ONGC's Growth Strategy
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Case Code: BSTR130 Case Length: 12 Pages Period: 1999 - 2004 Pub Date: 2004 Teaching Note: Not Available |
Price: Rs.300 Organization: ONGC Industry: Oil and Energy Countries: India Themes: Corporate Restructuring |
Abstract Case Intro 1 Case Intro 2 Excerpts
Excerpts
Vertical Integration
Industry experts felt that ONGC new strategy was essential. They felt that there was a pricing cycle for crude, (Refer Exhibit. I for world oil prices for three decades) gas, refinery margin, marketing margin, petrochemical margin and that international prices operated on different cycles in each case. This meant that confining to one sector, whether upstream or downstream or petrochemicals would make any organization vulnerable to the ups and downs of a particular cycle. The integration of these activities would ensure profitable operation across a number of cycles and financial stability. ONGC acquired 297 mn shares of MRPL from the AVB group for Rs 2 per share in March 2003. The company pumped in Rs 6 bn by issuing fresh equity of MRPL, increasing its equity stake to 51 per cent. Later on, ONGC purchased 356 mn shares from institutional investors and increased its stake in MRPL to 71.5 per cent. This deal was worth about Rs 3.9 bn. The total amount invested by ONGC in MRPL was about Rs 10.494 bn...
The Growth Plan
ONGC tried to overcome the declining production of oil and natural gas by focusing on new domestic production enhancement programs, offshore exploration and technology upgradation. To improve productivity and financial performance, ONGC concentrated on human resources development and financial restructuring. For the fiscal year 2004-05, ONGC planned to spend approximately Rs 100 bn on capital expenditure relating to exploration and development of domestic oil and gas properties. As part of production enhancement, redevelopment of Bombay High oil wells was given top priority. This involved two projects called Bombay High North Redevelopment and Bombay High South Redevelopment, which were expected to cost around Rs 82 bn. The program aimed to achieve an additional 76 mn tonnes of producible reserves of oil and gas. ONGC expanded its global operations through its subsidiary OVL, by making sizeable capital investments in Vietnam, Sakhalin (Russia) and Sudan...
The Deregulation
The GoI deregulated the Indian oil industry with effect from April 01, 2002, by doing away with APM. This meant that domestic oil companies could take independent decisions based on import parity and market forces in pricing petroleum products. It also meant that oil PSUs would lose state protection and would have to face the global competitive business environment. Industry experts felt that deregulation would give an edge to domestic PSUs in marketing their products due to their strong investment base, superior infrastructure and extended distribution network. They felt that dismantling APM would also result in increased profitability for oil companies. As expected, the dismantling of APM benefited ONGC significantly. For the fiscal year 2002-03, ONGC reported a 70 per cent jump in net profits to Rs. 105.293 bn as opposed to Rs. 61.979 bn in the previous year. ONGC's revenues increased from Rs. 225.142 bn in 2001-02 to Rs. 342.773 bn in 2002-03, an increase of 53.4 per cent...
Future Plans
In mid- 2004, ONGC was contemplating forward integration opportunities in gas, petrochemicals and the power sector. It announced plans to set up major power plants using natural gas at Dahej in Gujarat and another plant at Mangalore in Karnataka. An agreement was entered into with Gujarat Government for setting up a Special Economic Zone (SEZ) for this purpose, including a 2,000 MW power plant based on re-gasified natural gas. In addition, another SEZ was planned in Kakinada, Andhra Pradesh, to establish a power plant and an LNG import terminal. Another 2,000 MW plant was planned adjacent to the company's subsidiary, MRPL, in Karnataka. However, ONGC did not plan to venture into transmission and distribution of electricity or power trading. As gas transportation was uneconomical, power plants were planned at gas fields and the power generated was proposed to be sold to grids or captive users. ONGC also planned to foray into areas like LNG marketing, diesel, naphtha and kerosene, which promised higher realizations...
Exhibits
Exhibit I: World Oil Prices Chronology (1970-2003)
Exhibit II: HR Objectives of ONGC
Exhibit III: Financial Performance of ONGC
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