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We have been financing about 70% of our investments from internal resources: D K Sarraf

Ajay Modi/New Delhi 19 Nov 12 | 12:07 AM

D K Sarraf has been managing director of ONGC Videsh, foreign exploration and production subsidiary of Oil and Natural Gas Corporation, for the past 14 months. He speaks to Ajay Modi on the impact of geopolitics on business, old and new challenges and the company's plans. Edited excerpts:

Of late, geopolitical developments have been impacting the oil and gas business in some countries. How do you see the future?
Oil and gas prospects are generally available only in difficult territories — either in terms of environment or geopolitics. If they are not difficult on either, they will be difficult on competition, with low returns. Geopolitics has been and will continue to play an important role in oil and gas exploration and exploitation. It needs to be handled on a case to case basis and there is no general prescription. This ultimately zeroes down to political risk, factored in while evaluating any opportunity.

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Has acquiring assets become more difficult in the past year due to competition?
Acquiring oil and gas assets has been competitive for many years and nothing has changed in the past year. In recent times, many opportunities for acquisition have come up due to the strategic portfolio shift of many Western companies, which are now concentrating on regions such as North America. However, the expectations of sellers in terms of the desired price have become higher.

ONGC has set a Perspective Plan 2030. What role will OVL play in it?
OVL produces a little less than nine million tonnes of oil and gas in FY12. Our vision is to produce 20 mt by 2017-18 and 60 mt by 2030. If we are able to achieve this, OVL’s contribution would be 46 per cent of ONGC group production by 2030, against the existing 15 per cent.

What is the near-term outlook for OVL’s production?
Production had decreased last year,l mainly due to problems in Sudan and Syria. These problems continue, leading to a further decline. In addition, some fields are on a declining phase. Consequently, we could produce 3.49 mt in the first six months, lower by 23 per cent. However, production would start looking up from the existing assets from 2013-14, as output would start from blocks A-1 & A-3 in Myanmar, the Carabobo Project in Venezuela and the second phase of the BC-10 block in Brazil. Also, our recently-acquired 2.72 per cent stake in the ACG fields in Azerbaijan.

How is OVL’s financial health? Any plan to list the company?
The financial health continues to be robust. We have been having profit after tax of more than Rs 2,500 crore for the past two-three years. Our profits for the first half of the current financial year are Rs 1,649 crore. The debt-equity ratio has decreased from 10 in 2003-04 to less than 1 now. We have been financing about 70 per cent of our investments from internal resources.

At the same time, being a wholly-owned subsidiary of ONGC, we get more strength from the financials of ONGC. This has been the highest profit making company in India and continues to be debt-free. We get full financial support from ONGC. On a listing of OVL, this is a decision to be taken by ONGC. I believe it makes more sense for ONGC to support OVL as at present, create more value and only then list it to get the maximum out of divestment.

Tell us about the progress in restoring output in South Sudan.
Production at 50,000 barrels per day is almost normal in North Sudan. But most of it is getting consumed in their domestic refineries and little is being exported. Once we resume production from the South, most of it will be available for export. Production from the South is expected to be restored in three to six months.

Is OVL looking at North America and Canada?
Very large hydrocarbon resources are available in North America. Canada is among the top nations in terms of oil resources. These are accessible to investors, unlike certain West Asian countries where crude oil can be bought but oil reserves can’t be owned. Canada is a very transparent and investor-friendly country.

With the increase in production of shale gas, the US now has an exportable gas surplus. Due to over-supply, gas prices are towards their historical lows. Gas import terminal facilities created in the past are being converted to export facilities. There are immense opportunities in the US for participating in its upstream business. They have a good network of pipelines.

However, the challenge here is that India does not have a free trade agreement with the US. Therefore, export of gas from the US to India requires approvals by US authorities on a case by case basis. Several applications are under consideration with the US government. We wish to have an integrated presence in the US, where we may produce gas, transport it to the shore through pipelines and have it converted into LNG (liquefied natural gas) for export to India.

Are you also look at investing in a terminal in the US?
Yes, we are. Also, one can invest in a terminal or preferably book capacity in an upcoming terminal.

What other regions excite OVL, in addition to the US and North America?
East Africa has good opportunities in Mozambique and Kenya. Brazil, Venezuela, Colombia in Latin America are interesting. Central Asian countries and Russia also provide good opportunities. Several new areas of interest are emerging.

OVL’s acquistion plans?
We are looking to make couple of big-size acquisitions. In the past three years, there had not been any major acquisitions but the ball has been set rolling with the purchase of stake in the ACG fields in Azerbaijan and the BTC pipeline recently. Some more would put us back on track.

What challenges do your vision face?
We have a vision to produce 60 mt by 203, but it is easier said than done. By 2030, most of the existing fields would be depleted. So, we have the challenge of creating afresh producing capacity of most of the 60 mt. For acquisitions of this magnitude, we need to streamline the organisation systems, personnel and organise finance. The challenge is deciding which areas to focus, how to select a partner, manage geopolitics, and so on. We have addressed some of these issues and the others are getting sorted. Other than the normal business uncertainties, the oil and gas sector has uncertainties of geology, crude oil price, regulatory regime, etc. There are different schools of thought on future oil prices, with no right answer; deciding on one for valuation becomes difficult.

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