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India’s ONGC Fights to Keep Up

THE WALL STREET JOURNAL

By JACKIE RANGE

New Delhi

As India strives to remain one of the world’s fastest-growing economies, its biggest oil-and-gas producer is struggling to keep up.

Oil and Natural Gas Corp. provides about a quarter of India’s oil and gas needs and its increased output is important to the nation’s growth. Yet ONGC’s production of oil, gas and natural-gas liquids in its fiscal year ending March 31 is up just 6.7% from fiscal 2004, far behind the pace of state-run energy companies in Brazil and China.

[ONGC chairman Sharma photo]Bloomberg News /Landov

ONGC Chairman R.S. Sharma says the company is overregulated. ‘We are taking a longer time in taking the decisions and implementing the decisions,’ he says.

To increase output and its global footprint, largely government-owned ONGC has been on an acquisition spree. It is expected Tuesday to close its £1.31 billion ($1.92 billion) purchase of Imperial Energy Corp. and its oil fields in Siberia. In the past seven years, ONGC has increased its number of projects outside India to 39 in 17 countries, from just a single project in Vietnam.

“The company has really become a global company,” Chairman R.S. Sharma said in an interview.

But while ONGC has expanded its international presence, it hasn’t sealed deals that could supercharge output. In the past few years, ONGC has lost out to China’s state-owned CITIC Group for assets in Kazakhstan and to Korea National Oil Corp. in Nigeria. ONGC is expected to be outbid by China Petroleum & Chemical Corp. and China National Offshore Oil Corp. for a stake in an Angola block held byMarathon Oil Co.

“They have missed out on some material opportunities,” said Gauri Jauhar, a senior consultant at PFC Energy.

For a country that imports more than 70% of its oil needs, those lost opportunities mean more than the typical jostling for market share. ONGC’s failure to increase production sharply has helped saddle India with higher costs for imported energy. Company watchers pin much of the blame on a government that, as it tries to keep rein over key assets, instead has hobbled ONGC.

In addition to expanding overseas, ONGC is trying to boost its domestic output. The company is responsible for about 80% of India’s domestic oil-and-gas production. ONGC recently reported a discovery off India’s east coast, which the company says could reach peak production of about 150,000 barrels of oil equivalent a day by 2017. Its current daily production is around 1.1 million barrels.

[Sluggish Growth chart]

But in recent years, ONGC has lagged behind newer, private-sector rivals like Reliance Industries Ltd. and Cairn India Ltd. on big domestic discoveries, said Thomas Grieder, an analyst with the IHS Global Insight consulting firm. “ONGC has tended to go for quantity rather than quality in terms of acquiring exploration blocks, which has probably affected the amount of discoveries the company has made,” he said.

While it trawls for new prospects, ONGC is investing to get more from fields that weren’t commercially viable at lower prices, said Mr. Sharma, the company’s chairman. ONGC has worked hard just to maintain roughly level domestic production over the past decade. “But for that, production would have been only going down,” he said. ONGC expects to boost domestic production by 5% in 2009, but the gain could be offset by declines in overseas production, he said.

In many ways, ONGC is hamstrung by its history as the government’s Oil and Natural Gas Commission. It became a corporation in 1994 and listed shares on the Bombay stock exchange in 1998. Today its market value is about $29 billion, making ONGC India’s third-largest listed company, after Reliance Industries and power generator NTPC Ltd.

But the government still holds a 74.13% stake and has considerable sway. At least 10 government entities have influence over ONGC, including the Planning Commission and the Central Vigilance Commission, a government body tasked with fighting corruption, said Ms. Jauhar, of PFC Energy.

“As a government company, I would say we are overregulated,” Mr. Sharma said. “We are taking a longer time in taking the decisions and implementing the decisions.”

Government control also has limited company salaries. An engineer can earn four times more in the private sector than at ONGC. Analysts say it has lost a significant number of important staff, though reliable figures aren’t available. Mr. Sharma described the departures as “a big problem.”

An oil ministry official said ONGC isn’t overregulated and that it has more autonomy than many of India’s public-sector companies. An ONGC spokesman said government intervention can provide diplomatic support for international deals.

But ONGC doesn’t get some of the government assistance that other national energy companies do. In 2004, for example, China extended a $2 billion loan to Angola to help build infrastructure. Around the same time, Angola rejected plans by Royal Dutch Shell PLC to sell its half of a project to ONGC, instead ordering Shell to sell to Chinese interests.

Four independent directors were appointed to ONGC’s board this month, which IHS Global’s Mr. Grieder said could signal that the government will reduce its control somewhat. Nevertheless, he believes the government still will keep “a firm grip.”

—Vibhuti Agarwal, Krishna Pokharel and Gurdeep Singh in New Delhi and Benoît Faucon in London contributed to this article.Write to Jackie Range at [email protected]

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