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ONGC SWOT Analysis-VII - Views on News from Equitymaster
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Jan 8, 2008

In the previous article , we continued with our SWOT analysis of ONGC by profiling the threats confronting the company. In this article, we take the analysis forward. Threats (contd...)

Natural hazards
Exploration and production of oil and gas is hazardous in nature. Natural disasters, operator error or other accidents can result in oil spills, blowouts, fires, equipment failure and loss of control over wells. As a result, people can get injured or killed; wells and production facilities can get damaged; and property and the environment may be harmed. Offshore operations face marine perils like severe storms and adverse weather conditions, vessel collisions, and governmental regulations based on environmental and other considerations.

Breakdowns in the company’s or the contractors’ equipment or infrastructure could disrupt operations. Computer, telecommunications and electronic systems and equipment are particularly vulnerable to breakdowns. Although the company maintains insurance coverage against some losses, several other risks may fall beyond the insurance net.

Environmental issues
ONGC is subject to extensive laws relating to protection of the environment governing emissions to the air, discharges onto land and into water, maintenance of safe conditions in the workplace, the remediation of contaminated sites, and the generation, handling, storage, transportation, treatment and disposal of waste materials. The company incurs significant capital and operating costs to comply with these requirements.

The company may incur liabilities even for environmental damage caused by its contractors. Under production-sharing contracts, the company is required to indemnify the contractors to the extent of the company’s participating interest. Also, some of the service contracts limit the contractors’ liability for pollution caused by their activities.

Exchange rate fluctuations
The international price of crude oil is denominated in U.S. Dollars. Most of ONGC’s expenditure as well as its accounts as a whole are denominated in Indian Rupees. In addition, most of the revenues and expenditure of OVL are denominated in U.S. Dollars, while its accounts are denominated in Indian Rupees. As a result, fluctuations in the exchange rate of U.S. Dollars for Indian Rupees have an impact on the results of operations.

Regulatory Regime
ONGC is subject to regulation by the Government of India and its departments. In addition, so long as the Government of India’s shareholding in the company exceeds 51 percent, it will be classified as a Government Company and will be subject to regulations generally applicable to public sector undertakings. These regulations concern personnel matters such as the appointment of key management personnel and the hiring, dismissal and compensation of employees. They also concern budgeting and capital expenditure.

As a PSU, the company’s mandate includes a social responsibility that may not be agreeable with its commercial objectives. For example, the Government mandates that public sector enterprises should give preferences to other public sector enterprises over private sector companies when they bid for its contracts. Disputes between public sector enterprises and Government departments, or between different public sector enterprises must be referred to the Committee on Disputes, or COD, before any legal action may be commenced.

The company continues to be subjected to regulated prices for gas, limitations on export of crude oil and natural gas, requirements to contribute to SKO and LPG subsidies, and requirements to contribute to the gas pool account. In addition, the Government mandates that it sell nearly all of the crude oil it produces to public sector refineries in India and all the natural gas to GAIL.

This concludes our SWOT analysis of ONGC.

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