Goldman Sachs’ report on ONGC: Motives suspect

Noor Mohammad, Hardnews Delhi

The key issues raised in the report relate to corporate governance and the continued government control. But then there is nothing new about these things. That is the reason why the motive behind the Goldman Sachs' sudden decision to put ‘sale' on ONGC seems suspect. More so when other leading financial companies such as UBS Securities and CLSA continue to maintain ‘buy' or ‘hold' on ONGC's share.

The global financial services major has also expressed concern that ONGC's strategy to acquire oil and gas assets abroad through its subsidiary ONGC Videsh (OVL) has not been effective. But from the Indian perspective, OVL has been very successful in its job in recent years.

The primary business of OVL is to prospect for oil and gas acreages abroad including acquisition of oil and gas fields, exploration, development, production, transportation and export of oil and gas. Incorporated as Hydrocarbons India Private Limited on March 5, 1965 and renamed as ONGC Videsh Limited on June 15, 1989, the company was largely dormant and without assets to speak of till 2002-03. Only in subsequent years, OVL emerged as an aggressive player. The credit goes to the fast-track investment decision-making procedure put in place by the government.

Hardnews learns that the OVL portfolio of oil asset rose from 0.07 million metric ton (MMT) in 2002-03 to 1.962 MMT in 1.962. During the same period, its portfolio of natural gas asset increased from 0.183 billion cubic meters (BCM) to 6.84 BCM.

In the report, Goldman Sachs also says that ONGC's track record in domestic exploration business has been unexciting and that its oil production costs in ageing fields are rising.

As for the ONGC's track record in exploration, the global investor services firm has missed the whole point. ONGC is valuable because it is the biggest oil exploration firm in a big but energy-deficient country. What is important about ONGC is its unwavering focus on exploration and not it's cost of production. India needs to ensure its long-term energy security and ONGC fits into that scheme, regardless of its cost of production.

As regards the Goldman Sachs' contention that production from ONGC's ageing fields is declining, this flies in the face of a comparative report compiled by the US-based global energy consulting firm PFC Energy recently on countries outside the Organization of Petroleum Exporting Countries (OPEC).

In the study report, ONGC fares much better compared to its peers in non-OPEC countries. The PFC Energy has noted that the Indian upstream company has been able to keep the natural decline rates low to enhanced oil recovery and increased oil recovery projects implemented by it in recent years. That is the reason why major credit ratings agencies continue to maintain a stable outlook on ONGC despite deterioration in the business environment for oil and gas exploration business in the wake of the current global economic crisis.

"The key reason for maintaining a stable outlook on ONGC is its more conservatively financed balance sheets," credit ratings agency Fitch said while reaffirming its ratings recently.