India’s largest oil and gas producer Oil and Natural Gas Corporation (ONGC) expects a profit of $1 billion a year from oil and petroleum product trading, which it plans to undertake in partnership with an international company. The public sector giant has also worked out a roadmap to optimise costs, which it expects will help save over Rs 9,000 crore on an annualised basis over the coming years. The planned oil trading venture as well as the cost optimisation plan is part of the company’s endeavour to reorient itself for a subdued oil price environment of $60 per barrel. Being an oil and gas producer, ONGC’s revenue moves in line with the movement in international energy prices. Given that the oil prices have been subdued over the past few months and are likely to fall further with ample supply expected to come to the market in the near to medium term, ONGC expects international prices to stay subdued at $60-65 per barrel over the next two to three years. Such a price scenario is bound to impact ONGC’s revenue as well as margins, and the company is gearing up to minimise the impact by reducing costs and developing new revenue sources. The price of benchmark Brent crude is under $65 per barrel currently. At the start of this year, it was over $75 per barrel, and had even breached $80 mid-January. ONGC noted that on average, international oil prices have reduced by 5 per cent each year—compounded annually—over the past five years. ONGC is in talks with four international players, and is expected to set up a joint venture for oil trading with one of them over the coming months, according to the company’s Director (Production) Pankaj Kumar. Kumar did not name any of the four potential partners, but said that none of those is a pure-play oil and gas trader. Another ONGC official said that the interested companies are large oil and gas players that also have experience in oil and gas trading, but declined to name the firms. ONGC wants the international partner to provide trading expertise. Most of ONGC’s own oil and gas production is sold domestically on nomination basis, its subsidiaries buy and sell around 70 million tonnes of crude oil per annum. These companies include its refining arms Hindustan Petroleum Corporation (HPCL) and Mangalore Refinery and Petrochemicals (MRPL), and its overseas investment arm ONGC Videsh (OVL). The proposed trading joint venture will bring all trading activities done by different companies in the ONGC group under one roof, which would help in bringing in efficiency and scale. The trading company will primarily buy crude oil for HPCL and MRPL, and trade oil and gas produced by OVL. ONGC expects this proposed trading JV to handle trade of up to 90 million tonnes per year to begin with, with $1 billion of annual profits within two-three years, it is learnt. The JV, whose equity split between the partners is yet to be decided, is likely to be formed before the end of the current financial year. As for cost optimisation efforts being undertaken by ONGC, the company expects savings of around 15 per cent per year in total costs—operational expenditure as well as capital expenditure—without scaling back on its capacity expansion plans. The company has already implemented over 20 initiatives for cost optimisation, and expects to save around Rs 4,300 crore in a year’s time. Within three years, the savings could go up to Rs 9,300 crore per year, as ONGC has planned numerous other initiatives. The company’s total annual expenditure is in the range of Rs 60,000 crore. The cost optimisation endeavour includes making cost-intensive processes like drilling more efficient and economical, streamlining and scaling up logistics with faster turnaround times, and tweaking project execution strategy to optimise it for efficiency and timely completion, among others. Kumar ruled out any staff rationalisation as part of the cost optimisation efforts. According to Kumar, the company is implementing a multi-pronged approach to prepare for a $60-per-barrel oil price environment. Apart from cost optimisation and oil trading, the focus areas include raising domestic oil and gas production, bringing in international technical expertise for some marquee fields, and building new supply bases.
