Oil & Natural Gas Corpn Ltd:Annual Report 2023-24 Analysis

Oil & Natural Gas Corporation Ltd. (ONGC): A Comprehensive Overview #

About the Company #

Year of Establishment and Founding History: Oil & Natural Gas Corporation Ltd. (ONGC) was established on August 14, 1956, as the Oil and Natural Gas Commission. It was later renamed Oil and Natural Gas Corporation Ltd. in 1993. The company was founded with the objective of exploring and exploiting petroleum resources in India.

Headquarters Location and Global Presence: ONGC’s headquarters are located in New Delhi, India. The company has a global presence through its overseas arm, ONGC Videsh Ltd. (OVL), which operates in various countries across the globe.

Company Vision and Mission:

• Vision: To be a global leader in integrated energy business through sustainable growth, knowledge excellence, and exemplary practices.
• Mission: To leverage technology and expertise to discover, develop, and produce oil and gas resources efficiently and responsibly, while contributing to India’s energy security.

Key Milestones in Their Growth Journey:

• 1956: Establishment of the Oil and Natural Gas Commission.
• 1961: First commercial discovery of oil at Ankleshwar, Gujarat.
• 1974: Discovery of Bombay High, a major offshore oil field.
• 1993: Renamed Oil and Natural Gas Corporation Ltd.
• 2003: ONGC Videsh Ltd. (OVL) established for overseas exploration and production.
• 2010: Awarded Maharatna status by the Government of India.

Stock Exchange Listing Details and Market Capitalization: ONGC is listed on the Bombay Stock Exchange (BSE: 500312) and the National Stock Exchange (NSE: ONGC).

Recent Financial Performance Highlights: Recent financial performance should be sourced from the ONGC official website or reliable financial news sources to ensure accuracy. Key metrics include:

• Revenue from Operations
• Profit After Tax (PAT)
• Earnings Per Share (EPS)

Management Team and Leadership Structure: The leadership team generally includes:

• Chairman and Managing Director (CMD)
• Directors responsible for various portfolios (Finance, Exploration, Production, etc.)
• Key Executives in charge of business units and support functions.

Notable Awards or Recognitions: ONGC has received various awards and recognitions for its performance, innovation, and sustainability initiatives. Recent awards should be sourced from the company’s official website or annual reports.

Their Products #

Complete Product Portfolio with Categories:

• Crude Oil: Extracted from onshore and offshore fields.
• Natural Gas: Processed and supplied to various industries and consumers.
• Liquefied Petroleum Gas (LPG): Produced as a byproduct of crude oil and natural gas processing.
• Naphtha: Used as a feedstock for petrochemical industries.
• Ethane/Propane: Used as a petrochemical feedstock
• Value Added Products: Various products from ONGC Petro additions Limited (OPAL), a subsidiary of ONGC, like Polymers.

Flagship or Signature Product Lines: Crude Oil and Natural Gas are considered the flagship products.

Key Technological Innovations or Patents: ONGC invests in research and development to improve its exploration, production, and refining processes. Examples include:

• Enhanced Oil Recovery (EOR) techniques
• Deepwater exploration technologies
• Geo-technical Analysis
• Software Applications developed for Seismic Interpretation

Manufacturing Facilities and Production Capacity: ONGC operates numerous onshore and offshore production facilities across India. Production capacity varies depending on the specific field and reservoir characteristics.

Quality Certifications and Standards: ONGC maintains various quality certifications and adheres to industry standards to ensure the safety, reliability, and quality of its products. Examples: ISO 9001, ISO 14001, OHSAS 18001

Any Unique Selling Propositions or Technological Advantages:

• Extensive experience in exploring and producing oil and gas in diverse geological conditions.
• Integrated operations, covering the entire value chain from exploration to distribution.
• Strong research and development capabilities.
• Skilled workforce.

Recent Product Launches or R&D Initiatives: Recent initiatives should be sourced from the company’s official website or annual reports.

• New exploration blocks awarded in recent auctions.
• Development of marginal oil fields.
• Investing in renewable energy projects, like compressed biogas.

Primary Customers #

Target Industries and Sectors:

• Power Generation
• Fertilizer
• Petrochemicals
• Refineries
• City Gas Distribution

Geographic Markets (Domestic vs. International): Primarily domestic, but ONGC Videsh Ltd. (OVL) has international operations in various countries.

Major Client Segments (agricultural, industrial, residential, etc.):

• Industrial (Petrochemical, Fertilizer, Power, Refineries)
• Residential (City Gas Distribution)
• Agricultural (Fertilizer)

Any Notable Government Contracts or Institutional Clients: ONGC is a major supplier to government-owned power plants, fertilizer plants, and refineries.

Distribution Network and Sales Channels:

• Pipelines for transporting crude oil and natural gas.
• Marketing divisions for selling refined products.
• Agreements with other companies for distribution.

Major Competitors #

Direct Competitors in India and Globally:

• India: Reliance Industries Limited, Vedanta Limited.
• Globally: ExxonMobil, Shell, BP, TotalEnergies

Competitive Advantages and Disadvantages:

• Advantages: Large reserves, integrated operations, government support.
• Disadvantages: Bureaucratic processes, regulatory hurdles, exposure to commodity price volatility.

How They Differentiate From Competitors: ONGC differentiates itself through its integrated operations, strong domestic presence, and focus on national energy security.

Industry Challenges and Opportunities:

• Challenges: Declining oil production, rising import dependence, environmental concerns, price volatility.
• Opportunities: Exploration of new frontiers, development of unconventional resources, investment in renewable energy, expansion of gas infrastructure.

Market Positioning Strategy: ONGC aims to maintain its position as the leading oil and gas company in India by increasing production, expanding its gas business, and diversifying into renewable energy.

Future Outlook #

Expansion Plans or Growth Strategy:

• Increase domestic oil and gas production.
• Expand gas infrastructure and increase the share of gas in India’s energy mix.
• Invest in renewable energy and reduce carbon footprint.
• Pursue overseas acquisitions through ONGC Videsh Ltd. (OVL).

Upcoming Products or Innovations:

• Increased natural gas production.
• Compressed Biogas production.
• Investments in Green Hydrogen.

Sustainability Initiatives or ESG Commitments: ONGC has implemented various sustainability initiatives to reduce its environmental impact and promote social responsibility.

• Reducing emissions.
• Investing in renewable energy.
• Community development programs.

Industry Trends Affecting Their Business:

• Energy Transition
• Geopolitical Factors
• Technological Advancements
• Environmental Regulations

Long-Term Vision and Strategic Goals: ONGC’s long-term vision is to become an integrated energy company with a diversified portfolio of oil and gas, renewable energy, and other energy sources, while contributing to India’s energy security and sustainable development.

Comprehensive Performance Overview #

3-Year Trend Analysis of Key Financial Metrics #

• Revenue from Operations: Decreased from ₹5,317,925 million in FY22 to ₹6,848,292 million in FY23, and further declined to ₹6,430,370 million in FY24.
• Total Revenue: Decreased from ₹5,392,302 million in FY22 to ₹6,929,033 million in FY23 and then to ₹6,552,589 million in FY24.
• Profit Before Tax (PBT): Increased from ₹540,911 million in FY22 to ₹447,461 million in FY23, and then increase to ₹768,600 for FY24.
• Profit After Tax (PAT): Increased from ₹492,941 million in FY22 to ₹340,465 million in FY23, and further increased to ₹571,008 million in FY24.
• Earnings Per Share (EPS): Increased from ₹36.19 in FY22 to ₹29.18 in FY23, and then rose to ₹39.13 in FY24.
• Net Worth (Equity): Increased from ₹2,595,029 million in FY22 to ₹2,827,750 million in FY23, and then increased to ₹3,370,702 million in FY24.
• Capital Employed: Increased from ₹2,308,133 million in FY22 to ₹2,352,382 million in FY23 and rose to ₹2,600,300 million in FY24.
• Return on Capital Employed (ROCE): Decreased from 25.43% in FY22 to 22.06% in FY23, before increasing to 31.85% in FY24.
• Net Profit to Equity: Increased from 17.54% in FY22 to 12.98% in FY23, before increasing to 14.60% in FY24.
• Debt Equity Ratio: from 0.33 in FY22, to 0.37 in FY23 and to 0.27 in FY24

Business Segment Performance #

• ONGC Standalone: FY24 revenue from operations was ₹1,384,021 million, with a net profit of ₹405,260 million.
• ONGC Videsh Ltd: FY24 gross consolidated revenue was ₹9,553 Crore, with a Profit After Tax (PAT) of ₹639 crore, decreasing from a PAT of 1,660 crores in FY23. The report explains that OVL did not account for revenue from Sakhalin-1, had higher impairment, and had lower crude price realization.
• Hindustan Petroleum Corporation Limited (HPCL): FY24 sales volume reached 46.82 MMT, with refining throughput at 22.33 MMT. Standalone PAT was ₹14,694 crore, with revenue from operations at ₹4,61,638 crore.
• Mangalore Refinery and Petrochemicals Limited (MRPL): FY24 standalone turnover was ₹ 1,05,223 crore, with a profit of ₹3,596 crore. Refining net throughput was 16.59 MMT, and GRM was USD 10.36/bbl.
• ONGC Petro additions Limited (OPaL): Revenue for operations of 143,073 million, with a loss of ‘34,561 million.

Major Strategic Initiatives and Their Progress #

• Energy Strategy 2040: ONGC is revising its strategic roadmap to emphasize the energy transition, with plans to invest significantly in renewable energy and decarbonization efforts. A detailed Decarbonization plan with investment of 2 trillion Rupees by 2038 has been firm up.
• Future Exploration Strategy: Established a target to bring 500,000 sq. km of area under active exploration by 2025.
• ONGC Green Limited (OGL): Incorporated as a wholly-owned subsidiary to focus on green energy and gas businesses, including renewable energy, biofuels, green hydrogen, and CCUS.
• Collaboration with NTPC Green Energy Limited (NGEL) and SJVN Green Energy Limited (SGEL): MoUs signed to explore and set up renewable energy projects, particularly offshore wind.
• Digital Transformation: Established ONGC DARPAN, a Corporate Visualization Center, and the Digital Center of Excellence (DCOE) to leverage Industry 4.0 technologies.

Risk Landscape Changes #

• Climate Change and Energy Transition: Addressed through the Energy Strategy 2040 and decarbonization strategies, including investments in renewable energy and R&D.
• Geopolitical Risks: Managed through diversification of international operations and strategic partnerships. Specific actions include securing extensions for exploration licenses.
• Operational Risks: Addressed through Project Parivartan for safety culture improvement and ISO certifications for all workplaces.
• Financial Risks: Addressed employer statutory liabilities such as provident fund, gratuity, and post-retirement benefit schemes, as well as other employee benefits.

ESG Initiatives and Metrics #

• Environmental: Target of achieving Net Zero operations by 2038. Investment of ₹2 trillion rupees in decarbonization.
• Social: CSR expenditure of ₹634 crore in FY'24, with ₹81 crore spent in Aspirational Districts.
• Governance: Compliance with Corporate Governance standards and reporting under SEBI and Companies Act, 2013.

Management Outlook #

• ONGC is committed to enhancing stakeholder value while maintaining capital spending, sustaining production levels, and optimizing operational costs.
• The Company is focusing on strengthening its financial metrics and making processes more agile, decentralized, and efficient.
• Future strategies include increasing presence in the petrochemicals sector, expanding renewable energy capacity, and leveraging digital technologies for operational improvements.
• Emphasis on cleaner fuels like natural gas for balancing variable renewable energy and reducing carbon emissions in the short term.
• Continued focus on organization-wide initiatives to enhance process, efficiency, digitalization, leveraging data analytics, and AI/Gen-AI solutions.

Detailed Analysis #

Forward Outlook: ONGC Financial Analysis #

Management Guidance and Assumptions #

• Energy Strategy 2040: ONGC’s strategic roadmap, adopted in 2019, focuses on energy transition. Decarbonization Strategy includes plans to achieve Net Zero operational emissions by 2038.
• Reserve Replacement: Management assumes a Reserve Replacement Ratio (2P) of more than one, maintained for 18 consecutive years.
• Operational Cost Optimization: Management aims for cost optimization while sustaining production levels.
• Capital Spending: ONGC is committed to maintaining momentum in capital spending and project execution.
• Future Exploration Strategy: Target to bring 500,000 sq. km of area under active exploration by 2025.
• Discount rates: Present value of cash flows are determinded using a pre tax discount rate of 16.10% for Rupee transactions and 12.16% for Crude Oil, natural Gas and value added product revenue.
• Restatement: Previous year financial statements have undergone restatement due to the correction of prior period errors.

Market Growth Forecasts #

• India’s Energy Demand: Expected to surge at the fastest rate in the coming decades, driven by economic growth, rising living standards and a growing young population.
• Petrochemicals Demand: Expected to remain strong, driving oil and gas demand.
• Global Oil Demand: Projected to rise by around 1 million barrels per day in 2024 and marginally surpassing 2024 rate at 1.2 mb/d, driven by Asian emerging economies, particularly India and China.
• Renewable Energy Capacity: IEA projects that global annual renewable capacity additions are set to have increased by nearly 50% in 2023, nearly 560 GW.

Planned Strategic Initiatives #

• Shared Finance Services (SFS): Launched in collaboration with IBM Consulting to centralize vendor payments and streamline processes.
• ONGC DARPAN: Establishment of a Corporate Visualization Center for real-time view of ONGC operations.
• Digital Center of Excellence (DCOE): Created to leverage Industry 4.0 technologies for business objectives.
• ONGC Green Limited (OGL): Incorporated as a wholly-owned subsidiary to focus on green energy and gas businesses, including renewable energy, biofuels/biogas, green hydrogen, and CCUS.
• Increase exploration: Focus on deep & ultra-deepwater exploration in the Mahanadi Deepwater sector
• Organization-wide initiative: To make processes more agile, decentralized, and efficient.

Capital Expenditure Plans #

• FY'24 CAPEX: Over ₹37,400 crore invested.
• FY'24 Major Projects: Two major projects with an investment of 2,740 crore were completed and 6 other projects with a cost of 11,000 Crore and a life cycle gain of 26.64 MMTOE
• Ongoing Projects: Twenty-three major projects (over ₹100 crore each) under implementation, with a total cost of around ₹62,343 crore and an envisaged lifecycle gain of ~80.52 MMTOE.
• Decarbonization Investment: ₹2 trillion investment by 2038 on decarbonization, including ₹1 trillion by 2030 for 10 GW renewable energy capacity.
• Renewable Energy Projects: 5 GW solar energy projects in progress.
• CBG Plants: Progressing towards incorporating 25 CBG plants.

Efficiency Improvement Targets #

• Process Optimization: Uran plant implemented measures to save 68.65 MMSCM of natural gas annually, valued at ₹1,304 million.
• Flare Gas Reduction: Uran plant’s Flare Gas Recovery Project reduced flare gas from 35.4 MMSCM in FY'23 to 17.93 MMSCM in FY'24, saving 17.5 MMSCM of natural gas valued at ₹420 million.
• Dynamic Gas Blending (DGB) System: Implemented in drilling rigs, achieving a 45% reduction in HSD consumption and reduced stack emissions.
• Centralized Processing: Centralized processing of vendor invoices through Shared Finance Services Center.

Potential Challenges and Opportunities #

• Challenges:
  • Managing decline rates in mature fields (especially Western Offshore).
  • High operating costs in mature fields.
  • Limited prospectivity in some Indian sedimentary basins.
  • High debt levels in subsidiaries and joint ventures.
  • Geopolitical tensions and local issues impacting overseas production (e.g., ONGC Videsh).
  • Regulatory hurdles.
• Opportunities:
  • Growth in India’s energy demand, driven by economic expansion.
  • Potential for new discoveries in underexplored Indian sedimentary basins.
  • Expansion into petrochemicals to diversify revenue streams.
  • Investment in renewable energy and green initiatives (ONGC Green Limited).
  • Strategic collaborations with global majors for technology and expertise.
  • Potential for cost savings through process optimization and technology upgrades.

Scenario Analysis and Sensitivity to Key Assumptions #

• Oil and Gas Price Volatility: Sensitivity analysis shows that revenue from operations is highly sensitive to changes in crude oil, natural gas, and VAP prices. A +/- ₹1 change in price impacts revenue by ₹55,166.29 million.
• Interest Rate Risk: A 50 basis point change in interest rates would impact profit or loss by +/- ₹32.13 million.
• Discount Rate Sensitivity: Decommissioning provisions are sensitive to changes in discount rates.
• Exchange Rate Fluctuations: The company is exposed to currency risk, particularly against the USD. A 5% change in the USD-INR exchange rate could impact profit or loss.
• ESG Risk and Carbon Management: Reduce emmissions and eliminate routine flaring on all operations.

Audit and Regulatory Analysis #

Auditor’s Opinion and Qualifications #

• The Statutory Auditors issued an unmodified opinion on the Standalone Financial Statements for FY'24.
• The Statutory Auditors issued an unmodified opinion on the Consolidated Financial Statements for FY'24.
• The Comptroller and Auditor General of India (C&AG) provided ‘Nil’ comments on both the Standalone and Consolidated Financial Statements for FY'24.

Key Accounting Policies and Changes #

• The Company adopted Ind AS, effective from April 1, 2016.
• The Company uses the historical cost convention and accrual system of accounting, with certain assets and liabilities measured at fair value.
• Subsidiary and Joint Venture investments are recorded at cost less impairment, if any.
• There was a change in MRPL accounting policy during the current financial year.
• The Company changed its accounting policy on the inventorization of scrap material, however, applied the change prospectively from the current financial year citing immaterial impact of retrospective application.
• The Group reclassified acquisition costs for the Mozambique project.
• Depletion of Oil and Gas Assets is computed using the ‘Unit of Production Method’.
• Provisions for decommissioning costs are recognized based on the present value of estimated future expenditures.

Internal Control Effectiveness #

• The Company has an Internal Financial Controls system in place.
• The Statutory Auditors expressed an unmodified opinion on the adequacy and operating effectiveness of the Company’s internal financial controls over financial reporting.
• The Audit Committee/Board reviews the Internal Financial Controls.
• SAP-based E-PTW system is implemented for enhanced safety and efficiency.
• The Auditors have not identified any instance of audit trail feature being tampered with except in case of one subsidary and two joint ventures.

Regulatory Compliance Status #

• The Company has complied with applicable Secretarial Standards.
• The Company is a Government Company under the administrative control of the Ministry of Petroleum and Natural Gas (MoP&NG).
• There was a non-compliance regarding Board composition in the year under review, with a shortfall of one Independent Director from May 5, 2023, to January 31, 2024. Full compliance was achieved as of March 31, 2024.
• No penalties or strictures were paid by the company during the last three years on account of non-compliance.

Legal Proceedings and Their Potential Impact #

• The Company discloses the impact of pending litigations on its financial position.
• There are ongoing disputes and claims with tax and regulatory authorities and from vendors/suppliers, with provisions made where deemed probable.
• A suspected fraud regarding fictitious medical payments was reported, and investigations are ongoing.
• There is ongoing litigation related to the classification of the tariff.

Related Party Transactions #

• The Company has entered into contracts/arrangements with related parties in compliance with the Companies Act, 2013 and SEBI (LODR) Regulations, 2015.
• Details of related party transactions are provided in Form AOC-2 (Annexure B to the Board’s Report) and Note 44 to the Standalone Financial Statements.
• Transactions include sales, purchases, services, and financial guarantees with subsidiaries and joint ventures.

Subsequent Events #

• No material changes and commitments affecting the financial position occurred between the end of the financial year and the date of the report.
• The Board of Directors proposed a final dividend of ’ 2.50 per share, subject to shareholder approval.
• HPCL took loan of USD 1000 million during FY'20 against which the company made two repayments of USD 500 Million and US 80 Million.
• In April 2024, ONGC Videsh Limited secured extensions for exploratory licenses in multiple projects.

Analysis of Accounting Quality and Regulatory Risk Assessment #

• Accounting Quality: The use of estimates (e.g., decommissioning costs, reserves, impairment) introduces inherent uncertainty. The reliance on management’s technical/commercial evaluations and the use of unaudited statements for some Joint Operations introduces a risk of inaccuracy. The change in accounting policy for scrap material, while prospectively applied due to immateriality, should be noted.

• Regulatory Risk: The Company operates in a highly regulated industry. Disputes with tax and regulatory authorities, as well as ongoing legal proceedings, present potential financial and operational risks. Compliance with environmental regulations and the transition to cleaner energy sources pose both challenges and opportunities. The windfall profit taxes introduced by the Government of India highlight the risk of regulatory changes impacting profitability.