ONGC India: In search of a new growth strategy

Question 1:

How did Raha transform ONGC? What are the key themes of the strategic transformation? What elements of his strategy would you agree with and what elements would you disagree with? Explain why.

How did Raha transform ONGC?

Provided Company with new visionLocating Reserves WorldwideCBM project in West BengalDeep Water Exploration project in KG BasinRedoubling of efforts by ONGC subsidiary ONGC Videsh Ltd. (OVL)Incentive plans targeting innovation and productivityComprehensive redesign of the entire performance appraisal process

How did Raha transform ONGC?

Created a management development institute(ONGC Academy) to provide leadership and technical trainingA voluntary retirement program was announcedInternal systems were restructured/revamp for smooth organization functioningFour new performance reward schemesEliminating bureaucratic layers of staff approvalIdle cash reserves to pay off its foreign debt

Areas of Strategic Transformation

Five key areas:

Vertical Integration

Increasing Oil and Gas reserves

Improving existing wells

Improving Cost efficiencies

Placing a Greater emphasis on human resource development

Disagree

ONGC entering into areas where it had no expertise(Trying to go against core competency of the company which is Oil E&P)Relying on the power of few to make good decisionsInefficient data analysis structureFocused on Rig Utilization MaximizingShift of 200 engineers, geologists, and geoscientists to Reliance on account of bright future prospectsPessimistic approach to Indias potential for oil and gas

Question 2:

How would you assess the refining industry in India? Would integration into the R&M business be a good growth avenue for an oil company such as ONGC? Why? Why not?

The Refining & Marketing LandscapeIn the year 2007, India had installed refining capacity of 2.6 million bpd which it wanted to double in the coming 5 years or so.One of the major reason for this big move was government expected more & more Oil & Gas exploration to take place in next decade. Indian Government was aware that in order to take full advantage of new Oil & gas discoveries, India had to become major player globally in supplying refined products.Government allowed many state owned companies to enter into JV with Big names of Middle East to carryout their expansion plans.

Installed capacity & Throughput for Refining sector

Refinery Crude Throughput ('000 tonnes) Installed CapacityRefiner19912001200220032004200520062006Cap. Utln%IOCL237423322633761352883765936628385224135093.2HPCL923011980123471292913699143291422913000109.5BPCL695786838744871187579138102981200085.8CPCL569866256689681970408923103621050098.7MRPL6438548772531006911809120149690124RPL26033296543054432345343093316333000100.5

Paradigm ShiftIf we have a glance at the statistics, upto year 2007 state controlled firms enjoyed the protected status in domestic refining industry as most of the private players were mere spectators.

However, as case with most of the state owned entities, assets of this state-controlled players were outdated to handle complex crude which provided a Golden Gate to private players to enter into R&M sector.

Reliance A Game ChangerReliance Petroleum Ltd (RPL) which was already well established in E&P tried its fortunes in R&M & emerged as one of the formidable players in R&M.

It had Worlds third largest refinery with a capacity of 0.6 million barrels per day & was set to commission second refinery.

Optimism related to Indias growing demand for refined products in the near future was the major reason behind Reliance increasing its refining capacity.

ONGC One more Feather in the Cap?OrMore burden on Weak Shoulders?Founding objective & core purpose was to explore & exploit Indias Energy reserves.Already well established Government players like IOCL, HPCL, BPCL in R&M sector with significant market share.Refining market was saturated & both public & private players were sufficient to take care of current consumption.Refining capacity would remain unused if - 1. Global Surveys & Government expectations regarding Indias undiscovered Oil & Gas deposits proved to be wrong. 2. India failed to explore this hidden treasures.Huge Capital investment needed to foray into R&M business.

Not ONGCs cup of TeaHistorically, refining investments had been the Achilles heel of petroleum companies.Big names in petroleum industry suffered huge loses in the 1980s-1990s as they experimented to enter refining business & become a Integrated player.If refining capacity declines, profit margins of the company will decline very sharply. Strict Environment rules & regulations were the major hurdles in setting up a refinery.

Subir Raha had an axe to grind.

ONGC had a workforce having sense of entitlement rather than performance oriented progress Incentive plans targeting innovation and productivityComprehensive redesign process won ISO 9000 Certification and spanned across all key elements of HR discipline

*A voluntary retirement program was announced fairly early in Rahas tenure, and the offer had the positive effect of reducing the ranks by 10%, an uphill accomplishmentEliminating bureaucratic layers of staff approval to revamp the decision making process and faster approval of tendering processIdle cash reserves to pay off its foreign debt and thus decreasing the debt and interest and tax burden and increasing the working capital

Sales at ONGC rose from Rs. 22,841 crores to Rs. 50,900 croresIn 2007, the company was ranked as the best E&P company in Asia, third among global E&P companies, and 23rd among global energy companies by Platts Top 250 Global Energy Companies. profits rose from Rs. 6,197 crores to Rs. 14,175 crores to Rs. 50,900

*In line with the vertical integration strategy, Raha acquired Mangalore Refinery & Petrochemicals from KM Birla. "The vertical integration is not only needed, but is essential, he explainedMoved into retail wider flexibility in monetizing its assets by becoming a part of crude cycle, refining cycle and product cycle

Increasing Oil and Gas reserves by exploring international production through OVL(ONGC Vidhesh Ltd, wholly owned subsidy of ONGC) and many unexplored areas in India

Explorations apart, Raha focused on improving existing well operations, using the slogan, "well flowing well". This theme urges employees to view each well as a sunk investment. As he explains, "For us, each well is like a factory. How well or how efficiently each well is performing is a sigma of production each well is an investment. If a well does not perform as efficiently as it should, there is an idling of investment. From both angles, the key challenge is to see that every well that we have drilled, whether it is for production, improved recovery or water injection, performs to its best capacity in the given circumstances."

Raha has also heavily invested in technologyRaha also made the repayment of foreign debt to decrease interest and tax burden and increase working capital A voluntary retirement program was announced fairly early in Rahas tenure, and the offer had the positive effect of reducing the ranks by 10%, an uphill accomplishmentEliminating bureaucratic layers of staff approval to revamp the decision making process and faster approval of tendering processONGC had a workforce having sense of entitlement rather than performance oriented progress Incentive plans targeting innovation and productivityComprehensive redesign process won ISO 9000 Certification and spanned across all key elements of HR disciplineFour new performance reward schemesCreated a management development institute(ONGC Academy) to provide leadership and technical trainingWrokers suggestion box*The vertical integration strategy was not without its detractors.(coal-bed methane, underground gasification of coal, power generation, LNG and petrochemicals) were all uncharted territory for the company and the company had lost its focus on exploration, the primary reason for its constitutionDisagree for short term basis but for long term this can be fruitful because it could lead to economies of scope (scale).From economists point of view in a competitive market, there will be atleast 3-4 competitors of equal caliber and market share would not be more than 35% for a given company. In theory there has to be numerous competitors for a perfectly competitive market.

Influential decision making by most senior staff or the local manager making a call where to dig due to which Onshore exploration ratio 1:4/1:5 compared to industry avg 1:2,Offshore 1:10 absent of system of check and balances before digging

Lack a central repository where all the data from its prospective fields were analyzed hence taking more time to take decisions

By 2006, ONGC had spent Rs. 3000 crores (roughly $616 million) in three years and had drilled an embarrassing 20 dry wells***