P Elango, who spearheaded Cairn India and made it touch a peak output of 2,00,000 barrels per day (bpd) at India’s biggest onshore block—Barmer in Rajasthan—left the Vedanta Group company in late 2014. In February this year, the 54-year-old took up a challenging assignment to turn around Hindustan Oil Exploration Company (HOEC).
Incorporated in 1983 and backed by Rome-based ENI, the firm has stakes in both onshore and offshore assets. Until now a small player in the hydrocarbons sector, Elango—as the managing director—and his team are drawing a new beginning for the firm. He discusses his turnaround plan and the road ahead for the private explorer, in an interview with Siddhartha P Saikia. Excerpts:
You made the fields in Barmer touch peak output. Do you expect a similar turnaround for HOEC?
The steep decline in gas production from HOEC’s flagship PY-1 field led to erosion in value and management uncertainty. I joined the board of HOEC along with R Jeevanandam—the CFO—in February. Our strategy is to focus on onshore assets in Assam and Gujarat, build a strong geo-technical team to revive the offshore assets when the price cycle turns, and then look at investment opportunity in the growing gas and value extension market in India.
And later in the Asia-Pacific region. Our mission is to transform HOEC through talent and technology.
The government has approved the field development plan (FDP) for your block in Assam. How do you plan to develop it?
Our focus on the Assam asset helped us cross the first milestone of securing management committee approval of the FDP last month. The field is estimated to hold 130 billion cubic feet (bcf) of recoverable gas reserves and can sustain a daily gas production rate of 20 mmscfd for 15 years. Fortunately, the field is located close to the well-known Digboi oil & gas field. Oil India, which is our JV partner, has a wide network of pipelines; this provides us ready access to a market that has substantial unmet gas demand.
When do you target to commence production and how much would you spend?
The Dirok gas development project is fairly simple. We already have three wells drilled that require to be completed and tested. We will also be drilling one or two new wells and will set up a gas-processing installation away from eco-sensitive zones by laying the required pipelines. The total investment in this development project would be about R500 crore. The project execution is being mentored by my former colleague in Cairn, SV Nair, who was the project director for Mangala oilfield development in Rajasthan. We are determined to complete the project within 12-18 months from the date of receipt of environment and other statutory clearances. Everyone in HOEC is working as a team to achieve our goal of delivering the first gas by the end of 2016-17.
How do you plan to market the gas?
The government is likely to allot the gas from the Dirok field to Brahmaputra Gas Cracker Project; there is a great support to fast-tracking this project. The state will benefit through a R500 crore investment over 18-24 months, and being an onshore development, will also earn a royalty revenue of R200 crore over a 10-year period. We are passionate about promoting “local content”, which will have a long-term impact on the local economy. It’s a win-win project for all the stakeholders.
Do you plan to borrow funds from domestic or overseas sources?
The Rs 500 crore development cost of the Dirok gas project will be shared proportionately by the respective JV partners according to their participating interest. It is a highly profitable project with IRR in excess of 50% and our strategy is to make further progress and de-risk the project and choose the right instrument of debt. As a first step, we completed a rating exercise by ICRA which assigned a BBB+ rating for R100 crore long-term debt fund. We will now reach out to the market and evaluate the most cost-effective debt option.
How strong are HOEC financials?
As of now, we are a debt-free company, which is able to meet operating expenses with operating revenue and is capable of generating operating cash surplus to add to cash-on-hand. FY15 was a challenging year, with decline in both prices and volumes complicated further by the burden of ECB and management uncertainty.
HOEC took loans from its promoter ENI…
All that is history. ENI very graciously wrote off close to R1,000 crore of debt and we further impaired around R200 crore from carried offshore asset value while retaining title to the assets. This exceptional one-time write-off and consequent treatment of accounts reflected in the company positing a book loss of R1,200 crore.
What is the current ENI interest?
ENI continues to hold over 47% stake in the company and is our promoter. HDFC holds 11% in the company and has been a consistent investor. ENI has two of its nominees on the board, which is chaired by SB Mathur, former chairman of LIC, and Sharmila Amin is our other independent director.
Where else is your focus?
Now that we have ensured the take-off of the Assam project, we will turn our attention to Gujarat, where the company operates three marginal fields—Asjol, North Balol & CB-ON-7. Together, these fields contribute about 150 boepd. Even at such small volumes and low prices, their operating margins are high due to super-efficient and low-cost operations. We have deployed a workover rig to improve recovery factors, by looking at each well as a factory. We are initiating environment approval process to acquire new 3D seismic data over these matured oilfields and, if required, we will drill new replacement wells next year to improve recovery rates.
Would the Gujarat project be any different?
Our vision for Gujarat is to collaborate with fellow operators and replicate, on a small scale, the North American operating model, where oil & gas is a cottage industry which embraces technology, shares common infrastructure and builds ready access to on-call oil services delivered efficiently through modular units.
What is the current production from HOEC projects? What CAGR growth are you targeting on the production profile?
Last year we had average daily production rate of 650 boepd. The next big jump will occur once we deliver the first gas from Assam, which has the potential to double the operating revenue of HOEC. Since our current production base is low with yet to be recovered reserves in all our seven producing and development blocks, we expect to deliver a double-digit CAGR growth over the next five years.
Will you rope in financial investors?
Our current promoter ENI has disclosed to the market that they will not be infusing further capital in the company. Our strategy is to pick up financially robust projects, de-risk them for execution and raise appropriate capital with committed end-use restrictions. This can be either equity or debt after obtaining all the required approvals.
However, we are neither desperate nor in a hurry to do so.
You have worked in the oil & gas industry for over 25 years—ONGC and Cairn India. What is your long-term vision for HOEC?
The vision is not to grow big overnight, but to grow steadily, by taking prudent steps in this volatile price environment, which not only protects the interests of our shareholders but also creates value.