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ONGC SWOT Analysis-I - Views on News from Equitymaster
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ONGC SWOT Analysis-I
Nov 27, 2007

In the previous articles we have profiled ONGC’s fundamentals using the accounting equation framework. With this in the background, from this article onwards, we shall proceed towards forming an opinion on the company by analysing it through the SWOT framework. Strengths

Large proved reserves of high-quality crude oil and natural gas, with significant exploitation opportunities.
ONGC has the highest proved reserves in India of any oil and gas company, which provide its with a more abundant and stable long-term production base relative to its major competitors. In addition to extensive domestic proved reserves, the company also has significant proved reserves of crude oil and natural gas in foreign countries.

FY07 Oil (MMT) Gas (BCM)
Proved developed reserves 370 257
Production 34 27
Ratio (in years) 11.0 9.5

Based on the production for FY07 and its proved developed reserves as of March 31, 2007, its ratios of proved developed reserves to production for oil and natural gas were approximately 11.0 years and 9.5 years respectively. As of March 31, 2007, proved & developed reserves accounted for 73% and 59% respectively of ONGC’s total global proved crude oil and natural gas reserves.

FY07 Oil (MMT) Gas (BCM)
Proved developed reserves 370 257
Proved reserves 504 435
% 73% 59%

Most of its crude oil reserves are comprised of sweet crude, with a significant majority in the form of light sweet crude, varieties that yield a higher proportion of higher-value light and middle distillates. The majority of its natural gas reserves consist of gas with a high calorific content.

Extensive experience in crude oil and natural gas exploration, development, production, refining, and gas processing and fractionation.
Over the nearly five decades since its inception, ONGC has amassed substantial exploration, development and production expertise, particularly with respect to the geological conditions in India. The company has accumulated an extensive collection of raw and proprietary geological data on offshore and onshore regions in India, which potentially provides an advantage over other foreign and domestic oil and gas companies seeking to compete with the company in India for exploration licenses, in production and in other areas.

In addition, this advantage makes it more attractive to prospective joint ventures and production-sharing partners, which further improves its ability to pursue domestic exploration, development and production opportunities, and to obtain access to advanced technologies and techniques. The company also benefits from a highly skilled workforce and a senior management team with extensive industry experience. It has historically been a technology leader in the Indian market. For example, ONGC was the pioneer in introducing natural gas processing and fractionation technology to India.

Sizeable exploration area.
Since the establishment of the New Exploration Licensing Policy, or NELP, by the Indian Government in 1999, ONGC has been awarded 85 blocks out of 162 blocks in six rounds, i.e. around 50%. The company also has an extensive amount of proved undeveloped oil and natural gas reserves and a considerable area of under explored sedimentary basins. With the significant financial resources afforded by its results from operations and low debt levels, ONGC is well positioned financially to exploit these exploration opportunities.

Significant infrastructure for exploration, production, refining, gas processing and fractionation, transportation and storage.
ONGC has an extensive installed infrastructure of drilling and work over rigs, onshore and offshore production facilities, well stimulation services, sub sea and land pipelines, gas processing and fractionation facilities, refineries, exploration and transport vessels, storage facilities and other infrastructure located throughout the main oil- and gas-producing regions of India, providing it with an advantage over its existing principal competitors in India as well as new entrants into the upstream and refining sectors of India’s oil and gas market. This installed base also provides it leverage in its existing operations into retail and other downstream sectors.

Attractive cost structure.
ONGC’s average finding costs and all-in production costs benefit from its low manpower costs, lack of net interest expense, relatively high use of in-house services in place of more expensive third-party contractors, utilization of depreciated infrastructure and equipment, adoption of cost-saving technology in its exploration and production operations, and effective use of its large store of geological data and expertise. This cost structure will allow the company to compete effectively even in an environment of low crude oil prices.

Strong research and development and training network.
ONGC’s prospects for success are dependent on its access to advanced technologies and expertise. Overcoming the challenges of operating in a diverse range of environmental and geographical conditions and in highly competitive markets requires ongoing upgrades of existing technology and developing and adopting new and improved technology in exploration, development, production and refining. The company’s R&D institutes form an integral part of its business and are instrumental in providing much of the technological and analytical support and scientific, engineering and technical know-how that are critical to its success. Similarly, affiliated training institutes provide educational services and skills training crucial to effectively developing ONGC’s human resources and maintaining its competitive edge.

Government support in obtaining stakes in blocks overseas.
ONGC’s wholly owned subsidiary OVL benefits from the initiatives taken by the petroleum ministry to further India’s interest in overseas blocks. For example, the petroleum ministry will shortly explore the possibility of an Indian stake in Sakhalin-IV and V offshore oil fields in Russia through an agreement with Rosneft, as well as the possibility of setting up a petrochemical hub.

We shall continue with our SWOT analysis in the next article.

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