Why fixing ONGC won’t be easy for McKinsey

November 8: When the Prime Minister finally gets around to conducting his on-now-off-now review of the country's oil sector, he would be we...

November 8: When the Prime Minister finally gets around to conducting his on-now-off-now review of the country’s oil sector, he would be well advised to pay very close attention to ONGC, the country’s largest, and public sector, oil producing company. For, a reasonably large part of the problem the country is facing in terms of falling oil production can be traced to this single entity. An equally large part, it goes without saying, must also be attributed to the fact that even now, despite the navratna policy, the petroleum ministry refuses to allow bodies like ONGC any independence.

While reams have been written about how ONGC flogged and damaged the country’s largest oilfield at Bombay High, what has not been highlighted is that ONGC doesn’t seem to have learnt too many lessons from it. Experts point to how the problems that are being seen in the Neelam oilfields today are very similar to those faced in Bombay High in the past, and indeed even presently. When Bombay High output declined dramatically, the study team pointed out that its gas-oil’ and water-oil’ ratios had risen to unsustainable limits — it was then recommended that a strict watch be kept on these parameters. Yet, five years later, history repeated itself, this time at Neelam. Two points have to be made here. First, ONGC didn’t even anticipate this kind of problem based on its studies of the oil basin.

Second, it wasn’t able to take corrective action quickly enough. Neither are qualities usually associated with efficient oil companies. Worse, according to a recent report prepared for the ninth plan by the ministry, ONGC has not been able to rectify the damage done to Bombay High though it has been close to 6 years since it has been engaged in the task. It has been carrying out repairs to the field by several methods including water-injection — one of the techniques prescribed by its experts at that time.

It was then projected that, by 1995-96, production would rise to 15.7 million tonnes in 1995-96. Yet, production in that year was 13.6 million tonnes, and is expected to decline further. Quiz the top brass of ONGC on the matter and they’ll probably tell you that the crux of the problem is that the present structure doesn’t empower the person in charge of a particular field to take the necessary decisions needed. The over-centralised nature of ONGC, of course, also stems from the fact that all its decisions have to be cleared by the ministry.

This is why, for example, they were not able to take a decision quickly enough on what to do with Neelam — for over a year, there has been no decision on entering into a joint venture with a well-reputed global oil major to arrest Neelam’s decline. ONGC’s management will also probably tell you how this will now get fixed since they’ve hired international consultants Mc Kinsey & Co to do a study on restructuring, and that this is now being implemented.

Mc Kinsey, for example, told ONGC that its reporting and decision-making structure had to be changed to give the field-manager more powers instead of all decisions being routed through headquarters. Mc Kinsey has now told ONGC to form asset-management teams’, and put them in charge of certain oilfields as an experiment. These teams will be empowered, and will be allowed to take key decisions for three fields, to begin with — Lakwa in Assam, Neelam off Bombay High and Gandhar in the Cambay basin have been chosen for this experiment. Once the results of these pilot projects come in, it is proposed that this reporting structure be replicated all over ONGC. While decentralisiation will certainly be a good thing, a few points need to be kept in mind. Namely, that until officials in ONGC are not held responsible for their mistakes, it will continue to function the way it does. It goes without saying, of course, that ONGC officials cannot be held accountable for anything until the ministry gets off their back.

Let’s just go back to the Neelam field to highlight this point. This was cleared at a cost of Rs 3,100 crore to produce 63 million tonnes of oil over the field’s life. Yet, just a couple of years down the road, production has fallen by half and estimates of recoverable reserves have been lowered to around a third, to around 24 million tonnes.

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Clearly someone’s goofed up, either in the original estimation, or in the process of production and that’s why the recoverable estimates have been cut so dramatically. Yet, when quizzed by this writer a week ago, ONGC chief B.C. Bora saw no reason why any one individual should lose his job for this. In a situation where no one is ultimately responsible for anything, and where no one’s job is on the line, it’s difficult to see how the organisation can really change.