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ONGC SWOT Analysis-III - Views on News from Equitymaster
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Dec 11, 2007

In the previous article, we looked at the weaknesses section of the SWOT analysis of ONGC. In this article, we take the analysis forward. Weaknesses (Contd.)

Development plans require capital expenditure.
Due to the nature of the ONGC’s business, new projects require significant capital expenditure. Such projects entail exploration, engineering, technological upgrades, construction and other commercial risks. Many of the projects may involve significant cost overruns, may not be completed in a timely manner or at all, or may not operate as planned. If the company does not have sufficient internal resources to fund its capital expenditure requirements in the future, it may need to raise funds through debt or equity financings or enter into joint ventures. If it is unable to raise these funds or enter into joint ventures in a timely manner or at all, it will be unable to implement its business plan, which may have a material adverse effect on its business.

Further, the company needs government approval for all significant investments in joint ventures. OVL too needs government approval for any significant proposed investments overseas. Any delays in obtaining any such approvals may put ONGC at a competitive disadvantage.

Existing technologies need upgradation and advanced technologies need timely and cost-effective assimilation.

Many of ONGC’s producing fields are maturing resource provinces. Though the technology employed has been periodically revamped, the rate at which the company has adopted new technology has been lower than the rate at which technology has developed in the industry. In order to optimise production from these provinces, carry out exploration in deepwater areas, exploit non-producing basins and acquire knowledge and expertise about frontier basins, it is necessary that the company adopts advanced technology rapidly and cost-effectively, and train its personnel in the operation and maintenance of such technology. If the company is unable to acquire such technology in a timely manner or fails to appropriately revamp existing technology, it may not be able to fully exploit its reserves and compete effectively.

As acquisition of technology is highly capital-intensive, if such technology is not utilised in a productive and efficient manner, the company may not realise the benefits it expects. In addition, if it is unable to acquire new technology it may have to incur even greater expense to lease such technology. In certain areas of its operations, outsourcing is more efficient and effective than in-house development and the company must be able to balance its needs for in-house development vis-à-vis outsourcing and alliances with other exploration and production companies in order to benefit from their expertise.

Government company.
The government of India, acting through the Ministry of Petroleum and Natural Gas, continues to control ONGC and has the significant influence on proposed five-year plans, revenue budgets, capital expenditure, dividend policy, transactions with other government- controlled companies such as GAIL, IOC, BPCL or OIL, or the proposed assertion of claims against such companies and other public sector companies.

In addition, under ONGC’s articles of association, the President of India may issue directives with respect to the conduct of the company’s business as long as it remains a government company under the Companies Act. The government could delay or defer a change of control of the company or a change in its capital structure, delay or defer a merger, consolidation, takeover or other business combinations involving ONGC, or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company.

In particular, given the importance of the petroleum industry to the economy and the mass consumption of certain petroleum products by the Indian public, the government could require ONGC to take actions designed to serve the public interest in India and not necessarily to maximise its profits.

Approvals or licenses required in the ordinary course of business.

ONGC requires approvals, licenses, registrations and permissions for operating certain assets, basins and plants. In addition, the company conducts its domestic exploration and domestic production activities under licenses and leases. If it fails to obtain any of these approvals or licenses, or renew them in a timely manner its would affect its business.

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

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