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ONGC looks overseas to help increase oil production

The Indian state-run player is looking overseas to diversify its production base, while acting to tackle problems at home. NJ Watson weighs up whether the company is doing enough

Oil & Natural Gas Corporation's (ONGC) latest financial results highlight the Indian state-run firm's two main challenges: domestic oil subsidies and the rising investment required to reverse a long-term decline in oil production.

ONGC beat forecasts for the quarter ended December following the Indian government's decision in January to raise the prices of subsidised diesel in order to cut the fiscal deficit Its net profit for the October-December quarter was  55.63 billion rupees ($1.04bn), down 17.5% due to a one-off gain in the year-earlier period, but higher than the 53.7bn rupees net profit expected by analysts polled by Thomson Reuters Starmine. However, gains were limited because crude prices rose, meaning ONGC  had to fund more of the gap between subsidised retail prices and the market price of fuel.

This situation probably improved in the latest quarter. With the oil price lower at the end of the January-March quarter, the cost of the subsidies for ONGC eased.

"Further declines in oil prices will subsequently help in reducing the subsidy burden of upstream oil companies and chiefly ONGC, who shares the maximum subsidy burden," says Namita Lohia, an analyst with Dani Investment Services.

ONGC's results also show it is struggling to arrest long-term output decline. In May, it reported a 5.8% drop in oil production for the fiscal year ended 31 March. The 20.485 million tonnes of crude produced in fiscal 2013 means output has declined steadily. In fiscal 2008, it produced 25.95m tonnes.

The reason for the decline is what Standard & Poor's describes as ONGC's "geographic-concentration risk". India accounts for about 80% of the company's oil and about 90% of gas production. Ageing fields in the Mumbai basin account for about two-thirds of the company's domestic production. The Mumbai High fields produced 9.55m tonnes of oil in fiscal 2013, compared with 9.976m tonnes produced in fiscal 2012.

ONGC report card

"The shortfall is mainly due to non-commencement of production from the G-1 field and overhauling of process gas compressors at Neelam. Decline in production from major fields, poor influx, increase in water cut and power shutdowns also affected production," a recent performance report of ONGC submitted to Indian oil secretary Vivek Rae revealed.

ONGC has a developed a three-pronged strategy: to improve its oil recovery at home; intensify exploration; and increase involvement in foreign projects via its overseas subsidiary ONGC Videsh Limited (OVL). ONGC hopes to double its reserves by 2020 and increase sevenfold its overseas production to 1.2m barrels of oil equivalent per day (boe/d) by 2025, as well as strengthening its recovery factor from 28% to nearer the global norm of 40% over the next 20 years.

ONGC is looking to invest the $20bn allocated to acquire overseas assets.

At the top of the list is a bid to join the Kashagan project in Kazakhstan. In November, ConocoPhillips said it had struck a deal with ONGC to sell its 8.4% stake in the Kashagan consortium. Valued at around $5.5bn, this would be the biggest deal struck by an Indian oil and gas company for an overseas asset.

The initial statement said the two companies were looking to complete by the first half of 2013, but delays in getting government approvals have raised doubts over whether it will go through.

The development is complex and costly - start-up has been repeatedly delayed since . However, Kashagan's estimated 8bn to 12bn barrels of recoverable oil means it is crucial to the Kazakh economy. The Kazakh government has made noises about exercising an option to buy that stake in place of ONGC, while in April the Kazakh energy minister, Sauat Mynbayev, revealed China had expressed interest in buying the stake.

If the government waives its pre-emption rights, the decision on ConocoPhillips' share will show the extent of influence wielded by either China or India in Kazakhstan. IHS Global Insight notes President Nursultan Nazarbayev's visit to China on 5 April yielded a bilateral programme aimed at providing access to resources in exchange for investments in energy. However, Nazarbayev is a past master at playing one power off against another, and may opt to throw the Indians a bone.

ONGC is optimistic. On 10 May, an unnamed senior executive was quoted by the Wall Street Journal as saying the company hadn't heard anything negative from either government and is looking to raise $4bn in foreign debt to partly fund the acquisition.

Any new debt would follow April's $800m Eurobond issue, the company' first dollar-denominated debt since 1986. This issue was part of ONGC's efforts to take advantage of the rally in emerging market bonds to refinance an $870m bridge loan that it took to fund the purchase of a stake in an oilfield and pipeline in Azerbaijan.

That deal, which completed at the start of April and saw ONGC pay $1bn to buy Hess's 2.7% stake in the Azeri-Chirag- Guneshli oilfields and 2.4% of the Baku-Tbilisi-Ceyhan pipeline, will increase the company's overseas reserves by 9% and production by about 11%, according to Business Monitor International.

Another deal in the works is a joint bid with Oil India for the 20% stake in Area 1 (Rovuma-1) offshore Mozambique. The Indian consortium has placed a $5bn-$6bn bid for the 20% stake. "Awarding a stake to an Indian bidder could help unlock the Indian market, as it is hoped that partners will not only help fund the gas development but also buy output," says IHS.

ONGC is raising domestic production through improved oil recovery and enhanced oil recovery (IOR/EOR) techniques. In an interview with The Hindu daily in April, Sudhir Vasudeva, managing director of ONGC, said that 21 IOR/EOR schemes have been launched at a cost of around $7bn. At home, ONGC continues to make big discoveries. In 2012, it  made 23 oil finds in India, adding 242m tonnes of oil equivalent (toe) to its total reserves of 7.59bn toe.

It is also investing in shale gas, recoverable reserves of which are put by the Energy Information Administration at 60 trillion cubic feet.

ONGC has been diversifying into refining and oil distribution.

ONGC is also in talks with Shell over potential investment in exploration and refining.

The companies are considering a deal to set up a new, world-class refinery complex on India's west coast and expand their retail fuel business, according to reports.

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