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ONGC SWOT Analysis-VI - Views on News from Equitymaster

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Jan 7, 2008

In the previous article, we began profiling the threats confronting the company. In this article we take the analysis forward. Threats (contd...)

Crude prices

Historically, international prices for oil and value-added products have fluctuated widely in response to many factors. These factors include:

  1. Global and domestic economic conditions

  2. Global and regional economic and political developments in resource-producing regions (particularly the Middle East)

  3. Global and regional supply and demand

  4. The ability of the Organization of Petroleum Exporting Countries (OPEC) and other oil and gas producing nations to set and maintain global production levels and prices

  5. Discoveries and commercial availability of alternative fuels at cheaper prices

  6. Indian and foreign governmental regulations such as tariffs on imports

  7. Price and availability of new technology

  8. Weather conditions.

ONGC does not have control over these factors. Moreover, it is not possible to forecast future oil price movements with accuracy. In addition, as the Government continues to allocate most of the crude oil, it reduces the company’s negotiating power with buyers.

New reserves are critical

The majority of ONGC’s proved reserves are in the Western Offshore, Western Onshore and Upper Assam basins, which are all maturing resource provinces. Unless the company conducts successful exploration and development (or redevelopment) activities or acquires properties, its proved reserves will decline over time as existing reserves are produced.

As far as global presence is concerned, most major international oil majors have been in the business of acquiring international assets for a long period of time and have accumulated a large share of the world’s hydrocarbon resources. Although the company has initiated an aggressive strategy to build up its international oil and gas reserves through its wholly owned subsidiary, ONGC Videsh Limited (OVL) it may still be unable to match the majors in the rate of reserve accretion. The company also has to venture into more difficult and hostile environments, both politically and geographically. As a result, exploration, production and development are more technologically challenging and expensive.

Exploration is risky and capital intensive

ONGC has only limited experience in ultra deep-water exploration, which is a particularly high risk and capital-intensive activity. It is carrying out exploration and development activities overseas through OVL in various countries where it is not the operator in any of the fields and has limited control over expenditure and drilling decisions. In addition, its use of advanced technologies requires high-resolution surveys and infrastructure for interpretation, which involves greater exploration expenditures than traditional exploration practices.

The cost of drilling, completing and operating wells is often uncertain. There are several factors such as:

  1. Unexpected drilling conditions

  2. Pressure or variations in geological formations

  3. Equipment failures or accidents

  4. Adverse weather conditions

  5. Compliance with governmental requirements

  6. Shortages or delays in the availability of drilling rigs and the delivery of equipment.

  7. Failure of third party contractors

  8. Inflation

  9. Foreign currency exchange rate fluctuations

  10. Unanticipated conditions prevailing in the areas of exploration

As a result of these factors, the company has incurred cost overruns, curtailed or terminated drilling operations in the past. Examples of unsuccessful drilling are Saurashtra on-land, the Bengal Basin, the Ganga basin and activities in the early 1990s in Egypt, Tunisia and Yemen.

We shall conclude our SWOT analysis of ONGC in the next article.

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