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ONGC SWOT Analysis-V - Views on News from Equitymaster

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ONGC SWOT Analysis-V
Dec 18, 2007

In the previous articles, we looked at the strengths, weaknesses and opportunities in the SWOT analysis of ONGC. In this article, we look at the threats confronting the company. Threats

Competition

The oil and gas industry is extremely competitive, especially with regard to exploration and development of new sources of oil and natural gas. The Government of India has implemented the New Exploration Licensing Policy, or NELP, whereby private participation in the allocation of exploration acreages is permitted through competitive bidding. In the six rounds of NELP bidding so far, ONGC has been awarded a majority of the exploration blocks offered by the Government, yet it remains subject to competitive pressure.

The Government of India now automatically approves 100 percent foreign equity ownership in exploration activities conducted under the NELP. This policy is aimed at encouraging foreign oil companies to invest in India. New domestic and foreign entrants, including the world oil majors, seek to enter the exploration and production industry in India, and increased competition could adversely affect ONGCís business by limiting the number of new exploration blocks that will be available to it in the future. For example, the seventh licensing rounds under the NELP may involve many of the large international oil companies seeking to acquire licenses for exploration through their subsidiaries and joint ventures. Some of the foreign competitors are much larger, more established companies with substantially greater resources, and in many instances have been engaged in the oil and gas business for much longer than ONGC. These companies may be able to bid more aggressively for exploration blocks and may be able to acquire a greater number of properties and prospects, including operatorships and licenses.

The company also faces competition in its refining business as well as planned downstream retail marketing business.

Political unrest

ONGC faces security risks in some of its assets in Assam, Nagaland and Tripura, which are located in the North East region of India. The company has suffered the adverse effects of insurgency, terrorism and civil strife in the region, and insurgent groups have targeted its oil installations. There have been several instances of attacks against its staff, including the kidnapping of and killing of its officials in the North East region. It has experienced interruptions in its production and exploration activities due to these attacks. In other politically sensitive areas of India where the company believes there are hydrocarbon reserves, for instance Nagaland, it has been unable to carry on exploration activities because of the risk of insurgency or terrorism.

In addition, its offshore installations in the open seas, such as in the Western Offshore resource province, are vulnerable in the event of acts of war or terrorism directed towards India. Minor security concerns throughout India include instances of oil pilferage, equipment sabotage and theft, which have an adverse effect on the company. ONGC has taken steps to bolster its security. It interacts closely with various state administrations, the navy and the army. It has instituted protective measures for the safety of personnel and installations, and has disaster management plans in place. Despite these measures, it remains susceptible to security threats that may have an adverse effect on the conduct of its operations.

OVL has participating interests in assets located in Iraq, Iran, Sudan, Vietnam, Myanmar, Syria, Libya and Russia, many of which have experienced instability in the recent past, or may experience instability in the future. The oil and gas industry has in the past been subjected to regulation and intervention by governments around the world, including in the regions and countries in which OVL has operations, relating to such matters as environmental protection, controls, restrictions on production, and potentially, nationalization, expropriation or cancellation of contract rights, as well as restrictions imposed by other governments on entities conducting business in such countries. In accordance with standard international practice in the industry, OVL has entered into contracts, including political risk insurance contracts, relating to its activities in its countries of operation that contain provisions intended to protect its commercial rights, and the Government of India maintains bilateral investment protection agreements with some of the countries where OVL operates. In the event that such adverse events beyond its control occur in the areas of OVLís operations overseas, contractual provisions and bilateral agreements between countries may not be sufficient to safeguard OVLís interests, and its operations in those areas may be materially adversely affected.

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

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