels. The third set of reserves lie within the CIS, of which Russia is the largest. The acquisition cost per barrel here is still among the lowest in the world, and we have an additional advantage of excellent G2G relations as also our strategic relationship with the Rosneft. And it is our considered opinion that the Russian regulatory regime provides much more stability and continuity than other countries which have such humongous reserves.
The OVL has set a production target of 60 million tonnes of oil and gas by 2030. How confident are you about achieving this goal? What is your strategy to meet the challenge?
The immediate target of the OVL has been growth and more growth. It is to achieve the target of doubling the OVL production of 8.92 MMT, achieved in the 2016 fiscal, by 2018-2020. Our recent acquisition of a 26% stake in the Vankor was geared towards achieving that target and we managed to reach 12.8 MMT in the 2017 fiscal as a result of this acquisition. We are hoping to cross 14 MMTOE in the ongoing fiscal, making about a 70% jump in the last four years which, however, still leaves a gap of around four MMT. This only goes to show that the challenges are huge. The OVL actively scouting for opportunities for inorganic growth, while striving to put our development asset into production. Primary among these are our projects in Mozambique, Venezuela and Iran. It would be worthwhile to mention here that 2P reserves presently stand at 704 MMTOE, while till date our company has produced a little over 100 MTOE, which led our phenomenal growth from 0.25 MMT in 2003 to 12.8 MMT presently. These massive reserves provide us with the benchmarks for production, and we are confident of putting them into production as planned. Our investment and capex allocations will be driven primarily on these opportunities, apart from the ongoing capex and opex commitments in our existing projects. It’s worthwhile to mention that we did not lower or rationalize our targets despite the plummeting oil prices. The OVL advantage in comparison to other upstream players is that we are very lean and we have strong backing from our parent company, ONGC. Additionally, we have a strong government mandate for oil and gas acquisitions and we are a partner of choice for host governments and NOCs.
What is the global scenario as far as acquisitions are concerned?
The industry is witnessing the early greenshoots of revival. This year has witnessed a marked uptick in M&A activity compared to the dismal scenario since the past couple of years. Woodmac expects global upstream investment to touch US$410 billion this year, up 3% on 2016. That percentage growth is not much, and it is still 40% below the 2014 high but at least investment spending is turning the corner and is headed in the right direction. Another heartening development is that FIDs have jumped sharply in 2017. The low point of the cycle was 2015 when operators took FIDs on just eight projects with reserves over 50 mmboe, down from the typical 40 or so project sanctions in the prior few years. Nine months into 2017, the figure by industry trackers is 18 FIDs and counting, well up on the 12 in 2016. The forecast is 20-25 projects for the year, holding a total of 10 bnboe of reserves. Prices have also moved decisively towards the seminal figure of $60, and all indications are that this is a fundamental demand-supply predicated movement which portends a decisive turnaround from the preceding years. In such a positive environment, we can assume global M&A activity to pick up substantially, while eschewing euphoria in valuations of the earlier years and being based more on fundamental assessments. Along with the global trends, perhaps it’s time to look beyond oil and gas to forge ONGC Videsh into an international energy company rather than just an E&P operator or producer. We are in the process of stakeholder consultations and keeping our options open to look forward to new forays into the evolving energy space of renewables to augment our contribution towards the energy security of India in the coming years.