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ONGC SWOT Analysis-II - Views on News from Equitymaster

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ONGC SWOT Analysis-II
Dec 10, 2007

In the previous article. , we began our SWOT analysis of ONGC by studying its strengths. In this article, we shall take a look at its weaknesses. Weaknesses

Administered pricing mechanism for gas.
Historically, most of the gas produced by ONGC is sold to GAIL at government-regulated prices (Administered pricing mechanism), which are considerably lower than market prices. The impact of the recent decision on KG-basin gas is yet to be seen on ONGC’s production. In addition, the prices of gas produced by joint ventures in which the company participates are linked to the international prices of a basket of fuel oils subject to a floor and a ceiling. The gas prices received by the company are net of an annual contribution to the government gas pool account plus the difference between the price at which GAIL purchases gas sold by ONGC’s joint ventures and the price at which it sells such gas to its customers. Increases in the price of gas payable by GAIL to the joint ventures, which occur when international prices of fuel oils increase, and increases in the quantity of gas produced by the joint ventures would tend to further reduce the net price ONGC receives for its gas. The control by the Government of the sale prices of ONGC’s natural gas from nomination blocks places it at a disadvantage as compared to the price of gas from joint ventures.

Sharing the under-recoveries of the oil marketing PSUs.
The public sector oil marketing companies (BPCL, HPCL and IOC) are restricted by the government to increase the selling prices of superior kerosene oil (SKO) for public distribution and liquefied petroleum gas (LPG) for domestic use. The resultant under-recoveries are made up by allowing the oil marketing companies’ to charge higher prices for other retail products, and the balance is shared between the public sector oil marketing companies and the public sector upstream companies, namely ONGC and GAIL.

Crude oil and natural gas reserve data are estimates.
The reliability of proved reserve estimates depends on the quality and quantity of the geoscientific, engineering and economic data; whether the prevailing tax rules and other government regulations, contracts, and oil, gas and other prices will remain the same as on the date estimates were made; the current and future production performance of the reservoirs; and extensive engineering judgments. Many of the factors, assumptions and variables involved in estimating reserves are based on data that are currently available and subject to variations over time. Results of drilling, testing and production after the date of the estimates may require upward or downward revisions in the reserve data, which could be significant. In addition, all of ONGC’s estimates of its international proved reserves have been provided by its international joint venture partners in countries where OVL operates based on international standards that may differ from those used by ONGC.

In calculating its proved domestic reserves, the company uses internally-developed definitions that are based on international standards promulgated from March 1995 by the Society of Petroleum Engineers, or SPE, and the World Petroleum Congresses, or WPC. SPE International Standards differ in certain material respects from standards applied by the United States Securities and Exchange Commission (SEC Standards). It should also be noted that the magnitude of any proved reserve difference between the SPE International Standards and the SEC Standards could vary greatly. If at some point in the future ONGC were to adopt SEC Standards, it could potentially cause the amount of estimated proved crude oil and natural gas reserves reported by the company in future periods to be lower than would otherwise be reported under SPE International Standards. A decrease in the amount of estimated proved developed crude oil and natural gas reserves reported could affect the amount of depreciation and depletion expense, impairment charges.

Development projects involve uncertainties and operating risks.
ONGC’s development projects may be delayed or may not be entirely successful for many reasons, including financial constraints, cost overruns, lower oil and gas prices, equipment shortages, mechanical and technical difficulties, the failure to obtain necessary governmental approvals, and industrial action. These projects may also sometimes require the use of additional and advanced technologies, which can be expensive to purchase and implement, and may not function as expected. In addition, some of its development projects will be located in logistically difficult environments, such as the deep-water projects in the Arabian Sea and Bay of Bengal, or will involve challenging reservoirs, which can exacerbate such problems. The company may encounter delays and cost over runs in certain other development projects due to failure of third party contractors hired for the project to complete their scope of work in a timely manner as well due to such factors as inflation, foreign currency exchange rate fluctuations, and unanticipated conditions prevailing in the areas of development activity. In addition, development projects, particularly those in remote areas, could become less profitable if the oil industry experiences a prolonged period of low oil or gas prices.

We shall continue with the “weaknesses” section our SWOT analysis in the next article.

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