The deal signed by Reliance Industries and BP recently poses a long-term threat to ONGC?s dominance in the oil and gas exploration sector. The state-owned company must come out with credible counter moves if it has to maintain its share in domestic oil and natural gas production. ONGC accounts for 74% and 49% of the domestic production of crude oil and natural gas, respectively.
BP has recently agreed to buy 30% stake in RIL?s 23 acreages in India for $9.2 billion. The international oil major can provide a technological and financial edge to RIL?s domestic exploration progamme.
But rather than let itself be unnerved by RIL?s master stroke, the company should see this as an opportunity to get its act together. Luckily for ONGC, it has enough time to plan and execute its moves as the RIL-BP deal will take at least 2-3 years to get fully operationalised, according to industry experts.
ONGC holds the highest mining and petroleum exploration leases. But because of its slow pace of exploration and development work, it is unable to step up production. For example, the company is constrained by technological expertise expediting development work in its discovered blocks in the KG basins. It had persuaded Brazil?s Petrobras and Norway?s StatOil to partner in development of the discovered KG basins. But both quit due to delay in approval. Now ONGC is back to square one.
ONGC must find a partner on whose technological prowess it could bank on in deep and ultra deep water exploration. International oil majors such as Exxonmobil, Shell, Chevron and ENI.
The company is already in talks with ExxonMobil and ENI to seek their help in the development of KG blocks. But ONGC would be better advised to rope in one of these companies in an overarching deal rather than take a piecemeal approach in strategic collaboration. A strategic tie-up with international oil major would also help it optimise its production costs.
ONGC can also leverage the RIL-BP deal to re-negotiate more favourable financial terms with the government. It is bearing royalty and cess on behalf of its partners in several pre-Nelp blocks. Besides, it is also sharing under-recoveries of public sector oil marketing companies (OMCs). It paid out over Rs 12,000 crore in price discounts to OMCs as its share in petroleum subsidy burden for the April-December 2010 period. ONGC can also leverage the RIL-BP deal to persuade the government to reduce its financial burden.
ONGC can also negotiate with the government to deregulate natural gas prices. Significantly, the share of natural gas reserves has increased in ONGC?s portfolio in recent years. The company had benefited from the revision of APM gas prices. If the government decontrols pricing of natural gas, it would lead to a commensurate increase in ONGC?s potential and current revenue from the green fuel.
That would in turn help ONGC aggressively pursue its exploration programme. In recent years, ONGC has taken initiatives to diversify into downstream businesses like refining and petrochemicals. The move was apparently prompted by its experience of the oil market in the wake of the Asian financial crisis of 1998.
Oil prices had then touched the $8 per barrel. However, the underlying trend in long term oil prices seems to have radically changed since then. Oil prices did not fall below $30 a barrel following the market crash in 2008.
And the way the world oil bounced back later indicates a radical change in the demand-supply dynamics.
Owing to the tie-up with BP, RIL is better positioned to benefit from the new trend in the oil market. ONGC needs to move fast. Otherwise, it could miss the bus.