“COMPETITIVE ENVIRONMENT WOULD FORCE ONGC 
TO REDEFINE ITS BUSINESS STRATEGY”
Says I N Chatterjee, Director (Finance), Oil & Natural Gas Corporation

As a D(F) of Navaratna company, how do you think ONGC has been performing on the financial front?
It is difficult to differentiate the financial performance of a company from its operational performance as financial performance ultimately depends on operational performance. As far as ONGC is concerned, we have been making substantial profits over the last few years. During the past year i.e. 1999-2000 our profit reached a record of Rs, 3,629 crores which is the highest ever made by any business enterprise in the country. This increased profitability is mainly attributable to higher product prices due to hardening of the petroleum product prices in the international market. The performance of an E&P company like ONGC is influenced by the volatility of crude oil price at least in the short term. Since forecasts made by various experts indicate that the crude oil price would remain bullish, in short term, it is expected that the company would be able to maintain its profitability in near future provided production rallies around and we manage our costs and expenditure. As regards the performance in the finance and accounts department, special care is being taken in the area of treasury management, budgetary control, expenditure monitoring and reporting and internal audit so that finance can provide value added services to the operating wings of the organisation.

What do you think are the roles of a Chief Financial Officer of any company?
As a part of the top management, Chief Financial Officer (CFO) has to ensure better utilisation of the resources in the given circumstances and advise the functional management in this regard. The focus would be on value creation through better resource allocation and thereby expanding the asset base of the company and its value. He works as a facilitator and analyst and provides the functional executives with relevant data so that right decision is taken at the right time. He has to inculcate a sense of financial discipline and cost culture in the organisation so that the overall organisational objectives are performed within the available resources at least cost. In fact, the CFO is the eye and ear of the company and has a role in the entire value chain of the company encompassing all the activities as all business transactions have an impact on finance and helps in organisational growth, improved capital productivity and improved value for shareholders’ fund.

Do you think that ONGC's return on investment is comparable to other companies in the E&P Sector elsewhere? If not, then what are the lacunas identified till date?
Till recently the national oil companies like ONGC were operating under Administered Price Mechanism and the price of our products had been lower than the international price. Even today ONGC is getting partial parity to the international prices for crude oil and natural gas. Secondly, the operating environment and statutory conditions under which these companies operate are not similar to the one prevailing in India. Therefore, comparison of Return on Investment (ROI) on apple-to-apple basis may not be feasible. However, we have been making attempts to evaluate the performance of ONGC vis-a-vis international oil majors and it is observed that our Return on Investment is quite comparable with other global E&P companies.

Government has already decided to move towards market price regime from administered Price regime? How is it going to affect ONGC?
Since replacement of Administered Pricing Mechanism (APM) by Market Determined Pricing Mechanism (MDPM) with effect from April 1998, market has witnessed significant volatility in crude oil price. When the international price was at the rock bottom level during 1998 and early 1999 ONGC’s bottom line was protected due to floor price concept. With hardening of international crude price and due to partial linkage with such price, ONGC had gained in terms of better revenue income as well as higher profit. If there is a volume growth, and market price remains firm at the current level, it is expected that both revenue and profit would grow. However, since no increase in volume has taken place in recent past, any benefit that ONGC is likely to derive would primarily be on account of higher market price. Situation, however, will alter dramatically if there is a decline in product prices. ONGC’s bottom line will then be under severe pressure. Most of the international oil companies have a quick response mechanism by which they adjust their activity levels quickly to avoid significant erosion of their bottom line performance. Such companies remain very much focused to market price of their stocks and shareholders’ value creation. In case of ONGC, in view of very high content of fixed cost which is almost 80 percent of our total operating cost any negative price volatility is likely to have a cascading effect on ONGC’s overall financial performance as we do not have such quick response system in our operational areas. In order to protect our bottom line under such a scenario, our planning process needs to be flexible enough and we should be in a position to develop project(s) at a low cost. When market sentiments are not favourable, we should be in a position to adjust our plans through prioritisation of our activity programme based on their value creating ability. Thus, our main focus should be on cost optimisation, productivity improvement and asset prioritisation.

What are the actions ONGC should take or already has taken to prepare itself to face the volatility of international prices of oil?
I have just mentioned that E&P business is very much susceptible to the volatility of oil price. Successful oil companies have a very flexible operating system so that they can quickly respond to the changes in market conditions. We have seen how successful oil companies reduced their volume of operation as well as cost when the oil price crashed in 1998 and in the earlier part of 1999. Although, it may not be feasible for a national oil company like ONGC to take such drastic action, what is essential in the given circumstances is to have a continuous focus on our cost of operation. We have to make all out efforts to identify areas where cost reduction could be effected. Secondly, continuous review of the portfolio of assets is essential to ensure proper deployment of resources in response to the market conditions. Nowadays, most of the oil companies are resorting to forward transactions for crude oil to face volatility in oil prices. Even though it has not yet been in practice in India, I am sure that in times to come this would be a very useful tool particularly after the introduction of free market price mechanism for petroleum products. ONGC is also contemplating entering into long-term sale agreements for its product with some of the national oil companies in the downstream sector. We are also in the process of setting up a Marketing/Commercial Cell to look after marketing and pricing issues. We are also building up appropriate network of systems, which would support quick decision-making and reduce our response time.

How is ONGC going to be benefited by the cross holding of equity with IOC and GAIL?
When we look at the international arena, there is hardly any pure E&P company. Oil companies elsewhere are mostly integrated energy companies. In recent times, we are witnessing mega mergers like BP-Amoco, Exxon-Mobil, Elf-Total etc., to increase their market share and competitive strengths. With the liberalisation of Indian economy more and more international companies are coming to India. To face competition and to maintain market leadership, national oil companies have to come together so as to leverage their areas of strengths and build synergy.
Secondly, NELP has also brought a series of opportunities as well as threats for the national oil companies. Perhaps time has come when we have to do some SWOT analysis and find out how we can strengthen ourselves in a coordinated manner. The cross holding among ONGC, IOC and GAIL would create an environment of understanding and trust where these companies can combine these resources and thereby create synergy through proper resource allocation instead of competing with each other. A joint venture for LNG has already been entered into with ONGC, IOC, GAIL and BPCL as partners. Another joint venture with IOC has been signed in the area of training and consultancy.

Are there any plans to divest Government’s share in ONGC’s equity?
The Government of India would take this decision. As such we are not aware of any plan of the Government to divest it’s holding in ONGC immediately. I feel that present market price of ONGC’s stock is not the true depiction of the company’s fundamentals and intrinsic value. It may be beneficial to the Government if the divestment, if at all to were taken up, is effected after deregulation process is complete and the company is allowed free market price for its products.

The financial management information system is under revamp through UFSO Project. How is it going to benefit line Managers?
Even though we have plethora of information, we lack meaningful cost information and analytical management information. Once the financial system is upgraded with introduction of ERP process, we would be able to capture data not only on real time basis but also for each activity with necessary analysis. The availability of such timely and meaningful information would help operational executives to take necessary corrective action in time as well as help in scenario planning for deciding best course of action. The new upgraded financial system is expected to generate activity based costing and motivate the executive to avoid such activities which have adverse impact on cost and focus their attention to such areas of operations which have potential to create higher value. This system would also help the organisation to quickly readjust its operational priorities in response to the changes in the environment, which is very much essential in E&P business due to volatility in its product prices. The system would also help in generating monthly profit and loss statements, help in automatic reconciliation etc. with less and less manual efforts.

What are the cost optimisation/wealth maximisation measures you would suggest when ONGC's production levels are falling/stagnating?
In fact, we are on a cross road today. Our production is falling while exploration success is not very encouraging. This is putting extra pressure on managing costs and maintaining healthy bottom line. Being an E&P company, we have to continue to invest in exploration. Our exploration is now entering into more frontiers unchartered areas like deep-sea exploration requiring larger resources. As a short and medium terms effort we have to improve recovery factors of our main producing assets for volume growth and to generate more surplus. These efforts call for more rigorous due diligence, application of more cost effective technology, prioritisation through scenario planning by distinguishing performing and non-performing assets. We also need a tight budgetary system with measurable performance criteria.

Every employee contributes in the finance function of an organisation. What are your comments?
Yes, I fully endorse that every employee of an organisation can contribute in the finance function. In fact, finance is basically a support service for the executives. Primarily the finance and accounts formation of a company helps the executive to take right decisions to add value to the company. If we look deeply into it, it may be seen that finance is an activity, which compliments the actions of the operational executives. Whenever an employee makes any contribution or adds value to the organisation or for that matter destroys value it affects the finance of the company. Thus finance embraces all activities of the organisation and hence every employee should have some feel of finance function.

Has any exercise been carried out in ONGC to assess the true value of the company?
The true value of an E&P company is represented not only by its financial statements i.e., balance sheet, but also by the quantum and quality of reserves it possesses. A valuation exercise with the assistance of ICICI Securities and J P Morgan was carried out some time in 1993-94. In recent times however no such detailed evaluation has been undertaken except periodic reporting by analysts of various Investment bankers. We are however contemplating carrying out a fresh review of intrinsic value of the organisation as it is observed that present market price of ONGC’s share is not depicting the true value.

There is no significant accretion of oil or increase in oil production in the past few years. How do you perceive the future of ONGC in such a scenario?
It is true that ONGC has not been able to find any substantial hydrocarbon reserve during the last few years and our reserve base is gradually depleting. For sustaining development it is a must for an E&P company like ONGC to add sufficient reserves on an ongoing basis at least to match its production i.e. the reserve to production ratio needs to be one or more. Fortunately a number of on-land basins, which hold promise, are relatively unexplored and deep sea is almost a virgin territory. Even though these are frontier basins, our geo-scientists believe that these hold much promise. There are also opportunities outside India, which we need to seize. Fortunately we do have resource strength and talented manpower. Against this backdrop, I am quite optimistic about our future. 

What is your advice to increase the financial prudence of the company?
If each of us have clarity on role and responsibility and is focused on value chain of the business i.e. clear understanding of which operations create value and which destroy value, there would be greater participation in resource utilisation. We need to understand value drivers and cost drivers of our business activities and the same should be inbuilt in our planning, budgeting and monitoring process. Such a step would surely generate greater awareness in financial prudency.

How would NELP affect ONGC’s operation?
Till NELP was promulgated the national oil companies in the E&P sector namely ONGC and OIL were having free access to any area of the country for exploration and exploitation of hydrocarbons. After NELP, national oil companies would not have such free access and will have to compete with other private and international oil companies for licence to explore any new area. Out of 25 PELs granted recently by the Government, ONGC either solely or jointly has been able to get only 8 PELs. This competitive environment would force ONGC to redefine its business strategy to be more cost effective and efficient in the long run. ONGC will have to look for more cost effective technology and have to replace complacent business outlook to a more competitive customer focused environment. The coming years would be a testing time for our ability to adjust, adopt, and re-engineer to maintain our market leadership and competitive advantage.

ONGC has been the proud winner of NPMP Award of excellence in Finance management. What were the unique features of the Fund management?
Well, I would like to add that NPMP Award was not only for fund management but for overall excellence in financial management. One of our major thrust area was management of financial risk namely exchange rate, liquidity risk and credit risk. ONGC had been able to manage the exchange and interest rate risks by pursuing diversified portfolio of foreign currency loan having floating/fixed rate mix and thereby spreading the exchange rate and interest rate risks. The loan portfolio is regularly reviewed to utilise opportunities for refinancing and pre-payment of costlier loans. Due care was also taken for effective deployment of surplus funds. ONGC has highly innovative cash management system whereby balances remaining in the centralised cash credit account are automatically transferred to term deposits for fifteen days. Any requirement of funds before maturity is met by encashing such TDR on value date basis. By following this practice, ONGC was able to earn substantial interest. In addition to these, a number of initiatives have been taken in the areas of financial management like upgradation of financial system, restructuring of internal audit through introduction of multi-disciplinary approach and adopting best practices, industry bench marking etc.

In the present competitive environment, how do you see the role of socio-economic welfare activities by ONGC?
ONGC is very proactive in its role of meeting socio-economic needs particularly in the region of its operations. Question arises whether in a competitive environment with commercial focus, can ONGC continue to play such socio-economic welfare activities in future. In my view, we should continue to play such role as such efforts generate lot of goodwill in the society which add value with direct and indirect benefits which may also prevent many hidden/unforeseen costs in the long run.

Questionnaire designed by Narayani Mahil for ONGC REPORTER.