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December 17, 2008

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Kannan Ramaswamy

ONGC India: In Search of

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a New Growth Strategy
R.S. Sharma had been delighted to hear the news of his confirmation as the new chairman and manag-
ing director (CMD) of Oil and Natural Gas Corporation (ONGC). He had witnessed the sharp decline
in the relationship between the top brass of ONGC and the Petroleum Ministry of the government of
India. The friction had focused on the disagreements over the future strategic direction of the company.

yo
It had cost Subir Raha, the chairman and managing director (CMD), his job. Sharma had taken over
the helm of the company upon Raha’s departure as interim CMD.

Raha was credited with a major transformation of the public sector behemoth from 2001-2006.
During his tenure, sales at ONGC rose from Rs. 22,841 crores1 to Rs. 50,900 crores (approximately
$5.7 billion to $12.7 billion), and profits rose from Rs. 6,197 crores to Rs. 14,175 crores (approxi-
mately $1.6 billion to $3.5 billion). In 2007, the company was ranked as the best E&P company in
Asia, third among global E&P companies, and 23rd among global energy companies by Platts Top 250
op
Global Energy Companies.

Raha had articulated a bold vision to recreate ONGC as an integrated player with a global portfo-
lio of assets in both the exploration and refining ends of the business. The company had quickly capital-
ized on India’s newfound market credentials to buy properties in far-flung countries, and had managed
to cobble together an integrated structure that spread well into the retail stream as well. However, crude
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production had stagnated at around 30 million tons a year, and, despite significant investment in explo-
ration, ONGC had been unable to make sizable finds. The Petroleum Ministry had become concerned
that ONGC was not living up to its founding objectives that clearly emphasized its central role in
exploring and exploiting India’s energy reserves, and was instead launching new initiatives that took it
farther away from its core purpose. This proved to be the genesis of major differences between manage-
ment and ministry.

Upon assuming charge as the interim CMD in May 2006, Sharma had assured stakeholders that
No

“The rich legacy of Mr. Subir Raha will continue, and all efforts will be made to take the organization to the
great heights which Mr. Raha has envisioned. The transition will be smooth, maintaining the culture of
performance, in cooperation with all stakeholders.”2 Now that he had been confirmed as the new CMD of
ONGC, it remained to be seen whether he would vote to stay the course or make corrections. The
pressure to see better E&P (Exploration and Production) performance was building, and there were
visible signs that the forays into refining, retailing, and global markets that Raha had engineered were
coming under fire. It would be Sharma’s role to write the next chapter of the company’s strategy.
Do

1
A crore is equivalent to 10 million. It is commonly used in India and neighboring countries.
2
www.scandoil.com/moxie-bm2/news/company_news/r-s-sharma-takes-over-as-.shtml.

Copyright © 2008 Thunderbird School of Global Management. All rights reserved. This case was prepared by Professor
Kannan Ramaswamy for the purpose of classroom discussion only, and not to indicate either effective or ineffective
management. Mr. Jitendra Singh, MBA 2008, provided research assistance.

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 The Exploration and Production Landscape in India

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The U.S. Geological Survey World Petroleum Assessment of 2006 reported that India had about 5.4
billion barrels of proven reserves and about 10.6 billion barrels of undiscovered deposits. Applying
2006 consumption rates, it was determined that these reserves would last a mere 20 years.3 Given the
economy’s projected growth rate of around 7-8%, demand was expected to outstrip supply much sooner.
Industry watchers expected India to become the world’s fourth largest energy consumer by 2010.4 (See
Appendix I for a pictorial representation of the structure of the oil and gas business in India.) It was the

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sixth largest consumer in 2006, and was already importing 70% of its oil needs mostly from Nigeria,
Saudi Arabia, Kuwait, and Iran. The competition for new reserves was intensifying worldwide, exacer-
bated by China’s equally dire need for more oil to fuel its own economy.

The search for oil in India commenced in 1866 in the Upper Assam region located in the north-
east of the country. The first find was made in 1889 in Digboi, a region that continues to produce today,
albeit at very marginal levels. It is arguably the world’s oldest continuously producing field. Over time,
this strike had been followed by other finds in Bombay (now called Mumbai) High offshore, the Krishna-

yo
Godavari (KG) basin, Rajasthan, and the Cauvery basin. (Appendix II shows the geographic locations
of India’s major reserves and prospect sites.) In 1997, the government realized that advanced technology
and deep pockets were needed to explore in the remaining geologically challenging areas, and therefore
decided to open the E&P sector to foreign and domestic private firms. The New Exploration Licensing
Policy (NELP) was enacted in 1997 to invite capital and technology. Appendix III identifies the salient
features of the NELP program.

ONGC dominated the exploration and production business in India, with 57% of exploration
op
licenses covering more than 588 thousand Km2. It accounted for close to 80% of both India’s domestic
petroleum and natural gas reserves. The Mumbai High field situated offshore in the Gulf of Cambay
was a joint discovery by India and Russia. Considered to be the pride of Indian E&P efforts, Mumbai
High produced around 400,000 b/d at its peak in 1989, and had then started a steep decline. ONGC
had invested very large sums of money in new technology to increase the recovery rate from these fields,
but, despite its best efforts, the recovery hovered around 26-28% compared to average rates of 40%
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worldwide.

Raha had invested substantial sums to launch and sustain a deep-water program, among the larg-
est in the world. The Sagar Samriddhi program (roughly translated as self-sufficiency from the ocean)
cost more than $2.5 million a day and was expected to find about 11 billion tons of oil in the waters off
India’s east and west coasts. However, the program had proven to be lackluster at best in terms of finds
with 11 dry wells within a short time period.5 Raha had famously observed, “Digging dry wells is a
learning experience.” The finds in the Krishna-Godavari basin, the Cauvery basin, and the finds at
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Panna and Mukta, both in the Arabian Sea, fell far short of the expectations for the ambitious program.

Exhibit I shows the major discoveries reported under the NELP program.

Although some “junior” independents had found success in India, the international majors chose
to sit on the sidelines. For example, when the bidding for NELP Round VI opened in 2006, the Direc-
tor General of Hydrocarbons had received bids from 135 firms, including some large players such as BP,
Total, and Eni. However, when awards were announced, none of the big players were on the list. Some
of the larger foreign players complained that it was impossible to match the terms and conditions that
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the winning bidders had offered.

3
India In-depth. Offshore Rig Review, May 4, 2006.
4
Mitra, P. 2005. Indian diplomacy energized by search for oil. YaleGlobal Online, March 14, 2005.
5
Raja, M. 2004. India’s oil safari adds fuel to the fire. Asia Times Online, www.atimes.com/atimes/South_Asia/
FD30Df02.html.

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Exhibit I. Discoveries Made in India (‘99-00 to ‘06-07)6

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No. of Discoveries
Commercial Development Under
Name of Company Oil Gas Relinquished Total Approved Approved Evaluation
Cairn Energy 19 4 1 22 9 8 13
Reliance Industries Ltd. 3 20 0 23 9 2 14
ONGC 0 5 0 5 0 0 3
Gujarat State Petroleum 4 2 0 6 0 0 6

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Essar Oil Ltd. 1 0 0 1 1 0 0
Focus Energy 0 1 0 1 0 0 1
BG Exploration 1 0 0 1 0 0 1
Niko Resources 0 2 0 2 2 2 0
Hardy 0 1 0 1 0 0 0
Total 28 35 1 62 21 12 41

A losing bidder from an international oil company complained, “Government-owned companies

bid aggressively and are expected to win most blocks. We believe that some of their bids are not economically

yo
viable. In some cases, the investment recovery was as low as 20%....Some bidders had even agreed to share
90% of their profit with the government even before recovering their investments.”7 The results of the NELP
Round VI indicated that ONGC had once again won the lion’s share of the acreages that were up for
bid.

Cairn Energy was perhaps the most successful foreign entrant in India. Its million-barrel oil dis-
covery in Rajasthan in 2004 was second only to Mumbai High offshore that came in the early 1970s.
Growing from its Scottish roots, Cairn had established a firm footing in India since the country opened
op
its doors to foreign investment. It operated India’s largest privately held oil field and had interests in 15
blocks in the country. Seeing its fortunes rise after the Rajasthan find, the company had floated an
initial public offering (IPO) that was a resounding success, attracting the interest of other oil firms in
the region such as Petronas of Malaysia. It had a fairly high success ratio in its prospecting activities and
reported more than $1 billion in revenues for 2006. Its strength originated from its technology resource
base and the fortuitous strikes it had made in Rajasthan. It estimated that it had access to about 3.6 bn
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boe (barrel of oil equivalent) in Rajasthan. In addition to this property, it had been operating in the KG
basin, Gulf of Cambay, and the under explored northern regions of the country. Many of these projects
were pursued as joint ventures with ONGC under production-sharing contracts.

Oil India (OIL), a government-of-India company, was another E&P company pressed into ser-
vice to help India meet its energy needs. The company originated as part of the Burmah Oil Company
that operated in Assam in northeast India for many years. While its strikes had mostly been limited to
the Assam region, it had obtained interests in a few other blocks in Rajasthan, Western offshore, as well
No

as the KG basin. It had also launched an overseas exploration program by acquiring interests in Libya,
Gabon, Nigeria, and Yemen. Some of these properties had been acquired in conjunction with other
Indian public sector enterprises such as IOCL and ONGC.

Indian Oil Corporation (IOCL), the country’s largest refiner, had been recently permitted by the
government to engage in E&P activities, both in domestic fields as well as foreign properties. IOCL had
not been active in domestic exploration, however, having limited itself to a few assets in India’s north-
east. It had bid jointly with OIL for blocks in Libya, Iran, and Gabon.
Do

Reliance was the largest domestic private sector entrant in the E&P segment. The Reliance Group
was among the largest in India with extensive interests in petrochemicals, telecommunication, retail,
and a host of other economic segments. It had posted outstanding results in every sphere of activity it
had entered. Although a relatively late entrant to the E&P segment, Reliance controlled exploration

6
Director General of Hydrocarbons. www.dghindia.org.
7
Pandey, P. 2006. Public sector oilcos may bag 75% of NELP-VI blocks. The Economic Times. September 19.

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 rights in 34 domestic blocks and two foreign properties in Yemen and Oman. It was also active in five

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coal-bed methane projects in India. The pride of place in its E&P stable belonged to its properties in the

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KG basin off the eastern coast, where it had found gas estimated to be around 7 trillion cubic feet, the
biggest find in 2002 worldwide. It reported a success rate of 74% for all wells drilled, a feat that re-
mained unmatched in the country. Its foray into the E&P sector was matched by an equally audacious
position in the refining segment. Its refinery in Jamnagar in the state of Gujarat processed 660,000 bpd
(barrels per day), was the third largest such facility in the world. In August 2007, the company had
announced a plan to invest $14 billion over the next few years to intensify its exploration activities. It

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had entered into several partnerships with ONGC, Niko Resources, BG Exploration, and other E&P
companies to bolster its exploration program in the country. It planned to dig more than 100 wells in
three to four years, and had initiated actions to procure seven rigs, mostly for deepwater use.

Although the Director General of Hydrocarbons (DGH) had intended to launch the seventh
round of NELP in August 2007, the process appeared to be delayed. Given the worldwide rig shortage,
the DGH felt that successful bidders might not be able to complete test wells in the time frame stipu-
lated on winning bids. There was another complication regarding the sanctity of PSAs. The concern

yo
arose from pricing gas that was to be produced by Reliance at its find in the KG basin. The original
terms that were offered at the time of bids stipulated that gas and oil when found and produced from
the leased properties could be sold at prevailing market prices. However, when Reliance was ready to
produce gas from its KG basin asset, it encountered stiff opposition from the fertilizer companies and
power generation units, two of the largest buyers for its gas. Ironically, one of the leading voices of
protest was that of the Anil Ambani Group, a company that had cleaved from the original Reliance
Group when the Ambani brothers had a public feud over the ownership of the company upon their
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father’s death. The Anil Ambani Group had banked on lower gas prices to fuel a mega power plant that
it was commissioning.

The government had appointed a ministerial-level commission to examine the pricing structure
for Reliance’s gas. Seeing the writing on the wall, other NELP block holders protested loudly. The
managing director of BG Exploration, William Adamson, wrote to the cabinet secretary, saying that
this prelude to a renegotiation of gas prices “would dampen the pace of exploration and erode the
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confidence of the international companies in forthcoming bidding rounds.”8 Hardy exploration vice
president Ashu Sagar said, “Any action to renege on commitments will weaken investor confidence, not
only in NELP but also in Indian contracts.”9 BP country head Ashok Jhawar said, “Subsidies in energy
pricing should come at the consumer end; otherwise, countries which set an unrealistic wellhead price
for gas will suffer from lack of exploration and development since exploration investment tends to flow
to higher priced locations.”10

The Refining and Marketing Landscape

No

India was gearing up for a boom time in refining. The government had announced plans to
increase its refining capacity from 2.6 million bpd to 4.84 million bpd (240.96 million tons per year) by
2012. It had a small excess of capacity in 2007 since it consumed 2.2 million bpd against an installed
base of 2.6 million bpd.11 India’s state-owned companies had entered into joint venture agreements with
overseas competitors from the Middle East and elsewhere to commission much of this capacity expan-
sion. Kuwait Petroleum Company, Saudi Aramco, Shell, and Oman Oil Company were a few of the
foreign partners who had signed construction deals with Indian refinery operators to build new plants.
This explosion in capacity clearly underscored India’s potential as an exporter of refined products.
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8
Double Jeopardy in Oil and Gas. The Press Trust of India. August 17, 2007.
9
Ibid.
10
Ibid.
11
www.kwrintl.com/library/2007/indiamajorfuelexporter.htm.

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Exhibit II. Installed Capacity and Throughput for the Refining Sector

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Refinery Crude Throughput ('000 tonnes) Installed Capacity
Refiner 1991 2001 2002 2003 2004 2005 2006 2006 Cap. Utln%
IOCL 23742 33226 33761 35288 37659 36628 38522 41350 93.2
HPCL 9230 11980 12347 12929 13699 14329 14229 13000 109.5
BPCL 6957 8683 8744 8711 8757 9138 10298 12000 85.8

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CPCL 5698 6625 6689 6819 7040 8923 10362 10500 98.7
MRPL 6438 5487 7253 10069 11809 12014 9690 124.0
RPL - 26033 29654 30544 32345 34309 33163 33000 100.5
Source: Government of India, Petroleum Statistics 2006.

Indian Oil Corporation (IOCL) was India’s largest refining and marketing company (R&M).
With annual turnover of approximately $51 billion (2006), it was ranked 135th in the Fortune 500

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index of global corporations and as the 20th among petroleum companies worldwide. Its assets were
spread across 10 refineries, a pipeline network spanning 9300 kilometers, and 11,739 retail gasoline
outlets. In recent years, IOCL had set out to explore new horizons in both downstream and upstream
operations. It had already enhanced its capabilities in the area of petrochemicals, and was exporting
significant volumes to neighboring countries in Asia and the Middle East. It had expanded its retail
network to reach Sri Lanka and its bunkering business into Mauritius, the Middle East, and East Africa.

Hindustan Petroleum Corporation Ltd. (HPCL) and Bharat Petroleum Corporation Ltd. (BPCL),
op
two other major state-controlled12 companies, were active in refining and marketing. HPCL had two
refineries that controlled roughly 10% of overall refining capacity. A third refinery was in the planning
stage. It had also invested in a minority share of another state-owned refiner, Mangalore Refinery and
Petrochemicals Ltd. (MRPL). Given the liberalization of constraints governing state-controlled compa-
nies in the country, HPCL had evinced keen interest in pursuing a strategy of vertical integration. It was
not only expanding its refining potential, but was also entering the exploration arena through alliance
relationships with other firms.
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Exhibit III. Retail Outlets for State-Controlled

Downstream Companies
BPCL
25%
IOCL
38%
No

HPCL
25% IBP
12%

Source: Petroleum Statistics, 2006-2007. Ministry of Petroleum and

Gas, Government of India.
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BPCL was the third state-owned refinery that managed two refineries, and it also managed 2,123
gasoline retail outlets. It had evolved from the old Burmah Shell that was nationalized by the govern-
ment in the 1970s. It, too, was building a third refinery with six million tons per annum capacity in
Madhya Pradesh.
12
The government holds controlling interests in these entities and has allowed public shareholding. These are
consequently listed on the local stock exchanges.

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 Collectively, the state-controlled refiners had a lock on domestic refining capacity. They had en-

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joyed a protected status for a fairly long time and had built mini-empires in both the refining and retail

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ends of the industry. However, private competition was already on the horizon. Since many of the
existing state-owned refineries were old, they did not have the ability to handle complex crude, further
exposing them to downside risks.13 This was an area in which private players were seeking to gain an
advantage.

Reliance Petroleum Ltd. (RPL) had emerged as one of the formidable players in the downstream

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business. Reliance Industries, one of India’s largest companies that had made its fortune in textiles,
polyester filament yarn, and associated petrochemicals, had floated RPL to establish a foothold in the
refining business. It complemented Reliance’s efforts upstream. It had an installed capacity of 30 mil-
lion tons per year (0.6 million barrels per day), making it the world’s third largest refinery. It was in the
midst of doubling that capacity and was set to commission a second refinery that had a Nelson com-
plexity rating of 14, thus enhancing its ability to process heavier, sour crudes that traded at a discount
compared to the light, sweet variety. Chevron-Texaco, the U.S. major, had invested 5% in Reliance’s
refining venture, and it was expected that RPL would export up to 40% of its refined output to devel-

yo
oped markets, mostly in the U.S.

Historically, refining investments had been the Achilles heel of petroleum companies. Integrated
super majors in the U.S. and elsewhere had been quite reluctant to invest in downstream refining after
having suffered serious losses in the 1980s-1990s when worldwide capacity overhangs combined with
declining demand to wipe out profits. Environmental regulations and mandates had made it extremely
difficult to establish greenfield refineries in the U.S. The refiners had become particularly adept at de-
op
bottlenecking and technology improvements to increase yields from their historical refining invest-
ments. However, there was periodic overcapacity in the Middle East and Singapore, two locations
within easy reach of India.

Some industry watchers had predicted an average refining surplus of 17.5% by the end of the
decade, even assuming that the massive capacity that Reliance was bringing online would be mostly
exported.14 The optimists, however, were touting India’s growing demand for refined products, widely
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expected to accelerate at an average annual rate of 4.5%.15 Competing projections at that rate of growth
showed that a substantial capacity increase would be needed even for the domestic market.

The Indian government had historically maintained an Administered Price Mechanism (APM)
that included a complex system of subsidies and shadow prices in order to insulate local prices from the
vagaries of international market fluctuations. This usually resulted in the upstream exploration and
production companies having to foot a significant portion of the oil bill by pricing their production
lower than world market prices. Pure refiners were also called upon to support the system of artificial
No

prices and hence shared in the subsidies. In 2002, the country announced that it was dismantling the
APM approach, although within two years of doing so, the government was intervening once again to
keep prices low when crude prices started to move upwards quickly. This new round of intervention was
less transparent and more ad hoc. For example, customs duty on imported crude was pegged at 5%,
while refined product imports were charged 10% duty. This assured that the refiners would be well
protected from foreign competition. It was widely believed that the refiners would be less profitable if
market prices were introduced along with a level playing field that was not punitive to imports. It was
reported in 2006 that ONGC alone was subsidizing consumers to the tune of $1 billion annually, and
the marketing companies were losing $51 million a day.16
Do

13
Shenoy, B., and G. Gülen. What should India’s long-term refining strategy be? www.beg.utexas.edu/energyecon/
thinkcorner/indian_refining.pdf.
14
Sabnis, A. 2006. India: Goodbye to pricing reforms? ABN-AMRO. 6 June.
15
Ibid.
16
Burnout: Oilcos lose $51 m/day. The Economic Times, May 18, 2006.

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 The Oil and Natural Gas Corporation of India

t
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ONGC evolved from the Oil and Natural Gas Directorate set up by the government of India in 1955
to oversee the exploitation of the country’s oil and gas deposits. The company had originally been
chartered to “plan, promote, organize, and implement programmes for development of Petroleum Re-
sources and the production and sale of petroleum and petroleum products produced by it, and to
perform such other functions as the Central Government may, from time to time, assign to it.”17 The
company had been quite successful in its initial forays into exploration and production. It had discov-

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ered deposits in Assam and at Mumbai High offshore. Armed with the lion’s share of India’s oil and gas
reserves, ONGC was among the largest companies in the country and quite profitable. It had reported
sales of $19.237 billion and net profits of $3.929 billion in 2006, making it the largest Indian Fortune
Global 500 company. Subir Raha, who took over the reins of the company in 2001, was largely respon-
sible for this meteoric growth. Appendix IV provides historical performance data for ONGC.

Raha’s climb to the top of ONGC was indeed an illustrious one. He had joined Indian Oil Cor-
poration (IOCL), the refining company, as a management trainee in 1970. With a background in

yo
electronics and telecommunication engineering and subsequently an MBA from Leeds, Raha rose through
the ranks of IOCL, holding several portfolios ranging from Human Resources to Marketing and Busi-
ness Development. During his tenure at IOCL, he had revolutionized fuels marketing, creating fully
computerized terminals for product sales, and developing India’s first convenience store concept. Along
the way, he oversaw the implementation of the largest SAP project in South Asia, and was nominated to
the board of directors of the company.18 After 31 years at IOCL, including a short stint in the Petroleum
Ministry on secondment as the head of the Oil and Gas Coordination Council, he was chosen to run
ONGC, widely considered the backwaters of the petroleum business in India.
op
Winds of Change at ONGC
When Raha arrived, he saw an organization that seemed to be plodding along solely on the basis of its
past performance. In 1999, McKinsey, the U.S. consulting company, had predicted that ONGC would
soon become a sick company, insolvent and beyond repair should it continue on the same trajectory. It
tC

had crippling systems of government control over its strategy, a competent group of technical personnel
with flagging motivation, and a fairly serious problem with overstaffing. Its portfolio of producing
assets was quite weak with Mumbai High alone accounting for roughly 40% of production and another
14 fields contributing 35%. The rest of its production came from over 100 fields. Although it was
profitable, there were hardly any signs that it would live up to its full potential.

Raha provided the company with a new vision to galvanize the troops into action. He declared
that ONGC would fulfill its key role in ensuring India’s energy security by locating reserves worldwide.
No

He announced plans for a coal-bed methane (CBM) project in the state of West Bengal, deepwater
exploration projects in the KG basin, and a redoubling of efforts by ONGC subsidiary ONGC Videsh
Ltd. (OVL) to bid for acreage outside India. He sought to breathe new life into a staid and stodgy
organization.

ONGC, like most of its state-owned counterparts, had a workforce that had a sense of entitlement
rather than performance-oriented progress. This had led to a bloated middle that was protected by
archaic labor laws that prevented management from enforcing performance discipline. A voluntary
retirement program was announced fairly early in Raha’s tenure, and the offer had the positive effect of
Do

reducing the ranks by 10%, an uphill accomplishment. Internal systems were revamped to make the
organization function smoothly. The company had been bogged down by bureaucratic delays in critical
project approvals because of the sheer number of executives who had to sign off on almost anything of

17
www.ongcindia.com/history.asp.
18
Subir Raha made ONGC a force to reckon with. http://news.moneycontrol.com/india/news/smartmanager/
subirrahaongc/subirrahamadeongcforcetoreckonwith/market/stocks/article/191666.

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 consequence. This had crippled the organization, and many technology vendors had balked at the

t
prospect of bidding for ONGC contracts. All contracts were subject to tendering, and technology firms

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were reluctant to submit their technologies to the tendering process given the inherent competitive
secrecy involved and the long gestation period for such tenders. They preferred negotiated contracts
instead. When ONGC had resorted to such contracts, it was constantly second-guessed by the Ministry
of Petroleum. As a result of these systemic problems, some believed that ONGC was behind in technol-
ogy by 5 to 10 years.19

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One of Raha’s very early moves as the new CMD was to revamp the entire decision-making
structure of the company by eliminating bureaucratic layers of staff approvals. He sought to create a
more flat structure that could make decisions quickly. In achieving this end, he sought to push au-
tonomy down the chain. These changes resulted in significant improvement with respect to the tender-
ing process. New tenders were being decided on in a matter of weeks as opposed to months under the
old system.

It seemed evident that ONGC would have to improve the quality of its talent pool if it were to

yo
realize the vision that Raha had created. In boosting high-performance behaviors, the company insti-
tuted incentive plans targeting innovation and productivity. These incentives were targeted at both
individual and group performance. The organizational structure was reworked to allow for autono-
mous decision-making within the constraints of state ownership. A comprehensive redesign of the
entire performance appraisal process was also initiated. The resulting process won ISO 9001 certifica-
tion and spanned all key elements of the HR discipline from learning benchmarks and work culture
analysis to succession planning and leadership development. Four new performance reward schemes
op
were also simultaneously launched to infuse the company with a performance orientation. ONGC
created a management development institute, christened as the ONGC Academy, to focus on providing
leadership and technical training to its employees.

The company also moved swiftly to put its financial house in order. It had a very heavy interest
and tax burden, especially because of the significant foreign loans it had to service. R.S. Sharma, then
CFO of ONGC, recommended that the company use its plentiful but idle cash reserves to pay off its
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foreign debt. The remaining cash was plowed back into the business. These actions resulted in signifi-
cant savings in terms of both taxes and interest. In 2004, the government decided to sell off a portion of
its holdings as a move to attract private capital to ONGC. The initial public offering for the 10% stake
was oversubscribed three times in a span of 20 minutes, a record for the Indian stock market. As of
2007, the government of India owned 74% of ONGC; IOCL and Gas Authority of India Limited held
7.69% and 2.4%, respectively, as a result of cross-holding agreements; while institutional investors,
employees, and the public held the remaining shares. In 2007, ONGC represented 10% of the market
capitalization represented by the Mumbai Stock Exchange, the largest stock market in the country.
No

International Forays and the Path of OVL

When Raha came on board, ONGC subsidiary OVL had one property in Vietnam. It had originally
been created in 1996 to prospect for oil and gas in foreign markets. After all, India had 15% of the
world’s population but only 0.5% of energy reserves, making foreign exploration crucial to energy
security. OVL was given the powers to draw talent from ONGC and elsewhere solely on the basis of
merit. The government designated OVL as India’s nodal agency in all bilateral energy discussions initi-
ated by the government, thus giving it a ringside seat to shape India’s energy security. As of 2006, OVL
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had invested $4 billion out of its investment budget of $5.1 billion and controlled 25 properties in 18
countries. (Appendix V provides a listing of key OVL properties around the world.) Its growth had been
meteoric, and it had demonstrated the ability to align itself with industry leaders such as Exxon Mobil
in the Sakhalin I project, Petronas of Malaysia in Sudan, and BP in Vietnam. It was also the designated

19
Ganguly, S. 2007. The ONGC: Charting a new course? The James A. Baker Institute for Public Policy. Houston,
Texas.

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 operator in many of the projects. It reported reserves of 206,109 MMTOE (million metric tons of oil

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equivalent) and production of 6.34 MMTOE in 2006. The goal was to produce 20 MMTOE by 2010

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and 60 MMTOE by 2025.

OVL had formed a joint venture with the highly successful Mittal group, the steel company that
had an enviable record in oil-rich emerging markets. Named ONGC Mittal Energy, this partnership
was born from a promise to open doors in challenging markets using the relationships that the Mittals
had established in building their steel empire. Despite the potential of this alliance, OVL faced stiff

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competition for acreage.

China and its national oil companies had shown a voracious appetite for prospecting acreage, and
hence had gone head-to-head against India and OVL in several auctions. While China had the financial
strength in foreign exchange reserves to pay high prices, OVL was forced to rely on India’s diplomatic
standing and goodwill. China had increasingly shown an ability to package development assistance
innovatively to resource-rich countries in Africa and elsewhere as a means of obtaining favorable terms.
The battle for reserves between China and India came to a head when both OVL and China National

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Petroleum Company (CNPC) bid for PetroKazakhstan, a Canadian-owned company with assets in the
Central Asian Republic of Kazakhstan. CNPC was allowed to re-bid after all bids were unsealed and,
having offered $4.18 billion, was declared the winner. Although OVL was also given an opportunity to
re-bid, the offer was summarily withdrawn and CNCP was awarded the rights. The petroleum minister,
Mani Shanker Iyer, complained, “The goalposts are being changed after the match has begun.”20 OVL
had lost to CNPC in Myanmar and to Sinopec in Angola. Reflecting on these losses, India and China
forged a bilateral partnership agreement where both countries had decided to cooperate in future bids.
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Following this agreement, OVL and CNPC won a bid for 38% of Al Furat Production Company,
Syria’s largest oil producer, and later with Sinopec for 50% of Omimex de Colombia.

A New Dawn for ONGC

Raha had been the architect of an integration strategy that called for a move into the downstream
segment. He wanted to transform ONGC into India’s first integrated major in the petroleum business
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and set about accomplishing that task. In 2003, an opportunity to implement this strategy presented
itself in the form of MRPL (Mangalore Refinery and Petrochemicals Ltd.), a privately held refining
complex that had fallen on bad times due to the vagaries of India’s price control system. ONGC ac-
quired a 71.6% stake in MRPL for a price that was widely believed to be about a tenth of what it would
have cost to build a refinery with equivalent capacity from the ground up. This was followed by a move
into the retail end when the government opened fuel marketing activities to new entrants. ONGC had
obtained licenses for a retail network and had opened a few fuelling stations by 2005. Ownership of
MRPL meant that ONGC could sell its crude to the company at arm’s-length prices and then sell
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refined products through its own petrol pumps. That way, the oil subsidies that ONGC was financing
would stay within the fold.

Vertical integration was an approach that promised to give ONGC control of its own destiny.
Further, it offered the company wider flexibility in monetizing its assets, a crucial determinant of suc-
cess. For example, Cairn India had been struggling to monetize its huge find in Rajasthan because it did
not have control over the pipeline that would carry its oil to the market. ONGC was a key partner in the
pipeline venture and possibly had a good appreciation of what could go wrong if the company did not
have control over the entire hydrocarbon chain. Raha had observed, “Integration along the hydrocar-
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bon value chain is not a matter of choice for a company with a global footprint; it is an imperative—we
have to squeeze every available paise21 out of every molecule of crude. We have to become a part of the
crude cycle, the refining cycle, and the product cycle to tide over any downturn in any one of them.”22

20
Gupta, A. 2005. Big just became a lot bigger. Business Today. December 4, 2005.
21
Paise is the Indian monetary unit equivalent to a cent.
22
Gupta, A. 2005. Big just became a lot bigger. Business Today. December 4, 2005.

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Exhibit IV. Crude Prices and Refining Margins for Indian Producers

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Source: ICICI Securities. Aug. 10, 2007.

The vertical integration strategy was not without its detractors. There were loud complaints that
ONGC was entering into areas where it had no expertise—coal-bed methane, underground gasification
of coal, power generation, LNG, and petrochemicals were all uncharted territory for the company. The
major concern was that ONGC had lost its focus on exploration, the primary reason for its constitu-
tion. While many others had made sizable discoveries following liberalization, ONGC had lagged be-
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hind. Ironically, the major finds made by competitors originated in areas where ONGC had been active
for several years.

Some industry experts blamed the internal organization of ONGC and the quality of its geoscien-
tists for the poor record. Unlike the oil majors who typically employed a multilayered system of evalu-
ation, appraisal, and decision-making, at ONGC the team with the most clout, often comprising the
most senior staff or the local manager, made the call about where to drill. Absent a system of checks and
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balances, it appeared that the company was relying on the power of a few to make good decisions. The
industry used an exploration ratio of 1:2 as a benchmark to evaluate drilling performance (drill two
wells to find one with potential). ONGC averaged 1:4 or 1:5 for on-shore and 1:10 or worse for deep-
water.23 Eleven of its deep-water wells in the Sagar Samriddhi program came up empty, and overall
production had hardly budged from 30MMT per year. “If one applies global averages, ONGC should
be producing 80 MMT per year,” said V.K. Sibal, the director general of Hydrocarbons.24
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Some analysts believed that ONGC’s poor track record was due to its inefficient data analysis
structure. It lacked a central repository where all the data from its prospective fields were analyzed.
Instead, this was done in a piecemeal manner, reducing the flexibility and speed at which decisions
could be made. The expense of hiring drilling rigs was another key consideration. Since the rigs cost a
huge amount of money to deploy, ONGC did not take much time to evaluate data methodically.
Instead, it was focused on maximizing rig utilization, thus compromising its ability to strike oil. It had
also justified this approach based on the fact that there was a global drilling rig shortage, thus eliminat-
ing the possibility of thorough analysis. In contrast, companies like Reliance usually signed drilling
contracts on a job charter basis only after they had completed exhaustive seismic data gathering and
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interpretation. By 2006, ONGC had spent Rs. 3000 crores (roughly $616 million) in three years and
had drilled an embarrassing 20 dry wells.25 To complicate matters further, the company had lost more
than 200 engineers, geologists, and geoscientists to Reliance, a trend that promised to accelerate further.
23
In wrong hands. The Public Affairs Magazine News Insight. www.indiareacts.com/
print_storydebate.asp?recno=1047.
24
Chandramouli, B. 2006. Dry well, not black gold. Business Today, June 18, 2005.
25
Ibid.

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 Raha was widely seen as being very dismissive of India’s potential for oil and gas, and even the

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official company Web site characterized India’s prospects as “limited.” In contrast, Bill Gammell, CEO

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of Cairn India, after striking oil in Rajasthan, observed, “I’ve always said for years that India is hugely
unexplored.”26 Expressing a similar point of view, Petroleum Minister Mani Shankar Iyer observed,
“We have 26 sedimentary basins, which in absolute terms is huge. But ONGC, far from being a failed
company, is a company with lots of potential. I want ONGC to focus on its core competence. Instead
of trying to make up its perceived losses in exploration by opening up petrol pumps—and worse,
fertilizer plants and power plants—I want ONGC to prove to me that its spending on exploration has

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reached optimal level and the next rupee spent would be a waste.”27

The combative Raha pointed out, “We are not making soap, textiles, or aluminum ingots. In any
given process, you know what the inputs are and, if you do so, you will get steel, glass, soap, or 20 cars
rolling out or so many meters of cloth. Exploration is not that kind of business. Exploration is a risky
business. It is unique. When you therefore talk of exploration, we accept that certain wells will go dry.
It took almost 200 dry wells before North Sea oil was established.”28

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Clouds over the Horizon
“Raha ko jute ki nok pe rakhna hai (You must keep Raha under your shoe),” S.C. Tripathy, the petroleum
secretary, was reported to have concluded in early 2006.29 Raha seemed to have overstayed his welcome
when he publicly crossed swords with the petroleum minister. The ministry had sought to appoint two
directors to the board of ONGC, but Raha went public with his displeasure and commissioned full-
page newspaper advertisements suggesting that the minister was trying to run ONGC like his own
fiefdom. After much public haranguing, the government withdrew its nominees and Raha had won the
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battle, or so it appeared. Iyer was reassigned to take charge of the Ministry for Youth Affairs and Sports.
However, when Raha’s contract came up for renewal in 2006, the ministry mandarins decided to let it
lapse without further renewal, as was the customary practice. They believed that Raha did not have the
right background for managing an E&P company, given his downstream predisposition and skills.
Some of his directors believed he was autocratic and made unilateral decisions without consultation, a
streak attributed to his success in the financial markets. In the end, the lackluster exploration record of
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ONGC seemed to have weighed heavily in the decision to let Raha leave after his contract expired.

The future of ONGC seemed to hang in balance. There was enough evidence to suggest that
ONGC was on a trajectory of growth that would lead to a prominent position among the global
players. However, there was equally strong evidence to argue that ONGC was faltering. In its first
annual report after Raha’s departure, the company had focused on an impressive array of projects under
way. It had signed technology deals with global giants like Schlumberger and Baker Hughes to obtain
critical insights into redeveloping its mature fields. It claimed that 44 of its 165 marginal fields were
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ready to commence regular production and that 96% of these assets would be brought back into pro-
duction over the next five years.30 Its alternative energy projects in coal-bed methane and coal gasifica-
tion had moved from the drawing board to an exploratory phase. Significant investments had already
been budgeted for these initiatives. It was also setting up a wind-power farm with a capacity of 50MW,
and thermo-chemical reactors for hydrogen and geo-bio reactors and fuel cells. Given the recency of
these investments, it was difficult to know whether they were indeed driven by strategy considerations
or political considerations.
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26
Ibid.
27
Saran, R. 2005. We are in the global league. Business Today, 13 March, 2005.
28
Subramaniam, T.S. 2005. Growing into a global player: interview with Subir Raha, Chairman, Oil and Natural
Gas Corporation. Frontline, Vol. 22, Issue 10. May 07, 2005.
29
In wrong hands. The Public Affairs Magazine News Insight. www.indiareacts.com/
print_storydebate.asp?recno=1047.
30
ONGC Annual Report 2006-2007.

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 The vertical integration strategy was steaming ahead alongside alternative energy projects. Two

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global scale petrochemical complexes were being set up in Dahej (Gujarat State) and Mangalore (Karnataka

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State). The Dahej facility was expected to cost approximately $2.8 billion and was scheduled to go
online by 2010. It was slated to use naptha feedstock from ONGC facilities close by in Hazira and
Uran. Due diligence studies were under way to explore feasibility for an additional refinery in Kakinada,
close to KG basin finds. The next major find, however, remained elusive.

R.S. Sharma had a lot of things on his plate and needed to make quick course corrections if that

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was indeed his conclusion. These were the best of times or the worst of times depending on one’s
perspective. Investors were eagerly awaiting Sharma’s strategic vision for ONGC. Whether it would be
one cast within the shadow of Raha or one that would diverge from his grandiose integration and
diversification plans remained to be seen.

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Appendix I. Structure of the Indian Oil and Gas Industry

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Exploration &
Production
Companies

Oil & Natural Gas

Corporation Refining Companies Marketing

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(ONGC) Companies
Oil India Ltd. Indian Oil Corp.
(OIL) Ltd. (IOCL) IOCL

Gas Authority of Hindustan ONGC

Government of India
India Ltd. (GAIL) Petroleum Corp.
Director General Ltd. (HPCL)
RPL
Reliance Oil & Natural Gas

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of Hydrocarbons
Petroleum Ltd. Corp. (ONGC)
(RPL) NRL
Ministry of
Petroleum and Hindustan Oil Bharat Petroleum
Natural Gas Exploration Co. Corp. Ltd. (BPCL) HPCL

National Gujarat State Reliance

Development Petroleum Corp. Petroleum Ltd. BPCL
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Council (RPL)
Essar Oil India Chennai Petroleum MRPL
Ltd..
Shell India
Cairn Energy Numaligarh
(India) Ltd. Refinery Ltd.
(NRL) MRPL
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Hardy Oil and Gas

Premier Oil

Gazprom
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Appendix II. Map of India Showing Major Oil and Gas Fields

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Source: DGH
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Appendix III. Salient Features of the New Exploration Licensing Policy

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• There will be no mandatory state participation through ONGC/OIL, nor will there be any carried interest
of the State.

• ONGC and OIL to compete for obtaining the petroleum exploration licenses on competitive basis instead
of the existing system of granting them petroleum exploration leases (PEL) on nomination basis. At the
same time, ONGC and OIL will also get same fiscal and contract terms as available to private companies.

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• Open availability of exploration acreages to provide a continuous window of opportunities to oil
companies. The acreages will be demarcated on a grid system and pending preparation of the grid, blocks
will be carved out for offer.

• Freedom to the contractors for marketing of crude oil and gas in the domestic market.

• Royalty payments at the rate of 12.5% for the onland areas and 10% for offshore areas. Half of the royalty
from the offshore area will be credited to a hydrocarbon development fund to promote and fund

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exploration-related activities, such as acquisition of geological data on poorly explored basins, promotion of
investment opportunities in the upstream sector, institution building, etc.

• To encourage exploration in deep water and frontier areas, royalty will be charged at half the prevailing rate
for normal offshore area for deep water areas beyond 400 m bathymetry for the first 7 years after
commencement of commercial production.

• Cess, which was earlier levied on crude production, has been abolished for the blocks offered under NELP.
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• Companies are exempted from payments of import duty on the goods imported for petroleum operations.

• There are no signature, discovery, and production bonuses.

• A seven-year tax holiday from the date of commencement of commercial production.

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• Contractor is provided fiscal stability during the entire period of contracts.

• A separate Petroleum Tax Guide is in place to facilitate investors.

• A revised model contract is in place.

Source: Press Information Bureau. Government of India. pib.myiris.com/eec2000/article.php3?fl=png/png2.

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Appendix IV. ONGC’s Performance 2001-2007
(Rs. Million)

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2007 2006 2005 2004 2003 2002 2001
SALES VOLUMES
Crude oil (MMT) 24.42 22.45 24.09 23.94 23.90 22.86 23.36
Natural Gas (MMM3) 20,306 20,500 20,644 21,103 21,110 20,446 20,501
LPG ('000 tonnes) 1,033 1,084 1,086 1,161 1,198 1,157 1,211
NGL/Natptha/ARN ('000 tonnes) 1,442 1,578 1,567 1,656 1,642 1,681 1,514

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FINANCIAL PERFORMANCE
Sales turnover 590,575 494,397 472,454 329,270 353,872 238,574 242,704
Statutory Levies 122,516 99,138 103,258 89,156 92,334 59,742 55,515
Operating Expenses 102,016 76,762 71,397 58,848 70,855 49,084 51,594
Operating Income (EBIT) 211,471 199,158 184,768 125,349 149,053 90,880 86,932
Capital Employed 540,744 493,763 419,926 395,299 352,170 329,061 310,331

EBITDA to Sales% 51.9 57.4 52.2 55.0 53.8 54.1 54.2

Profit Margin % 26.5 29.2 27.5 26.3 29.8 26.0 21.5

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EPS (Rupees) 109.7 101.2 91.1 60.8 73.8 43.5 36.7
ROCE% 56.7 57.5 58.8 45.8 54.0 39.2 42.4
ROE% 25.5 26.9 28.0 21.7 29.6 21.0 17.3
Exchequer Contribution/Sales % 48.5 47.3 48.3 51.2 54.0 45.6 45.9
Employees 33,810 34,722 36,185 38,033 39,352 40,280 40,226

Source: ONGC Annual Report 2006-2007.

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Appendix V. ONGC Videsh (OVL) Portfolio of Key Properties

Project OVL Share Partners Project Status
Vietnam Offshore 45% BP (35%) Petrovietnam (20%) Production
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Sudan Onshore 25% CNPC (40%), Petronas (30%), Sudapet (5%) Production
Syria Onshore 38.75% Fulin (50%), Mittal (11.25%) Production
Sakhalin-I Russia 20% ExxonMobil (30%), SODECO (30%), SMNG Production & Development
(11.5%), Astra (8.5%)
Colombia Onshore 50% Sinopec (50%) Production & Development
Sudan Onshore 24.13% Petronas (68.875%), Sudapet (7%) Exploration, Production, &
Development
Brazil Offshore 15% Shell (50%), Petrobras (35%) Development
Myanmar Offshore 20% Daewoo (60%), KOGAS (10%), GAIL (10%) Exploration & Appraisal
Iran Offshore 40% IOC (40%), OIL (20%) Exploration
Libya Onshore 49% TPOC (51%) Exploration
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Syria Onshore 60% IPR (40%) Exploration

Sudan Onshore 23.50% Petronas (41%), Lundin (24.5%), Sudapet (11%) Exploration
Egypt Offshore 70% IPR Red Sea (30%) Exploration
Nigeria Offshore 13.50% Sinopec (65%). Equator (9%), Hatman (2.5%), Exploration
Foby (5%), Momo (5%)
Cuba Offshore 30% Repsol (40%), Norsk Hydro (30%) Exploration
Sudan Pipeline project 90% OIL (10%) Completed, under lease
Source: ONGC Annual Report 2006-2007.

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