The Oil and Natural Gas Corporation Limited (ONGC) was the largest oil exploration and production

(E&P) company in India. The company enjoyed a dominant position in the country's hydrocarbon sector
with 84 per cent market share of crude oil & gas production. Around 57 per cent petroleum exploration
licenses in India for over 588 thousand sq. km belonged to ONGC.

Vertical Integration

Industry experts felt that ONGC new strategy was essential. They felt that there was a pricing cycle for
crude, (Refer Exhibit. I for world oil prices for three decades) gas, refinery margin, marketing margin,
petrochemical margin and that international prices operated on different cycles in each case.

This meant that confining to one sector, whether upstream or downstream or petrochemicals would
make any organization vulnerable to the ups and downs of a particular cycle. The integration of these
activities would ensure profitable operation across a number of cycles and financial stability.

The Deregulation

The GoI deregulated the Indian oil industry with effect from April 01, 2002, by doing away with APM. This
meant that domestic oil companies could take independent decisions based on import parity and market
forces in pricing petroleum products.

It also meant that oil PSUs would lose state protection and would have to face the global competitive
business environment. Industry experts felt that deregulation would give an edge to domestic PSUs in
marketing their products due to their strong investment base, superior infrastructure and extended
distribution network. They felt that dismantling APM would also result in increased profitability for oil
companies. As expected, the dismantling of APM benefited ONGC significantly. For the fiscal year 2002-
03, ONGC reported a 70 per cent jump in net profits to Rs. 105.293 bn as opposed to Rs. 61.979 bn in
the previous year. ONGC's revenues increased from Rs. 225.142 bn in 2001-02 to Rs. 342.773 bn in
2002-03, an increase of 53.4 per cent...
Equity Oil and Gas Abroad:

ONGC Videsh Limited (OVL) In addition to efforts to accelerate domestic E&P, another idea has gathered
significant traction within ONGC: obtaining equity oil abroad. The government also believes that oil
production owned by Indian companies, whether at home or abroad, enhances energy security by
securing supply.34 Leading this quest for oversees assets is ONGC Videsh Limited (OVL), the overseas
arm of ONGC. OVL aims to tieup 60 MMPTA (1.2 mbd) oil and gas production overseas by 2025. As of
31st March 2007, OVLs assets had grown to about $4.5 billionmostly in loans from its parent
company, stateowned ONGCfrom virtually nothing in 2001. By March 2008 OVL had 38 projects in 18
countries, giving it a proven reserve base of 194.6 MMT (95.7 MMT oil and 98.9 MMT oilequivalent gas)
and an annual o+oeg production of 8.8 MMT (Figure 1).35
Finances

Until April 2002 prices of crude oil and petroleum products in India were determined as a weighted
average of international prices and the domestic cost of production. But, in line with the HSPs objective
of moving towards marketdetermined prices, since April 2002 the GoI has linked the price of crude oil
to international prices. That has been a big boost for ONGCs finances. Like other oil companies with an
established production base, high oil prices in the international markets since 2002 have sent ONGCs
revenues and profits soaring (Figures 11 and 12).

http://docs.manupatra.in/newsline/articles/Upload/2120F465-A250-
4A63-9C31-A6DC62F814A7.pdf

ENTERPRISE RISK MANAGEMENT

In line with the requirements of Clause 49 of Equity Listing Agreement and DPE Guidelines on
Corporate Governance, ONGC Videsh had rolled out Enterprise Risk Management (ERM) System in
2012, which was further aligned with ISO 31000:2009, which is globally recognized Standard on Risk
Management.

Risks have been mapped along with their causes and mitigating factors, which are monitored on
periodic basis. The risk reporting structure is in place.

ONGC is a government owned enterprise and is one of the largest one. Though ONGC faces competition from other
oil companies like Bharat Petroleum, Hindustan Petroleum, Reliance Industries Limited and Indian Oil Corporation
Limited; yet it prices it products in controlled levels making a fixed amount of profits from them. The price of the
crude oil also depends on the international price of the crude oil which India depends upon and imports heavily. The
price of crude oil currently hovers around $50 per barrel. In lieu with governments policies towards making
households run on eco-friendly fuels, ONGC prices natural gas at very cheap prices. These are primarily purchased
by household suppliers and gas stations. LPG which is extensively used in household for cooking is priced at 600
per cylinder. Price of kerosene oil is highly subsidised by the central government as it is widely used as cooking oil
in rural areas. In such a case price of Kerosene oil typically hovers around 15 per litre. This gives an overview on
the pricing policies in its marketing mix. ONGC Videsh is faced with increasing challenges to add reserves at
competitive cost and grow production, and is exposed to geological, technology and execution risks that
are inherent in E&P activities. Moreover, it is exposed to significant geopolitical risks because of its
presence in some countries with a history of political instability and commodity price risk. softening of
international crude oil prices have adversely impacted the revenues and cash accruals of ONGC Videsh
given that the company derives more than 70% of its revenues for the sale of crude oil.

The financial risk profile of ONGC is also favourable even on a consolidated basis (including the debt of
ONGC Videsh and MRPL), with the gearing of the group at around 0.30 time as on March 31, 2015. The
company also enjoys significant financial flexibility on the strength of its large liquid investments
(estimated at Rs. 27,811 crore as on March 31, 2015 including the market value of its investments in IOC
and GAIL of around Rs 14,700 crore) and its superior standing among lenders and equity investors.
These strengths are partially offset by the regulatory risks governing subsidy sharing and control on gas
prices; risks inherent in the overseas expansion strategy and risks associated with large capex plans.

ONGC is gradually losing whatever domestic competitive advantage it had enjoyed during a
half-century of socialist protectionism practiced by the governments of the post-
independence era.
Even as governmental controls over the petroleum sector are being progressively
dismantled, the giant state-owned company is accelerating its strategy of international
investment in exploration and production. The aim is to join the diminishing ranks of
multinational majors-among them the (also shrinking) number of state-owned firms-that
seek to gain a competitive edge in an increasingly competitive global petroleum industry.
A decade ago, the Indian state company set up an international upstream arm, ONGC
Videsh, to compete in the E&P sector abroad. But, until recently, its successes were
virtually nonexistent (OGJ, Aug. 10, 1998, p. 24). It currently has exploration assets in
Algeria, Australia, and Sudan, and has undertaken upstream projects in Nigeria, Tunisia,
Egypt, Yemen, and the North Sea.

While ONGC is India's biggest oil and gas producer, it has no refineries; IOC has no
upstream operations but is India's largest refiner, with about half the nation's crude
distillation capacity, and is the nation's principal exporter and importer of petroleum
products. Thus the equity swap and subsequent joint venture offer the synergy of an
integrated major.

Bora contends that the current oil price climate is ideal to acquire oil fields and drilling rigs
abroad: "We can turn the current recessionary conditions to our advantage by acquiring oil
properties abroad. There are several good properties lying (shut-in) because the returns
from current oil prices would not even meet operational costs." He reckons that a great
many shut-in and undeveloped oil field properties are available at a cost of $5-6/bbl or less.
After factoring in operating costs, he estimates total net costs at less than $10/bbl.

The factors which influence the competition in the market are the governmental policies, its regulations,
functions of regulatory authorities, governments control on price mechanism etc. The market risks
originate from oil prices pushing-up inflation and adversely impacting economic growth.

ONGC Videsh Ltd, the wholly-owned subsidiary of ONGC, has come a long way since the year
2000, when it had only one oil and gas acreage, in Vietnam. Since 2000, the company has invested
$13 billion and has interests in 33 projects in 15 countries. At a time when global upstream mergers
and acquisition transaction value achieved an all-time record of $ 200 billion in 2010, companies
such as ONGC Videsh Ltd have been expanding their reach into new regions to get resources to fuel
their growing economies.

For 2010-11, ONGC Videsh Ltd's consolidated profit was up 28.76 per cent at Rs. 2,691 crore and
gross revenue at Rs. 18,683 crore, up 21 per cent. Mr D. K. Sarraf, Managing Director, ONGC
Videsh Ltd, talks to Business Line on the company's strategy for acquiring assets and ways to
mitigate risks.
http://www.thehindubusinessline.com/opinion/comparison-with-china-not-fair/article2612330.ece

The above approach relies entirely on the stated book value of the share. And book
values can be inaccurate because they do not always reflect the true networth of a
company. This can be attributed to use of different accounting methods for items like
depreciation, which can significantly affect the book value.

Oil exploration companies like ONGC offer a unique problem of valuation due to their
large value based on oil reserves. There is also a large uncertainty in many of the
assumptions, such as value and quality of their reserves. So, unless and until this data is
taken into account, a comprehensive analysis of oil stocks cannot be done.

Other oil and gas specific metrics includes valuation based on barrel of oil produced per
day, etc.

The above book value based approach does not give any weightage to the management
team (appointed by Govt. of India in this case). Experience is crucial and ONGC has
loads of it. But with ageing oilfields and increasing complexity of newer projects like ones
taken up by ONGC Videsh (& its Imperial Energy fiasco), this aspect should be given its
due importance.

Another issue with this approach is that it does not evaluate alternatives available within
the sector. For example, there are other explorers like Oil India Limited and Cairn (India),
which sometimes offer higher growth potential due to better reserve quality.

Its common knowledge that most of ONGCs oil fields are ageing and in no position to
increase their output. Such questions on future growth potential, in wake of lack of new oil
finds, can also be attributed to lower P/BV multiple being assigned to this stock in last
year and a half.
State-owned Oil and Natural Gas Corporation (ONGC) has sought a review of the natural gas pricing
formula as rates have dropped below cost.
India's largest natural gas producer demanded a floor or minimum price of natural gas be fixed at $4.2 per
million British thermal unit (mBtu) for the business to make economic sense.
The BJP-led government in October 2014 had evolved a new pricing formula using rates prevalent in gas
surplus nations such as the US, Canada and Russia to determine the rates for the country.
Prices have halved to $2.5 per mBtu since the formula was implemented.
"Keeping in view of cost of production of gas, cost of alternate fuels and other market dynamics, the ministry
of petroleum and natural gas is requested to review the existing domestic gas price formula and provide a
floor price at least to the level of earlier APM (regulated) price ($4.20 per mBtu)/non-APM price ($4.20 to
$5.25 per mbtu) fixed in June 2010," ONGC said in a letter to the oil ministry.
The public sector upstream oil behemoth also pitched for the deregulation of prices so that they are
determined by market forces. ONGC said several gas discoveries which were unviable at current prices
would become viable if prices are increased.
Natural gas price in the country is likely to be hiked 8 per cent to $2.7 per mBtu from April 1 following a spike
in prices in the global gas hubs. This would be the first increase in price since the hub-based formula was
approved in 2014.
Sources said the price of natural gas, used for generating power and making fertiliser and petrochemicals as
well as CNG (compressed natural gas) for automobiles, is likely to rise to $2.7 per mBtu for the period from
April 1, 2017 to September 30, 2017 from the current $2.5 per mBtu.
Licence extension
 The cabinet today approved a policy to grant extension to licences of oil and gas fields like that of Cairn
India on the payment of an additional 10 per cent profit share.
The policy covers blocks such as the Rajasthan oilfields of Cairn India, which were awarded prior to advent
of New Exploration Licensing Policy (NELP) in 1999.
Cairn's exploration license expires in 2019 and the company had been seeking a 10-year extension. That
extension will now come following the cabinet approving the policy but the company will have to pay an
additional 10 per cent profit petroleum during the extended life of the contract.

http://petroleum.nic.in/sites/default/files/Report1.pdf

http://www.ogj.com/articles/print/volume-97/issue-17/in-this-issue/general-interest/india39s-ongc-
accelerates-global-investment-strategy-as-competition-heats-up-at-home.html

http://www.mydigitalfc.com/my-world/pricing-freedom-ongc-small-fields-pipeline

https://numadic.com/blog/3-supply-chain-lessons-from-the-ongc-hpcl-acquisition/

http://www.livemint.com/Industry/97cZVS4IgTnbz54a71GeXL/Govt-allows-pricing-marketing-freedom-
to-CBM-gas-companies.html

https://spontaneousorder.in/a-guide-to-petrol-pricing-in-india-components-mechanisms-and-daily-
price-change-a84fb67f23dd

The Global E&P industry is going through one of its most transformative and critical phases. We are
witnessing one of the longest downturns in oil price history, with the prices reaching a bottom of about
USD 26/ bbl in January 2016, a level that has not been seen since September 2003, only to recover to
fluctuate at around USD 45/ bbl at present. Considering that this price decline started in Mid-2014, this
downturn has lingered longer than the crash of 1998 brought about by the Asian Financial crisis, the last
oil price decline in recent history which persisted for more than a year. Analytical evidence points
towards a fundamental demand-supply mismatch behind the present extended downturn.

Governments across the major oil producing countries are also struggling from the adverse impact on
their fiscal performance. Oil revenues have shrunk and it is hard for governments mainly reliant on oil
revenue to manage with a smaller slice of whats left. Companies continue to make efforts for seeking
more lenient fiscal terms from host governments, but success has been slow and limited. Governments
now face stiff competition when launching exploration licensing rounds. Many of the governments are
deferring their license rounds considering the current bleak industry scenario.

Gas prices also suffered significantly during the period. Price at Henry Hub has dropped from about USD
4.9/ MMbtu in March 2014 to about USD 1.73/ MMbtu in March 2016 and USD 2.79/ MMbtu on 2nd
August, 2016. Several LNG projects were envisaged in oil price scenario of USD 100/bbl. These projects
are facing severe challenges, with some investors delaying their FIDs, while others are recalibrating their
project plans in face of lower prices to preserve liquidity. A forward looking outlook is that the worst is
over and the things should move in positive direction. Already there are signs of decline in production
from US shale plays and analysists at IHS suggest third quarter seasonal demand strength will push
world liquids demand above supply for the first time since 2013. The industry is witnessingsome of the
largest cutbacks in investments and capital expenditure deferrals. According to Wood Mackenzie, the
industry will cut spending by USD 1 trillion through 2020. It further projects that the market will see 5
million barrels of oil equivalent per day (mboe/d) less this year, compared to expectations before the
collapse of oil prices. And next year, the industry will produce 6 mboe/d less than it otherwise would
have had the spending cuts not been made. Continued output declines of price-sensitive barrels
especially tight oil are critical to recovery of the market. It may however be stated that with numerous
factors determining the medium to long term price outlook, the situation is still not clear to take a
definitive call of future trajectory of oil prices.

ONGC Videsh has produced about 166 thousand barrels of oil and oil equivalent gas per day during
FY16 and has total oil and gas (2P) reserves of about 596.132 MMtoe as on 31st March 2016. During
FY16, there has been a marginal increase in oil and gas production by 0.47% (Oil 0.42% less and Gas
1.95% gain) as compared to previous fiscal year FY15.

ONGC Videshs share in production of oil and oil equivalent gas (O+OEG), together with its wholly-
owned subsidiaries, ONGC Nile Ganga B.V., ONGC Amazon Alaknanda Limited, Imperial Energy Limited
and Carabobo One AB, was 8.916 MMtoe during FY16 as compared to 8.874 MMtoe during FY15. The
overall gas production slightly increased from 3.341 BCM during FY15 to 3.406 BCM during FY16 (1.95%
higher) and oil production was 5.510 MMt during FY16 as compared to oil production of 5.533 MMt
during FY15. During FY16, the Company has incurred loss of `2,094 crore as compared to a net profit of
`1,904 crore in the previous year. The decrease in profit is mainly on account of lower crude oil prices
and impairment provisions in three of its assets due to lower oil prices. However, excluding exceptional
item pertaining to impairment provision of `3,047 crore, your Company earned a profit befor
exceptional items & tax of `1,872 crore in FY16 as against `3,067 crore in the previous year.