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ONGC-Goldman row: Our view
Mar 9, 2009

Recently, Goldman Sachs came out with a report on ONGC stating that the company’s corporate governance practices left much to be desired. Its main concern was that the Indian government has withdrawn US$ 20 bn in cash in the past 6 years from ONGC without consulting the minority shareholders. Although investors and independent directors have objected, the practice continues. The report also mentioned other points such as an ineffective overseas growth strategy, unexciting domestic business and cost escalation in the aging domestic fields.

In reply ONGC has stated that:

  1. The company provides more than adequate disclosures on all operational as well as non-operational issues.
  2. Subsidy discounts are applicable to crude produced from nominated blocks only, where there is no production sharing/ profit oil sharing with the government. Despite subsidy discounts, ONGC’s retention price has steadily increased. As a result the company feels that the minority shareholder’s interest is not unduly compromised.

    Year Gross price Subsidy discount Net price
    US$/ bbl Rs bn US$/ bbl US$/ bbl
    FY03 28.5 - - 28.5
    FY04 30.0 26.9 3.5 26.5
    FY05 43.2 41.0 5.4 37.8
    FY06 59.7 119.6 17.3 42.3
    FY07 66.3 170.2 22.1 44.2
    FY08 85.5 220.0 32.6 52.9
    9mFY09 99.8 273.7 50.5 49.3
    Source: Company
  3. Status of subsidy sharing was duly disclosed in IPO offer document. Thereafter quarterly results carry information on subsidy discounts.
  4. Its overseas reserves and production have grown during the last 6 years.
  5. Despite largely matured and depleting fields, domestic production levels have either been maintained or have marginally increased during the period.

Our view
It is true that ONGC’s subsidy burden, announced in an ad hoc manner by the government, is unfair for the minority shareholder. However, the world over, state-run oil companies are used instruments of government policy. Given that Indian downstream companies are not allowed to pass on higher crude prices to end users, it is not surprising that a portion of the burden ends up at the doorsteps of upstream companies like ONGC. The question is whether the company discloses the burden adequately. As per the above table, ONGC has disclosed subsidies of Rs 851 bn or US$ 19 bn (at Rs 45 to the US dollar), which is line with the figure mentioned in the report.

While US and European oil and gas companies indeed provide better disclosure, it has more to do with reporting practices followed over there by all companies in general. Most Indian companies, across sectors, do not disclose as much information as their international counterparts. We maintain our positive view on the company.

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