By Anupama Airy
The Narendra Modi Government’s `Make in India’ drive has already attracted interests of major global players in the defence sector like Lockheed Martin and Boeing to set up manufacturing shops in India. This trend is not just limited to the defence space but is fast catching up across sectors and the country’s oil and gas sector is no exception.
Having announced its plans of becoming an oil refining and petrochemical hub catering to the requirements of the entre South East Asian region, India is now working towards emerging as an important petroleum hub for manufacturing and services. Not only will this cater to the requirements of domestic players in exploration and production (E&P) but will also export equipments and services for international oil and gas operations.
As a result, we may soon witness leading players like Schlumberger, Halliburton, Baker Hughes and the likes taking note of this opportunity and set up manufacturing shops in India to cater to the domestic and export markets.
In an exclusive interview ahead of the ADiPEC conference, Chairman and Managing Director of India’s most valued and one of the highest profit-making public sector oil and gas companies — ONGC, D K Sarraf shared his vision over encouraging investments and making India emerge as a leading petroleum hub for manufacturing and services.
Sarraf expressed confidence that leading services players like Schlumberger, Halliburton, Baker Hughes and the likes may look at setting up manufacturing bases in India to cater to both the domestic and export markets. He also dwelled upon the company’s plans and strategies going forward and on promoting local content in the oil and gas sector.
Q: India is already on its way to becoming an oil refining and petrochemicals hub catering to demand of petroleum products in the entire SE Asian region, ideas are now being floated to create petroleum hubs in India for manufacturing and services. How do you view this?
A: This is very important both for the oil and gas sector and the nation. We are spending billions of dollars in importing equipments for the oil and gas sector and there is no reason why these equipments cannot be manufactured in India.
While any such move (to establish a manufacturing facility for equipment and services) will have to factor in the demand arising from Indian E&P companies, such a facility, if is used to cater to both the domestic demand as also for export of equipments for global oil and gas operations will make help in making any such facility a feasible option.
Manufacturers setting up shop in India will have to have a mind-set that they are not just catering to the domestic demand but also that of the global oil and gas market. India as a country offers lots of advantages including cheaper labour and skilled manpower, which manufacturers of oil and gas equipments can make use of. The government is already giving lot of export benefits which should come to their advantage.
Q: What is your assessment of these leading international service providers and manufacturers of drilling equipments and platforms coming and setting up shops in India. As the head of ONGC, you are one of the largest consumers of these services and keep interacting with them? What is the right model any company –domestic or global should look at?
A: To answer the latter part of your question first, either the Indian companies can create such facilities in joint venture with foreign companies or even the foreign companies can set their own manufacturing base in India.
International services and equipment companies like Schlumberger, Halliburton and Baker Hughes will have to be incentivised to do so.
We as ONGC will do our bit in taking forward this effort. The move will also help in promoting local content and sourcing in line with the government’s Make in India objective. We have had some initial discussions with some of the leading companies and let me tell you they are keen and may evaluate the opportunities that India has to offer. I am sure that some of them will come to India soon.
GE is another company that sees a lot of potential in India’s oil and gas sector and is keen to invest to cater to requirements for equipments and services by companies like ONGC.
Q: Which could be the favourite and feasible destinations for such manufacturing facilities?
A: Few attractive destinations for such manufacturing bases could be in Gujarat, Maharashtra, Andhra Pradesh, Assam, where most of the oil and gas industry is concentrated.
Q: Share with us ONGC’s operational performance especially in the era of low oil and gas prices. How has it affected your core areas of business?
A: Operations of any E&P company like ONGC involves three stages —exploration, project development and then production. Despite the worldwide trend of major E&P companies slowing down their operations and putting on hold new projects, we continue to invest in our E&P operations. We have put better systems and processes in place so as to reduce our operational costs yet continuing with our focus on exploratory drilling. As a result of this renewed focus backed by better processes and technologies, our exploration success has increased a lot.
With usage of better technologies and approach to exploration, ONGC’s expenditure on dry well drilling has come down drastically. However, even with reduced expenditure, the reserve accretion ratio has gone up. So we are spending less and accreting more. Some of the successes that we have got onshore have been put into production immediately as onshore is easier to produce as compared to offshore. As a result, the production from onshore fields has started increasing from this year.
Now once we explore, we have to put those fields into production and so comes the next stage of project development. The ground reality is that crude oil prices have come down substantially. International oil companies are not investing in new projects under this low oil price scenario and are simply working on projects either nearing completion or where they are legally committed. But beyond that nobody is investing anything. There capex have come down by as high as 70-80 per cent. So nobody is committing any further capital into new projects.
Similar is the case with exploration, as I mentioned earlier. But the views of national oil companies are little different. Now national oil companies are further of two types, one like us who are importing in a major way and other are like Saudi Aramco and others in Iran, Iraq or who are exporting in a big way and where oil exports is their major source of income. So in both the cases, national oil companies have their own rationale of investing to an extent even in such times. Their rationale is that they don’t want to decrease their share of oil production and maintain their production levels.
The rationale for investments by companies like us is that being large oil importers, we need to invest to reduce our dependence on oil imports and become self-sufficient by producing more and save outgo of the country’s precious foreign exchange. At the same time we have to justify these commercial investments in order to protect the investors interests being a listed company.
Towards this our logic is that the projects that we complete today are being done at a much lower cost because the services are available from the best companies, equipments are readily available as there is no rush from them from other international E&P majors, the yard capacity is available, the platforms would come on time and at lower costs. At ONGC, we are making use of these circumstances as we believe that oil prices would recover and again go up. So even though we are investing significantly, we are taking these decisions very carefully and after weighing all parameters.
E&P business is not like that of setting up a 15 mtpa refinery which once set up will keep on producing 15mtpa for next 20 years or so. You establish a similar capacity field and you will see the production coming down by 6-7% after 5 years of production and so to maintain production you have to invest and produce 6-7% more year after year to arrest this decline and maintain the production rate.
I compare upstream business with that of a treadmill where you may adjust your running speed to 6-8 or 10 kms/hr or more but you continue to be at the same place. You don’t travel from one place to the other on a treadmill even as you are still running. So upstream business is also like that which means you have to continue to run and maintain a given level of production. Because if you don’t run (which is continue to explore, undertake project development), the production from your old fields would decline year after year. So even if you increase your production by 6-8%, this matches with the decline rate which is also around the same level. And given the fact that 70-80% of our production is coming from fields that are over 40 years old, we have to constantly continue with this journey of exploration and project development.
Q: Give a sense of your capex and also the extent of investment commitments made by ONGC in the past two years?
A: Despite the fall in energy prices, ONGC has been maintaining a capex of around Rs 30,000 crore a year for the past several years. So on an average we are spending around Rs 30,000 crore a year but it is need based.
In 2014-15, we approved six projects worth Rs 28,000 crore only for Western offshore (Mumbai High). Again in 2015-16, we approved another seven projects worth Rs 48,000 crores which included development of our deep water gas block in the Krishna Godavari basin (KG-DWN-98/2), which alone was approved at a cost in excess of Rs 34,000 crore.
This is the largest investment by ONGC ever taken in any single project so far. One reason to go ahead with such a large investment was the timely and cheaper availability of services and equipments in these times of low energy prices. Then the government also announced the policy in March of higher gas produced from deep water and ultra-deep. Soon after this policy was announced, ONGC in March itself approved investments worth Rs 48,000 crore in seven projects including the KG basin block that alone saw an approval of Rs 34,000 crore. That shows our decision making and focus on project development. And it is not just approvals, all contracts have been awarded for the six projects approved by us in 2014-15.
Having said that, work has been also going on in case of all projects that were approved earlier and before 2014-15. To give you an idea we completed Rs 27,000 crore of previously approved projects in 2014-15 and another Rs 28,380 crore worth of projects in 2015-16. The results of these completed projects is already factored into our current production.
Q: How much of oil and gas is ONGC producing at present and how is the going forward?
A: We are producing 26 mtpa which includes the share of our joint ventures also. Gas production is around 24 bcm or so. This will go up further in the time to come as for the first time during this monsoon period which is from 15 May to 15 October, as many as 34 rigs were working on various development wells in offshore projects of ONGC. This is the highest ever in ONGC. All these projects that I mentioned we started in 14-15 are these where many platforms have been constructed. And once the platform is constructed we have to put our rigs there for drilling wells. The impact of these wells and some other older developments wells will be felt now both on oil and gas production once they are connected to the lines. During monsoon it becomes difficult to connect those wells with the lines and once it is done, the same will be result in higher oil and gas production.
You will see some of the results showing this year itself and significant jump in 2017-18. Gas production will show an increase even this year after we connect these completed offshore wells to the lines.
(*Disclaimer: These interviews have been done by Anupama Airy, Founder and Editor of EnergyInfraPost.com for The Confederation of Indian Industry (CII) which along with the Union Ministry of Petroleum and Natural Gas and state-owned Oil and Natural Gas Corporation (ONGC) is organising a conference during the Abu Dhabi International Petroleum Exploration Conference (ADIPEC) event on November 8th. The title of CII’s conference is : India – Emerging Investment Destination in New Energy Landscape.
The ADIPEC event is being organised by Abu Dhabi National Oil Company (ADNOC) at the Abu Dhabi National Exhibition Center (ADNEC) from 7 – 10 November 2016 and is one of the world’s largest technical oil & gas conferences.
The theme this year is Strategies for New Energy Landscape and the exhibition will see the participation of key stakeholders, senior industry delegates, and 2000+ exhibitors from over 120 countries.
The CII conference will focus on investment avenues in India’s oil & gas sector, covering upstream, midstream and downstream operations, with special emphasis on the Government’s Make In India campaign. A key focus area would be opportunities for the Indian oil field services sector to support the global industry with technological expertise and skilled manpower. Speakers will include senior Government officials, public and private sector multinationals from the oil & gas sector, investment agencies, and reputed industry consultants.)