India's oil ministry plans to carve up ONGC

Wednesday 28th April 2021 06:03 EDT

India's oil ministry has drawn up plans to carve up ONGC, the country’s largest explorer into smaller entities, sell stake in its major producing and upcoming fields to private companies and privatise smaller discoveries.

The ministry sent an ‘action plan’ to the company on April 1, a day after full-time chairman Shashi Shanker retired. The letter from additional secretary (exploration) Amar Nath asked acting chairman and director (finance) Subhash Kumar to respond by “Monday, April 5”.

The action plan centres around hiving off in-house operations - drilling, well services, logging, workover services and data processing - into separate entities. It identifies Ratna-R and Pana-Mukta offshore fields as well as Gandhar onland in Gujarat for inducting private partners in the western region. In the eastern offshore, the $5-billion KGDWN-98/2 gas project, slated to be the crown jewel, Deendayal West block, acquired from GSPC for $995 million in 2017, and Ashoknagar onland discovery near Kolkata have been flagged for inducting “global majors as partners”.

Industry analysts said the plan will turn ONGC into a surrogate company where it will be left with investing risk capital for exploration but will have to share the fruits of its toil with private partners brought in to develop discoveries “on market-friendly terms as lower royalty”.

Separating in-house expertise and functions, built over the years, into separate entities will weaken ONGC’s value and raise costs. “ONGC will have to pay 18% GST to the subsidiaries for services but will not be able to claim input credit. Today, this is not so since these are in-house functions,” an analyst said.

ONGC will lose its financial leverage in raising cheap debt as “nobody lends to a company whose primary task will be to sink risk capital”, a former company executive said. Another former executive said ONGC may be left stranded as the subsidiaries will look for contracts from others. “Many companies with fields are struggling due to dearth of cheaper domestic resources in these services. There could be instances where, say, the capacity of the drilling subsidiary is booked by other companies,” he added. The plan also envisages privatising smaller fields and monetising assets.

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