Oil and Natural Gas Corporation Ltd.

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Oil and Natural Gas Corporation Ltd.


Tel Bhavan
Dehradun, Uttaranchal 248 003
India Telephone: (91 135) 275 9561
Fax: (91 135) 275 5298
Web site: http://www.ongcindia.com

Public Company
Incorporated:
1959
Employees: 41,000
Sales: INR 482.2 billion (2006)
Stock Exchanges: Mumbai
Ticker Symbol: ONGC
NAIC: 211111 Crude Petroleum and Natural Gas Extraction; 211112 Natural Gas Liquid Extraction; 213111 Drilling Oil and Gas Wells; 213112 Support Activities for Oil and Gas Operations

The Oil and Natural Gas Corporation Ltd. (ONGC) operates as India's largest petroleum exploration and production entity and is responsible for over 84 percent of the country's oil and gas production. The company owns and operates over 11,000 kilometers of pipelines in India including 3,200 kilometers of sub-sea pipelines and also has established six billion metric tons of in-place hydrocarbon reserves with over 300 discoveries of oil and gas. The company claims to have cumulatively produced 685 million metric tons of crude and 375 billion cubic meters of natural gas from 115 fields. ONGC is India's most valuable company with market capitalization exceeding INR 1 trillion. In 1994, ONGC became a limited company during a partial deregulation of the Indian oil sector. In 1999, the government sold partial interest in ONGC to Indian Oil Corporation and the Gas Authority of India Ltd. In 2007, the Indian government owned 84.11 percent of ONGC.

EARLY HISTORY

The ONGC and other state-owned oil companies trace their origins back to a 1948 resolution by India's newly independent government. The Industrial Policy Resolution of 1948 specified that all new units in the Indian oil industry would be government-owned, unless specifically authorized.

In December 1955 an Oil and Natural Gas Directorate was set up within the Ministry of Natural Resources and Scientific Research to specialize in exploration. Early in 1956 its status was changed to a commission. In October 1959 the ONGC was made a statutory body by an act of Parliament.

The decision to create ONGC as a state-controlled body and, eventually, to bring most of the rest of the oil industry under government control, was based not just on ideology, but on the need to prevent a drain on foreign exchange and control by a group of foreign-owned oil companies that were predominant in the country. Before independence and immediately afterward foreign companies exercised a powerful control over the production and supply of petroleum substances vital to the country's industrial development.

Prior to independence, it was widely believed that India lacked large-scale commercial deposits of oil and gas. Many of India's needs were supplied by other parts of the British Empire, Persia, the Dutch East Indies, and Russia. Kerosene was the most important petroleum product in a country with few cars. Burma, then an administrative part of India, was known to have significant deposits, which sometimes derived from shallow, hand-dug wells. In 1947 both Burma and Pakistan, the latter with one discovered field, went their own ways.

India was left with only one major producing fieldDigboi, Assamwhich had been discovered in 1890. Despite extensive surveys throughout Assam, no other fields of any significance had been discovered. Digboi and its local refinery had been of profound strategic significance after the fall of Burma in 1942. It had furnished oil to Allied air bases from which supplies were flown to China. It would take several years for India's new leaders to learn the strategic and economic importance of domestic oil supplies.

During World War II, petroleum supplies were regulated by a committee in London, and prices were set in India by a committee chaired by Burmah-Shell. Wartime rationing continued until 1950, and a shortage of oil products continued to be exacerbated by the limited domestic production and refining facilities. Relations with Burmah-Shell and other foreign companies continued to sour after independence in 1947. They advised India against building its own refinery on the grounds that it could only be run at a financial loss. India's vulnerability to the pressures of the international oil market became clear after 1950, when the Iranian political leader Mussadegh nationalized a huge refinery at Abadan that Burmah-Shell had previously used to supply much of India's needs. Iran was in the sterling area, and when this source was cut off, India was forced to use its scarce dollar reserves to buy oil elsewhere.

The foreign companies were then persuaded to build two refineries, but the government remained skeptical about the costs of oil exploration. After the war, the Assam Oil Company, a subsidiary of British-owned Burmah Oil, had resumed exploration with little success. Assam finally achieved a major find at Nakhortiya in 1953, but a disagreement ensued between Burmah and the government. The government refused Burmah any right to refine or market this oil and would only allow the company joint ownership in production. As a result Burmah refused to undertake further exploration. Soon afterward, the government claimed Burmah-Shell and other foreign companies were charging excessive prices for imported oil. A controversy ensued over the companies' refusal to refine imported Soviet oil.

These controversies helped lead to the creation of ONGC. Burmah retained control of Digboi but development in the other Assam fields was taken over by a new company, Oil India Ltd., of which the government owned one-third and Assam Oil held two-thirds. By 1981, the Indian government had acquired 100 percent of Oil India.

EXPLORATION LEADS TO IMPORTANT FINDS

Burmah and Oil India were originally confined to the Assam fields, where ONGC was excluded. After 1956 no new concessions were granted to foreign companies for onshore exploration. ONGC became the principal exploration company in India. A Soviet consultant and several Soviet geophysicists were engaged. At first, exploration and drilling with equipment provided by the Soviet and Romanian governments yielded disappointing results. The Indian financial press criticized ONGC and the government for wasting the taxpayers' money. This attitude began to change after an important find at Cambay, Gujurat, in 1958. A chain of new finds followed.

Soviet and Romanian experts became enthusiastic about India's potential reserves. They estimated that 42 percent of the country's land area was composed of oilyielding sedimentary rock with even more lucrative possibilities offshore. Soviet-supplied exploration and production technology, however, was widely regarded as inferior, and the government looked for other sources of assistance, especially after a 1963 offshore exploration revealed promising structures beneath the Gulf of Cambay.

COMPANY PERSPECTIVES


Our vision is to be a world-class Oil and Gas Company integrated in energy business with dominant Indian leadership and global presence.

In 1959, the government had revised legislation to make it easier for foreign companies to undertake exploration work in some areas without the participation of ONGC. However, the government's preference for agreements in which explorers accepted a majority government stake in the crude-producing company was known. The government launched a campaign to persuade foreign companies to undertake exploration.

The French Institute of Petroleum provided some assistance, and some contracts were given to French and Italian firms. Press reports indicated that Shell, Caltex, Gulf, and Esso were interested, but in the end there were no major deals. There were more lucrative fields elsewhere, with fewer government conditions imposed.

With limited technology and Soviet help, ONGC's progress in developing new wells and in production was slow during the 1960s. The government's inability to attract foreign investment came under frequent criticism. More promising offshore geological structures were found during systematic surveys by the Soviet ship Akademic Arkhangeleisky during the period 196467.

Finally, in 1974, ONGC discovered the major Bombay High offshore field with a strike from the advanced Japanese-built Sagar Samrat drilling platform. The strain on foreign exchange caused by the 1973 Arab oil boycott brought a redoubling of exploration efforts. Further offshore oil and gas was discovered at Godavari, and gas off Portonovo and the Andaman islands, in 1980.

The importance of ONGC's new gas discoveries was underscored by the government's decision in 1984 to set up the separate Gas Authority of India Ltd. (GAIL) to process, market, and distribute all forms of natural gas. After the government acquired the remaining foreign interests of Burmah in the Assam Oil Company in 1981, Oil India Ltd. was given an expanded role as the second public sector undertaking engaged in oil exploration and production. Previously, Oil India had been restricted to eastern areas of the country.

BECOMING SELF-RELIANT

During the 1980s, ONGC sought to help the country achieve self-reliance in oil-related equipment, materials, and services. ONGC tried to speed up this process by working with a consortium of Indian firms that included Hindustan Shipyard Ltd., Burn Standard Company Ltd., Confederation of Engineering Industry, and Larsen & Toubro. The company reported that this progress resulted in the domestic industry supply of over 50 percent of the oil industry's equipment and materials requirements.

In its early days, ONGC experienced difficulties in obtaining up-to-date petroleum technology. It assigned a high priority to research and technology, which the company stated were on a level with that used in explorations anywhere in the world. ONGC's research efforts dated back to the founding of its Kashava Malaviya Institute of Petroleum Exploration in Dehra Dun in 1963. The Malaviya Institute was responsible for applied research in petroleum geology, geophysics, and well logging techniques. ONGC had six other research bodies. ONGC's policy was to run these institutes as profit centers.

Exploration efforts were expanded to many new areas at this time, including Krishna-Godavari, Cauvery, Tripura, Cachar, Dhansiri Valley, and Ravasan. The number of active rigs grew from 41 in 1981 to 144 in 1990. Future plans included the Ganges Valley, Himalayan foothills, Bengal, Kerala, and Konikan. Offshore, the firm's deepwater unit was formed to function as the central agency for planning, programming, and implementing exploration in deep water along India's coasts.

KEY DATES


1948:
The Industrial Policy Resolution specifies that all new units in the Indian oil industry will be government-owned, unless specifically authorized.
1955:
An Oil and Natural Gas Directorate is set up within the Ministry of Natural Resources and Scientific Research to specialize in exploration.
1956:
The directorate's status is changed to a commission.
1959:
The ONGC is made a statutory body by an act of parliament.
1974:
ONGC discovers the major Bombay High offshore field with a strike from the advanced Japanese-built Sagar Samrat drilling platform.
1984:
The government sets up the separate Gas Authority of India Ltd. (GAIL) to process, market, and distribute all forms of natural gas.
1994:
ONGC is reorganized as a limited company.
1999:
ONGC, Indian Oil Corporation, and GAIL buy shares of each other's stock; government ownership in ONGC falls to 84.11 percent.
2004:
The company sells 10 percent of its equity in a public offering.

As the government's agency, ONGC presided over an increasingly liberalized policy of encouraging foreign oil companies to explore offshore and they responded with increasing interest. In 1987, the Indian government invited foreign oil companies to bid for 27 offshore exploration blocks in the third round of initiatives to encourage foreign investment in India's offshore industry. This effort was made more successful than the previous rounds in which many companies refused to participate because they alleged that the government had reserved the most favorable sites for ONGC and Oil India. Twelve bids for nine blocks covering a total of 121,000 square kilometers were received from seven companies. Chevron, Texaco, Broken Hill Proprietary of Australia, and International Petroleum of Canada eventually signed deals allowing them to put 40 percent equity in a joint venture or to pull out if seismic data were not promising. In 1990, the government announced plans for a fourth round. Private Indian companies would be allowed to acquire concessions for the first time, but there were no immediate plans to privatize ONGC itself. In 1989 ONGC signed a joint exploration agreement in the Gulf of Thailand, signed drilling contracts with National Iraqi Oil Company, and raised money in the Tokyo and Swiss bond markets.

In 198182, the ONGC redefined its goals and objectives and prepared a corporate plan spanning the 20 years from 1985 to 2005 (this plan has since been updated to 2015). The emphasis was on accelerated exploration and production strategies. Growth from 1990 production levels of about 30 million metric tons of crude oil to 2015 production levels of 75 million metric tons was anticipated.

Over the 1980s and early 1990s, ONGC showed steady growth in crude oil and gas production, rig counts, profits, and contributions to India's treasury. India hoped to achieve self-sufficiency in fuel by the year 2005. As the company most active in the western offshore, India's most important oil and gas area, ONGC was essential to this task.

LIBERALIZATION: 1994 AND BEYOND

The process of liberalization, or deregulation, continued into the 1990s. In fact, during 1991, the Indian government adopted a new economic policy that partially deregulated the oil sector in the country. As such, ONGC was reorganized as a limited company in 1994 and shifted from a commission to the Oil & Natural Gas Corporation Ltd.

The government hoped the changes would bring foreign investment into the country and expand its oil production. Deregulation proved to be a slow process, however, and by the late 1990s India had not fully deregulated any of its state-owned companies. By 1999, the country was operating with a $22 billion budget deficit. During that year, it sold 10 percent of its interest in ONGC to Indian Oil Corporation and 2.5 percent to the Gas Authority of India Ltd. The cross-holding agreement between the Indian companies added $1.23 billion to the state treasury and reduced government ownership of ONGC to 84.11 percent.

As ONCG entered the new millennium, the company was intent on securing its position as an integrated energy multinational company. It also focused heavily on securing energy reserves across the globe. A May 2005 Asian Wall Street Journal article explained India's position. "India's annual crude-oil output has leveled off at about 34 million metric tons, less than one-third of the country's consumption. The bill for imported crude oil in the latest financial year ended March 31 was $29 billion, according to government officials, up 43 percent from the previous year." The article went on to report, "If that trend continues India will be more than 90 percent dependent on imported oil by 2030, according the Paris-based International Energy Agency."

As such, the company's ONGC Videsh Ltd. (OVL) subsidiary was tapped to acquire lucrative properties abroad. Overall, OVL had secured 15 properties in Vietnam, Russia, Sudan, Iraq, Iran, Libya, Syria, Myanmar, Australia, and the Ivory Coast. Gas production began in Vietnam in January 2003. The company also invested $1.77 billion in Russia's Sakhalin offshore field. It purchased a 25 percent stake in the Greater Nile Oil Project in Sudan. Over three million metric tons of crude oil was imported into India for refining as a result of ONGC's involvement in the project. The company also gained access to explore Egypt and signed a partnership with Brazil's Petrobras to swap interests in offshore blocks in India and Brazil.

ONGC was busy on the domestic front as well. In 2005, the company announced the first deepwater production in India from two fields in the Krishna Godavari basin. While the future of India's oil and gas sector remained subject to additional deregulation, ONGC appeared to be well positioned for future growth. In 2003, it became the first and only Indian company to secure a net profit exceeding INR 10 billion. The company offered 10 percent of its equity in March 2004 in one of India's largest public offerings. Despite a devastating fire in 2005 that destroyed one of the company's platforms and a ship, and even with drillings for new reserves stalled, ONGC remained India's most profitable company in 2006, buoyed by ever-increasing oil prices globally. ONGC also laid claim to many industry awards including being named Asia's Best Oil & Gas Company by Global Finance magazine. The company has been recognized as India's Most Valuable Corporation based on market capitalization, net worth, and net profits on multiple occasions by the Economic Times, Business Today, and Business Week.

Clark Siewert

Updated, Christina Stansell Weaver

PRINCIPAL SUBSIDIARIES

ONGC Videsh Ltd.; Mangalore Refinery & Petrochemicals Ltd. (MRPL) (71.62%).

PRINCIPAL COMPETITORS

Exxon Mobil Corporation; Royal Dutch Shell plc; TOTAL S.A.

FURTHER READING

Dasgupta, Bipab, The Petroleum Industry in India, London: Frank Cass & Company, 1971.

Hari, Vandana, "ONGC Set to Bring on India's First Deep Output," Platts Oilgram News, September 7, 2005.

"India Considers Privatization of Petroleum Sector," Platts Oilgram News, October 15, 1991.

"India Revamps Hydrocarbons Industry," Platts Oilgram News, July 7, 1992.

"India's Petroleum Privatization Gathering Speed," Oil and Gas Journal, March 14, 1994.

Kripalani, Manjeet, "So Much for Privatization," Business Week, March 1, 1999.

Larkin, John, "India Casts ONGC in Major Role," Asian Wall Street Journal, May 19, 2005, p. A3.

Lingam, Shiva, "Indian ONGC, Brazil's Petrobras to Swap Stakes," Platts Oilgram News, June 5, 2007.

"ONGC Still Most Profitable Co.," Economic Times (New Delhi), April 17, 2006.

"ONGC to Be India's Biggest IPO Ever," Times of India, February 25, 2004.

Paul, Cuckoo, "ONGC Dreams Big, but Setbacks Galore," Economic Times (New Delhi), July 30, 3005.

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