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Build Versus Buy: ONGC Opts For The Latter

India's state-owned oil exploration company is doing better by buying oil fields elsewhere than by investing in producing from its own.

Photo Credit : Bloomberg

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ONGC on Monday (28 March) announced its development plans for its deepwater block in the KG Basin - next to where Reliance had discovered gas. The total capital expenditure in this deal will be $5,076 million (Rs 34,012 crore) - one of the largest such projects after the development of Bombay High and the KG Basin development by Reliance. In return, ONGC will get approx 4 million tons/year of oil and about 4 million tons/year of natural gas. If implementation is on time, production will start in phases, from 2019.

It is not a given that a large and complex project such as this will not have any cost or time over-runs - Reliance, which developed a gas-field in the same area saw its costs soar when oil prices went up and oil field equipment became expensive.

Meanwhile, in September 2015, ONGC had announced a 15 per cent purchase in the Vankor oil field in Russia - cleared by the Russian government in March 2016. In this case, for an upfront payment of $1.3 billion, ONGC gets a 15 per cent stake in an oil field that already produces 22 million tons/year of oil - making ONGC's share 3.3 million tons/year. ONGC is in discussions to raise its stake in this field to 26 per cent - which would cost $2.25 billion if the earlier price is used as benchmark. For this amount, ONGC would have rights to 5.7 million tons/year of oil.

Effectively, for less than half the money it is going to spend in the KG Basin, ONGC is getting 75 per cent of the oil & gas from its Russian investment.

The cost comparison shows the current environment in the petroleum industry: because of the fall in petroleum prices, the values of underlying assets - oil & gas fields, has also fallen sharply.

Meanwhile, low price of oil means capital investments in oil & gas production will bring back less profits - as the value of product has fallen. As a result, energy companies across the world are cutting down the spend on exploration and production.

As a large buyer with a growing demand, India is going to continue to rely on imports to meet the bulk of its oil requirements. Therefore, the public sector oil firms need to take advantage of the 12 year low in oil prices, by buying up more oil fields globally, in politically secure locations. So far, Indian companies have announced two such purchases in the past 18 months, both in Russia. India needs to look at other locations, more aggressively.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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Amit Bhandari

Bhandari is a media, research and finance professional. He holds a B-Tech from IIT-BHU and an MBA from IIM-Ahmedabad.

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