ONGC :: In The Media

Incisive Q and A at the Investors’ and Analysts’ Meet liven proceedings

June 28, 2006, ONGCNews

Riding high on the stupendous financial performance of ONGC Group of Companies, announced on June26, 2006, the investors and analysts in Mumbai flocked to hear the phenomenal growth story of the most valuable corporate of the country. Attendance was overwhelming and it is to this niche audience that Mr R S Sharma, C&MD, ONGC Group of Companies, presented the highlights of the company.

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Mr R S Sharma, C&MD, ONGC addresses the capacity audience

Prior to commencing his presentation, Mr Sharma introduced the illustrious ‘Team ONGC’ represented by Dr A K Balyan, Director(HR), Mr N K Mitra, Director(Offshore), Mr A K Hazarika, Director(Onshore), Mr D K Pande, Director(Expl.), Mr R S Butola, MD OVL, Mr R Rajamani, MD MRPL and Mr L K Gupta, Director (Fin), MRPL.

Mr R S Sharma, C&MD, enunciated the new mission of the company inspired by President APJ Abdul Kalam on 14th August, 2005, “I would suggest ONGC to give world leadership in management of energy source, exploration of energy sources, diversification of energy sources, technology in underground Coal Gasification and above all finding new ways of tapping energy where ever it is, to meet the ever growing demand of the country”.

CMD went on to enumerate the major highlights, initiatives and strategic pursuits of ONGC Group of Companies in the year 2005-06.

Questions ranging from the Company’s subsidy burden, OVL investment opportunities, finding and lifting costs, enhancement of refining capacity, disclosure practices and good governance policies to ONGC’s foray in the alternative energy sector were posed.

Following are the excerpts from the lively Q & A session :

Q. First of all let me thank you for a very good presentation, we are also obliged that you touched the subject of subsidy because every investor and analyst first looks towards estimating the profit and the price which has become impossible.

C&MD : I will be very happy if you make your introduction so that the other colleagues here…

Q. I am Madhukar Sheth, member of Bombay Stock Exchange.

C&MD : Thank you Mr. Madhukar Sheth.

Q. The majority shareholder is imposing adhoc taxes on you by way of subsidy which makes it difficult for us to estimate your profits. Or rather for you also, it becomes difficult. You know sir, that FII is 9% in ONGC.

C&MD : 9.62%

Q. But they are 20%in SBI, it is a less important company than this.

C&MD : How much free float SBI is having, like ONGC’s free float is 26%

Q. I am not aware of this free float statement for SBI. In ICICI FII holding is 60%. People are not investing here only because of non transparency.

Sir, I request you to make concerted effort that the govt comes with the taxes through the front door, may be through the budgetary provisions and not through the backdoor by way of subsidies . Socialism is ingrained in our constitution but it can be front door socialism.

C&MD : Ok, let me respond to this. First of all we all are aware, Govt is also very much seized of the issue and as I mentioned it is not a unique situation in India. All the developing nations are undergoing this experience. They have been finding it difficult to pass on the burden to the consumers. There have been a couple of examples where they did pass majority burden to the consumers and they had a been a very big slow down in the economic growth itself. So I can tell you that the govt is very much conscious in trying to absorb it somewhere. As an Indian, I feel what they are doing is right. Our only issue with the govt is the mechanism, and the Rangarajan Committee which was constituted by the govt itself has come out with the recommendation . Myself and the then C&MD made presentations to the Rangarajan Committee on the mechanism of sharing of subsidies and we are so happy that they duly factored it in their report. Even though Rangarajan Committee was about product pricing and the levies adjustments. They did bring out that this adhoc system of subsidy sharing should be done away with. Your concern as an investor I appreciate, I am wholly with you. But as management – we want a transparent mechanism. And I have shared with you my discussions with the govt at various levels. I am very positive they are receptive to this they are working on the mechanism and soon you will find some mechanism coming from the govt. I am very positive on that.

Team ONGC faces the queries

Q. You are buying assets in foreign countries at a very high price, means at the market price. If you give us your balance sheet at the current market price of your assets, the producing assets, then we can realize the yield on your asset value.

C&MD : Mr Butola is here to specifically answer your questions. We follow the practice of assessing every opportunity that comes to us, we engage the best of technical experts, renowned reservoir experts, besides evaluation by our own team. We engage the best of legal experts and merchant bankers. We don’t economise on those areas. Only then do we make our offers . You might be reading at times in the media that ONGC once again has lost the opportunity. I am not at all embarrassed. I can give an assurance to the shareholders that if any opportunity does not meet our criteria, if we lose out we have no issues on that.

Q. Sir, I am discussing the existing assets like Mumbai High, Mehsana, if you give market value to them, you realize that you are not making any great profit. If govt. thinks we are making big profit and that is why we have to share the subsidy burden, then on the basis of the existing value of the asset..

Is your Bombay High crude price decontrolled?

C&MD : No. it is not decontrolled.

Q. There was some news in the media…

C&MD : In the news item there are certain options being examined, as of now it is same. I don’t foresee any change in the mechanism in the near future, but I must acknowledge that you have raised a very valid question, I am sure other people in the audience also would have appreciated that.

Q. Awadesh from ABM Amro. According to media reports, the govt is asking you to relinquish some of your blocks, your E&P commitments. Do you see any risk in going forward?

C&MD : The issue is the govt asking ONGC to relinquish some of the blocks that we have taken in NELP V. Unfortunately, in this country , media has become very hyper so they sometimes print news which even we are not aware of. Just to tell you tomorrow itself we are having discussions on this issue in the administrative ministry with the DGH. We are very positive that we will resolve it. For your comfort, the PSCs of the blocks do not have the provision for penalties which we are discussing in a positive environment. We should be able to carry it forward in the best interest of us as well as the govt.

Q. There is a worldwide shortage of rigs and there are some past commitments for spending on exploration on these blocks. Do you see a general risk in terms of ability to meet those past commitments and hence you are being forced to relinquish those blocks.

C&MD : In India we have 78 onshore drilling rigs. We are currently deploying 29 offshore rigs , no other operator is having those kind of resources, we have committed and we are confident we will be able to meet the targets that have been set in terms of these validities. Mr Pande would you like to say something?

D(E) : I can add on only one thing that we have invested more than 1100 crores in these areas. We have planned to acquire some more data and we are bringing in domain experts. We would like to request govt to reconsider whatever their new extension policy. We have the right kind of equipment to test the prospectivity. The PSCs have different kind of clauses. We would like to discuss with them in a very congenial environment.

Rapt audience at Investors’s and Analysts’ Meet

Q. Mr. Jaal Irani from McGuire Securities. Tell us about the finding cost, lifting cost, how many exploratory wells were drilled, how many did you strike oil and gas in and similar figures from the last year.

The finding cost for OEG is about marginally higher than $2/ bbls and lifting cost for OEG is slightly less than $5/bbl. But then we have separate figures for oil and gas and I will be confusing the audience if I start giving those figures.

Q. If you can also give us the comparable cost last year..

C&MD : The numbers that I have given are not for the fiscal 2005-06. They were for the fiscal 2004-05. For the fiscal 2000-01: 0.65, 2001-02 : 0.61, 2002-3 1.17, 2003-4 it was 2.29, 2004-05, it was 2.07, Finding cost is an issue depending upon the reserve accretion, these vary substantially. The global practice is to take a five year average, the 5 years average for us is marginally higher than $2/bbl.

105 wells were drilled..

Q. How many wells have you struck oil?

D(E) : The success ratio is 1:2.8. About 35 wells.

Q. Arun Kejriwal from Kejriwal Reseach: Subsidy amount that you are mentioning, 11956 crores, does it include the under-recovery that you had to share by lower billing, does it include the notional loss that you had on gas when you are supplying at $ 1.17 against $ 4.75 or those numbers are separate?

C&MD : Those numbers are separate. These are 11956 crores, that is the total under-recovery that we were made to share, we were asked to give discount on crude oil, LPG, SKO. If we try to work out a number, if we try to load entire subsidy on the crude so that it works out to $17.3 per bbl for the last fiscal, the gross billing was 59.66, the retention price works out to be $42.34/bbl.

Q. If you could quantify what you have lost on gas?

C&MD : 1.75 vs 4.75 so about 3 $ per bbl if we work out an absolute number, could ne 7-8 thousand crores.

Q. Why cant we inform our investors in our balance sheet that as a social contribution this is what shareholders have lost?

C&MD : Mr. Kejriwal, I appreciate the point you have raised, it has not been escaping our attention, but believe it , as a good governance practice, as a good disclosure practice, and also keeping in mind, the interest of majority shareholders we would not like to publish anything that would embarrass our majority stakeholder. But we do a fine balancing. If you see ONGC’s balance sheet, the kind of disclosures we have added in the last 3-4 years, I personally get compliments even from the FIIs that we have substantially improved on that.

Q. : Coming back to media, the media does not necessarily print what is good for the company. It is always reported in bits and pieces. The Rangarajan committee mentioned that certain things were to be done for pricing. Only one part of it was done in this budget. In a hurry to raise resources, something was done. What I am again trying to say is that you are also giving discount on crude that you supply from Mumbai high. So at various stages the company is being undercharged, the company has to undercharge, pay or receive lesser money. But only this 11950 figure is being made public. Further loss that is accruing by giving lower price from the gas is not being brought out.

C&MD : I can only tell you that this analyst and FII community is very intelligent. When I have one to one interaction, they do come out with numbers and all those who invest in these companies, they are able to make those analyses. If you are asking us to make those disclosures in the balance sheet, let me say very humbly that I would not like to … we do feel as a conscious decision, we would not like to mention it.

Q. Whatever figure that is being talked about.. 73,000 odd crores as under-recovery, 24,000 crore to be shared. Just doing number-crunching, just assuming 21,000 is the share of the company, …what would be the fate of this company?

C&MD : Fate of the company will continue to be very vibrant. Let me tell you, that current year results are a substantial improvement over the results declared in the last year.

Q. Taking into account the fact that you are talking about almost ten thousand crore being an additional burden.

C&MD : Last year the average billing was 59 dollars, so, if now your billing is 74 dollars, in case rupee depreciates we stand to gain there also, the crude oil production is looking up; in gas pricing whatever corrections have been made is helping us, we are earning in a big way. We can tell you we are very positive about the future prospects.

Q. I am VRK Raju from Syndicate Bank Treasury. There are concerns about the oil reserves. Media reports say that we are reaching peak oil in 20 years. In such a case, when production reaches its peak, being the major player, you have the monopoly, definitely you will get more price and all. In the long term, a stage arises when the entire society turns to alternate sources of energy. What will happen to ONGC then? My suggestion is, you being the energy major, why don’t you start investing in alternate sources of energy also for the future?

C&MD: Mr Raju, as all of us know, at the end of it, we all die. But you have raised a very valid issue. Earlier it was said that in the seventies, it will reach peak oil. With technology induction, production has been going up. Who knew somebody would be able to produce from the deep waters.

On this stage there are people more competent who can talk about technology. You can talk to Mr Mitra, Mr Butola, Mr Pande, Mr Hazarika, they have lot to share on this. Coming to your area of concern, alternate energy sources, I started my presentation with the message from the President of India. If you look at the vision, we want to be integrated energy company. We are moving towards integration of energy business. We have gone to Refinery, naptha, feedstock, we are going into aromatics; we have talked about LNG terminal, petrochemicals, retail outlet. Talking about alternate sources of energy, we have wind power, clean coal opportunities. CBM and UCG has added new dimension to our business. We have been working in all these areas.

D(E) : To add to this, the oil is not for infinite number of years. But at the same time, we have been talking that all will be lost in 10-15 years, right from 1950 onwards. Oil reserves in our country is 40 billion barrels, of which 16 billion barrels have been established by ONGC. We have as on date reserves of 8 billion barrels plus. There is still a lot of oil to be found. Regarding alternate sources, we are aware. We have started an Energy Centre. We are thinking about hydrogen, lithium cells, fuel cells. Apart from that, there are unconventional hydrocarbon resources. There is CBM and UCG. By 2010-11, as per our XI Plan, we will start commercial production from CBM and pilot production from UCG.

D(Off) : When I joined in 1967 Petroleum Engineering in Dhanbad, I was told that oil will last for 33 years. I recently attended a seminar in USA where they said peak oil will reach in 2011. There is scope that gas share will go up, and in the years to come, oil share might come down.

Q. I am Vinay J Singh from J Morgan Stanley. Domestic production would increase by 3 million tones this year and you also mentioned that Mumbai High could be one of the upsides. The other thing you mentioned are the marginal fields where we are spending 12,700 crores. Could you throw some light on the marginal fields’ potential and where do you see your cumulative potential this year in production?

C&MD: I have more competent people to talk on this, Mr NK Mitra, Mr Pande?

D(Off) : We have last year entered into a service contract. EOI has been floated for marginal fields. We are floating a tender now for marginal fields. We will be able to increase oil by 4-5 million tones in 5 years, for gas 10-12 million tones in another 4 years.

Q. Sir, anything in the short term? Post five years 5 million tones per annum?

D(Off) : I am not talking about per year, I am talking about incremental increase. Not cumulative.

Q. Moving on to my second question, you mentioned 10 exploratory finds. Throw some light on the potential we have there? Any update on that?

D(E) : When we talk of the strikes, finds or discoveries, we made 10 finds last year with an accretion of 137 MMT. Out of this 98 MMT is through exploratory effort itself. Remaining 40 MMT is from delineation or extension. So the 98 MMT accretion is exclusively through exploratory efforts.

Q. Is this only for ONGC or for ONGC plus OVL?

D(E): This is only for ONGC.

Q. You had 25% plus production growth in OVL but net profit did not grow that much though prices were much higher. Could you throw some light on whether we had some extraordinary items in OVL last year which should not be repeated this year?

MD(OVL) : I think your assessment is right. There is an extraordinary item of 450 crore which we took as a special item this year, otherwise our profit would have been higher.

C&MD : We had booked these as goodwill when we acquired Sudan and which as a prudent practice we decided to charge out this year.

Q. This is Vardrajan from Motilal Oswal Securities. I wanted a statement of reserves of ONGC and OVL. What would you be targeting from IOR/ EOR in 3-4 years/

C&MD : Let me briefly answer that. In our fields, natural decline has set in. If we don’t go for IOR/ EOR schemes, there will be a natural decline of 7-8% CAGR. Through these schemes, not only we are able to arrest this decline in production, we have been able to marginally increase and through that we are trying to improve the recovery factor. So, may be Mr Mitra would like to talk on that.

D(Off) : In 2001, we had planned for Mumbai High Redevelopment. We are going to spend 9,000 crores in 5 years. In that recovery factor would increase 3-3.5 %. That project would be completed by 2007. Rolling plan for Mumbai High Redevelopment and Heera will be launched this year. For every redevelopment plan, the recovery plan is expected to increase the recovery factor by 3-4%.

Q. I want to have the numbers in terms of existing reserves.

C&MD : IOR/ EOR do not give you reserve accretion. They only increase the recovery factor. That means whatever in-place reserves are there, ONGC’s current recovery factor is about 28-29 %. We are targeting it in Mumbai High to reach 32-33%, and over a period of time we are targeting to reach 40%.

D (Onshore) : IOR/ EOR scheme has to be continuous. Every five years we have to plan the IOR/ EOR schemes and spend a huge amount of money in various fields. This will result in the improvement in production from the field.

C&MD : ONGC has in-place reserves of 8 billion barrels and OVL’s ultimate reserves are 1.8 billion barrels. Regarding EOR/IOR schemes, till date whatever efforts we have planned to enhance production by about 100 million tones by 2020.

Q. Another question for Mr. Butola? Over and above, are there any discoveries that are being assessed which can yield future reserves?

MD (OVL) : Our portfolio has a combination of exploratory and producing assets. With Sudan Block 5A going for production yesterday, we have four assets which are discovered and put on development. One of them in Brazil which we bought this year; in Myanmar, where gas discovery has been made. In Qatar, we have a block in which discovery is there and in Egypt, where we have a discovery well. In addition to that we have acquired exploratory assets in Nigeria and Cuba. Two blocks in Nigeria as mentioned by CMD in his presentation, which hold very large reserves and we think that this will give us substantial reserves in the times to come. Cuba again as per the USGS has very high reserves in deep waters. As on date, it holds tremendous potential according to USGS. If we succeed in our efforts, this is a very high risk-high reward area. We have acquired 8 blocks.

Q. Can you tell us about the Well to Wire project of ONGC?

D(HR) : We have proposed a project in Tripura to which Govt has agreed. It is for generating power. That is the project we are currently working on.

Q. What is stopping you from merging MRPL with ONGC?

C&MD : Is it a question to MRPL or ONGC?

Q. Both of you.

Also, what is the effect of rupee depreciation? How much does it affect you, one rupee going down? How much does it add to your net profit?

C&MD : When we had acquired MRPL in 2003, we had deferred tax asset of the order of 1,500 crores. That would have made a significant upside for us, if the merger had come then, we could have taken the advantage. Merger is not in our scheme of things now.

Each rupee depreciation makes a difference of 600-700 crores in revenue. Rupee depreciating, our revenue goes up to that extent. Appreciating, we lose to that extent.

Q. Patrick, Goldman Sachs. A couple of questions. Could you give us an update on Sakhalin-1? Any discussions on potential sellers?

MD (OVL) : Sakhalin has started producing gas and oil and currently since the export terminal is not ready for oil, we are not exporting. We are selling the oil on a limited scale within Russia. Similarly gas which is being produced on a limited scale is being sold to the domestic market. As far as oil is concerned, we are expecting that first oil for export will happen in the last quarter of this year. As far as export gas is concerned , there are various options; pipeline to China, the LNG terminal to export the gas to wherever there is good market. All these are being evaluated and we expect to export gas sometime by 2010.

Q. Deepak Parekh from Quantum. In provisional results of 2005-06, you said about quadrupling refining capacity of ONGC group. Can you clarify on that front?

MD (MRPL) : You may be aware, refinery expansion from the present name plate capacity of 9.5 to 15 million is approved by the Govt. and work on that has started. Apart from that, there is a proposal which is yet to be approved by the government for a 15 million ton grass-root refining with its own integrated petrochemical complex. That is also proposed alongside the present site in Mangalore. In addition to that, there are various proposals of having refineries in Kakinada and Rajasthan. All put together, they come to 40-45 MT.

C&MD : Just let me put a rider on that. For these expansion plans, since we have not worked out the economics, the feasibility will only be decided after the marketability is worked out. Definitely, these are on our canvas.

Q. Refining capacity is in excess of local consumption. How do you see the future GRMs of these projects?

C&MD : All these are coastal refineries that we are talking about and they are export oriented. Don’t look at the domestic capacity. New capacity that is happening is to capture the global market. There is lot of potential and opportunities which we will capitalize on.