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Interview

with AK Hazarika, Chairman & Managing Director, ONGC

26.04.2011 / Energyboardroom

You became Chairman & Managing Director of ONGC in February this year. What did you see as your mission when you arrived into the position, and what were your immediate priorities?

I joined ONGC in 1976 as a graduate engineer and have stayed with the company since then. I have seen the company grow, and borne witness to the changes in the industry in this period. In February 2011, I took on the role of Chairman & Managing Director, whilst continuing my roles as the Director of Onshore for ONGC. Today in addition to my responsibility of the CMD, I am also holding the portfolio of Director of Human Resource, as well as my original portfolio of Director-Onshore.

ONGC is a growing company, and is today is the number one E&P company in the world (as per Platts). After taking charge, my first priority was to focus on the company’s performance. I wanted ONGC to continue performing as well as it has done in the past. One of the major challenges presently facing ONGC is that the production in our mature fields is declining. This is a challenge to be faced by every major oil company around the world at some point, and ONGC is no different. Onshore, the majority of the company’s fields are between 30 and 50 years old. In shallow waters, most of our fields have been producing for 30 years. Around the world, oil fields of this level of maturity are declining at a rate of 5-6% per annum. If we exclude OPEC and FSU countries, this rate is between 8-9%. However, ONGC’s Indian fields are not declining along similar lines; our decline rate is quite less, about 2% only. In recent years, we have not been lucky enough to have major exploration success onshore or in shallow water, but we are optimistic about our deepwater discoveries. However, monetizing these assets takes time.

The focus therefore is on how to improve the production from existing levels and how to reduce the decline from producing fields. We are trying to implement technology that will enhance ONGC’s current oil recovery rates. From existing fields we are trying to produce as much as possible, and trying to maintain decline at a rate of 1-2%. But my focus is how to keep the decline at the bare minimum. This is presently happening, and I am happy to say that all 32,000 plus employees of this organisation are committed and dedicated to maintaining production from mature fields.

At the same time, ONGC is investigating the viability of its marginal field assets, which historically were not viable production assets; but today, due to improved oil and gas pricing, some of the marginal fields we have in our portfolio are viable. So we are capitalizing on this and working to convert them into producing assets. Through this, I believe that by 2013/14, our net oil production will start to grow once again. By that time, we are expecting that discoveries made in deepwater areas off India’s east coast will have been put together in a way that will make them a big source of growth for ONGC.

With 7.3 billion metric tons of in place reserves, is it hard to balance the challenge of increasing efficiency of producing assets with increasing the company’s reserve replacement ratio?

ONGC an E&P company at its core, and for the last few years, its reserve replacement ratio has been above 1. But those accrued reserves are in difficult areas, and are mainly deepwater assets. The gestation period for moving deepwater assets from discovery to assessment and then to production normally takes a long time, so whilst we look at the viability of those assets for the long-term we have to look at other measures to address these issues.

In 2002 the company set itself the target of doubling in place domestic reserves from 6 billion tons to 12 billion by 2020. Today the figure is at 7.3 billion tons of oil equivalent, but there is still a long way to go in order to achieve our objective. Hopefully, a few big discoveries will narrow the gap, but at the same time, the priority has to be converting these blocks into producing assets. As part of our strategy, ONGC has decided that 4 billion tons of this new 6 billion in-place reserves will come from deepwater blocks. This will be highly challenging and capital intensive work. We are currently in the appraisal stage of developing these assets, and soon we will have a better idea of how to approach them in order to make them as cost-efficient as possible. Currently the most viable strategy seems to be putting these assets together into clusters, some gained from the NELP rounds and some pre-NELP, in order to make production more economically viable. We are also looking to adopt the same clustering strategy in order to monetize some of our onshore marginal fields. In this way, I believe that ONGC will be able to sustain its production levels, if not grow them.

What role will the company’s international assets play in the future?

Our focus is also on sourcing equity oil from outside India to meet the country’s rising energy demands. That is why we created our subsidiary company, ONGC Videsh Ltd (OVL), whose sole purpose is to look for oil internationally. In this regard, another strategy, set by the company in 2002 is to source 20 million tons of oil equivalent per year into the country by 2020, through OVL. Today, OVL is a good growth vehicle for the company, and now has 34 properties in 15 countries. OVL has 9 producing assets where it has equity oil, and year on year the company is producing an increasing amount of equity oil. This year it has reached 9.4 million tons of oil equivalent, whereas last year, in 2009, it was 8.87 million tons.

India is a country with a huge energy deficit. It has the second highest GDP growth rate in the world, and as a developing nation, a lot of energy is required. Importing over 75% of its oil requirement, India needs to make sure that it has access to the best E&P opportunities around the world. OVL is endeavouring to make this a reality for the country.

What are advantages to having OVL as a separate entity?

As you mentioned, OVL is separated from ONGC in a number of ways: the Board is completely independent, with a separate decision making capability. Their capital authority is currently set low, at $75 million USD, but improving this is an issue that is currently being discussed. But at the end of the day, OVL is still 100% owned by ONGC. But by creating a dedicated management team and executive board, the company is able to work more effectively on its separately identified mandate, not worrying about domestic oil and gas issues and only concentrating on international markets. This not only helps the company; it helps the country.

In which markets is OVL currently focused?

We have got a very good project in Sudan, and another good project in Sakhalin, Russia, as well as projects in Vietnam and Brazil. After partnering with these countries, NOCs have since come to India to partner with ONGC on domestic blocks.

One of the major focuses of OVL’s current work is heavy oil projects in Venezuela. The potential in these areas is huge, and once viability is established, production can be sustained for a long period. Today, OVL has two projects in Venezuela; San Cristobal, where from we are already getting equity oil, and the second project is Carabobo, which will be producing by 2014 or 2015. In this block we hold 11% equity alongside our other Indian PSU partners: Oil India has a 3.5% stake and IOCL has a 3.5% stake. OVL is currently eyeing similar opportunities in Canada, where heavy oil and oil sands look very promising.

Everywhere we have worked abroad, we have been well accepted by the partnering companies. We are very open. Our way of conducting business in an ethical and transparent manner has increased the credibility of other Indian companies as well.

After working abroad on so many technically demanding projects, is it easy to bring this experience back to India, and what is your progress in your new Shale gas venture?

International exposure of our employees through OVL is certainly a rewarding experience, particularly in terms of technology. As we have a rotation policy of manpower in ONGC and OVL, the expertise and exposure of people get well mixed up and benefits the oil and gas industry in overall perspectives. As such, in the technological side of business development, ONGC faces no problems, thanks to an open and competitive Indian service market for the oil and gas industry. Every technology we need here is currently available in the market through competitive bidding processes. Proven, cutting edge technology that is available around the world is also available in India, from drilling to seismic, or whatever is required.

In its latest India shale gas venture, ONGC has engaged Schlumberger, one of the largest service companies in India, and one of the most technically competent companies in the field of shale gas. We engaged them for a pilot shale gas project. The first well was drilled in West Bengal. After hydrofracking, gas was produced from the well confirming for the first time that the Indian shale also contains gas. We will have to drill a certain number of wells in different areas, where shale is available but where the potential of shale gas has yet to be established.

PSUs are mainly funded through their own internal resources, but with so much expansion and so many big projects coming up for ONGC, will your financing continue to be based on this very conservative model, or will you look to debt markets and other options to finance the growth of the company in the future?

Today, ONGC is a debt free company. For the E&P business, ONGC is not looking for any debt arrangements from the outside market as of now. We have enough cash for our own exploration and production business. However, when we eventually look to develop our deepwater projects, and begin to look for partners, we may have to take a call on project financing. At this stage, it is not something we are looking into.

Moreover, we are currently pursuing a number of integrated downstream projects. This will involve huge investment in relatively new sectors for ONGC, from petrochemicals to power. In these downstream projects, we are tying up debt from the market.

Once, the PSUs in India had very defined role. Today, we see many overlaps between the activities and priorities and the strategies of the PSUs. Given this, how do you define the role of ONGC today?

ONGC has an important role to play in India’s energy development. Today, ONGC contributes about 70% of domestic oil production for of the country. In gas, Reliance Industries has taken a large share of the market after the commencement of production from KG-D6, but still ONGC and ONGC’s share of its joint ventures accounts for almost 50% of India’s domestic gas production. OVL is also contributing around 20% of India’s total oil production. In India’s oil and gas industry, ONGC’s role will always remain important.

Other PSUs are now entering the upstream business, both domestically and internationally. They are getting good support from ONGC. For example, by taking Oil India and Indian Oil to Venezuela with us on our Carabobo project as stakeholders. There have also been some successes with other PSUs, such as BPCL’s gas acquisition in Mozambique.

Knowledge is ONGC’s greatest strength. Over the years, we have created a huge pool of talent, which has gone on to help build the Indian oil and gas business as it stands today, by working with both public and private sector companies. One challenge that the company needs to address is making sure that it does not lose too many of its most experienced and valuable employees. It takes a lot of time to build up knowledge, and as a government company we often cannot compete with the salaries of private sector players keen to bring in the best and the brightest that India has to offer.

India’s biggest energy challenge is fuelling the growth of the country through domestic production and imports. As a provider of both of these through its operations, what do you see as the greatest challenges currently facing ONGC?

The rapid growth of the economy has widened the gap between supply and demand of energy. With the spiralling oil prices, our energy import bill is increasing rapidly. And in order to solve this problem, we are focusing domestically as well as internationally, searching for the best places to find oil and gas.

In our international ventures we have been fully supported by the government of India, as many of these deals need to be negotiated at the diplomatic level.

One thing that has helped in our international dealings has been our reputation of transparency in doing business, which has also been recently recognized by Transparency International in its Promoting Revenue Transparency 2011 report.

Due to the internal rules governing PSUs, you can only remain as CMD for a certain amount of time. How would you like your time in the position to be remembered?

I do not know how long I will remain as Chairman, but whatever I achieve during my time, I would like to be remembered as a man of action, a Chairman who strongly focused on the priorities related to performance of the company, and took steps to helping ONGC achieve what it wants and deserves.

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