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ONGC is a great company of reputation. It has many national and international accolades to its name. This company has been top in Exploration and production in Asia and 2nd largest in E&P activities. It has many subsidiaries companies (like MRPL, ONGC Videsh Ltd., etc). Some of these companies are operating in operating in India and some are working overseas. After setting standards in upstream sector, ONGC also has plans to enter downstream sector in retailing, making it among the largest fully integrated companies in world. This project deals with the review of pricing module of crude oil and natural gas of ONGC in commercial department. This project will help the readers to know about the important elements in pricing of any Oil and gas product. A main limitation faced by pricing section is the lack of independence in terms of setting the prices of its own crude oil, because most of the agreements have expired with other parties. The prices of Crude oil are negotiated between the ONGC and the other parties followed by signing of a contract. The Price of Natural gas is regulated. This project also talks about Treasury group where the study of strategy of investment of surplus funds of ONGC along the risk factors faced by ONGC. Investment of surplus fund is a very part of ONGC because if there funds remain idle for even a single day that means a loss of lakhs of amount as interest, therefore ONGC has to constantly monitor the fund position to know if there is any surplus at any time. This project will lead the reader to know the various elements that are followed by every PSUs to make their investment and how to get the maximum returns while following those guidelines. This project will talk about the avenues for investment in market, while following the DPE (Department of Public Enterprise) guidelines and minimizing the risk involved. Then an overview of risk factor faced by ONGC in their whole operations and in their administration is also studied in brief. These risk factors are very important for every company and they need to be addressed. In this report an overview of these factors are give with the solutions.
BACKGROUND OIL AND GAS SECTOR SCENARIO IN INDIA
Table no. 1
Item 1. Reserves (Balance Recoverable) (i) Crude oil (ii) Natural Gas 2. Consumption (i) Crude oil (in terms of refinery crude throughput) (ii) Petroleum Products (excl RBF) 3. Production (i) Crude oil (ii) Petroleum Products 4.Imports & Exports (I) Gross Imports: (a) Qty : Crude Oil Petroleum Product Total (a) (b) Value : Crude Oil Petroleum Product Total (b)
Million. 703 732 741 733 Tonne INDIA DEPENDENCY IN ENERGY SECTOR Billin.Cub 760 763 751 854 .Mtr Million Tonne Million Tonne
103.44 107.27 112.56 121.84 127.42
100.07 100.43 104.13 107.75 111.63
Mn. Tonne "
104.14 113.46 118.58
Mn. Tonne " " Rs. Billion " "
74.1 9.27 83.37
78.71 7.01 85.72
81.99 6.74 88.73
90.43 7.9 98.33
95.86 8.83 104.69
99.41 11.68 111.09 1717.0 2 255.75 1972.7 7
1170.0 3 120.93 72.49 82.06 96.77 148.88 1318.9 780.25 676.46 844.01 932.05 1 659.32 603.97 761.95 835.28
(II) Exports: (a) Qty : Petroleum Product (b) Value Petroleum Product (III) Net Imports (a) Qty ; Crude oil Petroleum Product Total (a) (b) Value: Crude oil Petroleum Product Total (b) Mn. Tonne " " Rs. Billion " " 74.1 0.9 75 659.32 78.71 -3.06 75.65 81.99 -3.55 78.44 90.43 -6.72 83.71 95.85 -9.38 86.48 99.41 -9.83 89.58 1717.0 2 7.9 1724.9 2 Rs. Billion 76.72 82.19 108.68 167.81 299.28 247.85 Mn. Tonne 8.37 10.07 10.29 14.62 18.21 21.51
1170.0 3 3 44.21 -9.7 -26.62 -71.04 -150.4 1019.6 703.53 594.27 735.33 764.24 3 603.97 761.95 835.28
Table no. 2
Product Type Crude oil Natural gas liquid Refinery feedstock Liquified petroleum gas Motor gasoline Aviation gasoline Jet kerosene Kerosene Diesel Residual fuel oil
Production 28.7 100 NA 97.7 82 129.1 NA 129.5 93.5 107.9 99.6
Imports 71.3 0 NA 23.2 18 0 NA 0.1 6.5 0.3 7.3
Exports 0 0 NA -20.9 0 -29.1 NA -29.6 0 -8.1 -6.5
Domestic supply 100 100 NA 100 100 100 NA 100 100 100 100
The Oil & Gas sector plays a very important role in the economic and political scenario of the world. Oil and gas industry size is estimated at US$ 110 billion (about 15 percent of GDP). The Limited number of oil and gas reserves and increasing energy requirements across the globe has led to a mismatch between the demand and supply forces and hence to spiraling prices. The high economic growth in the past few years, increasing industrialization coupled with a rapidly increasing population has created a lot of concern for India's energy scenario. India has 0.5 % of the Oil and Gas resources of the world and 15 % of the world's population. This makes India heavily dependent on import of crude oil and natural gas. Imports of petroleum oil and lubricants (POL) during April-June 2006 rose by 47.2 per cent (31.0 per cent a year ago). This in turn was mainly due to a rise in international price level. The crude oil consumption increased to 119.3 million tonnes. The compound annual growth rate (CAGR) for oil consumption in India has been 5.9 percent. As for the gas consumption, India is among 20 largest consumers of gas.
Petroleum and natural gas constitutes around over 16% of GDP and includes transportation, refining and marketing of petroleum products and gas. At present, there exists a huge gap between the demand and supply side, which needs to be bridged . PURPOSE OF STUDY 1. To give an overview at the pricing elements, risk factors of ONGC. 2. To find out the details for the Investment procedure used in ONGC. 3. To find and analyse the importance of investment made by ONGC. 4. To find out the new investment avenues for ONGC. 5. To know the importance of different pricing factors, considered by ONGC.
OIL AND NATURAL GAS CORPORATION LIMITED
COMPANY HISTORY 1947 – 1960 During the pre-independence period, the Assam Oil Company in the northeastern and Attock Oil company in northwestern part of the undivided India were the only oil companies producing oil in the country, with minimal exploration input. The major part of Indian sedimentary basins was deemed to be unfit for development of oil and gas resources. After independence, the national Government realized the importance oil and gas for rapid industrial development and its strategic role in defense. Consequently, while framing the Industrial Policy Statement of 1948, the development of petroleum industry in the country was considered to be of utmost necessity. Until 1955, private oil companies mainly carried out exploration of hydrocarbon resources of India. In Assam, the Assam Oil Company was producing oil at Digboi (discovered in 1889) and the Oil India Ltd. (a 50% joint venture between Government of India and Burmah Oil Company) was engaged in developing two newly discovered large fields Naharkatiya and Moran in Assam. In West Bengal, the Indo-Stanvac Petroleum project (a joint venture between Government of India and Standard Vacuum Oil Company of USA) was engaged in exploration work. The vast sedimentary tract in other parts of India and adjoining offshore remained largely unexplored. In 1955, Government of India decided to develop the oil and natural gas resources in the various regions of the country as part of the Public Sector development. With this objective, an Oil and Natural Gas Directorate was set up towards the end of 1955, as a subordinate office under the then Ministry of Natural Resources and Scientific Research. The department was constituted with a nucleus of geoscientists from the Geological survey of India. A delegation under the leadership of Mr. K D Malviya, the then Minister of Natural Resources, visited several European countries to study the status of oil industry in those countries and to facilitate the training of Indian professionals for exploring potential oil
and gas reserves. Foreign experts from USA, West Germany, Romania and erstwhile U.S.S.R visited India and helped the government with their expertise. Finally, the visiting Soviet experts drew up a detailed plan for geological and geophysical surveys and drilling operations to be carried out in the 2nd Five Year Plan (1956-57 to 1960-61). In April 1956, the Government of India adopted the Industrial Policy Resolution, which placed mineral oil industry among the schedule 'A' industries, the future development of which was to be the sole and exclusive responsibility of the state. Soon, after the formation of the Oil and Natural Gas Directorate, it became apparent that it would not be possible for the Directorate with its limited financial and administrative powers as subordinate office of the Government, to function efficiently. So in August, 1956, the Directorate was raised to the status of a commission with enhanced powers, although it continued to be under the government. In October 1959, the Commission was converted into a statutory body by an act of the Indian Parliament, which enhanced powers of the commission further. The main functions of the Oil and Natural Gas Commission subject to the provisions of the Act, were "to plan, promote, organize and implement programmes for development of Petroleum Resources and the production and sale of petroleum and petroleum products produced by it, and to perform such other functions as the Central Government may, from time to time, assign to it ". The act further outlined the activities and steps to be taken by ONGC in fulfilling its mandate. 1961 – 1990
Since its inception, ONGC has been instrumental in transforming the country's limited upstream sector into a large viable playing field, with its activities spread throughout India and significantly in overseas territories. In the inland areas, ONGC not only found new resources in Assam but also established new oil province in Cambay basin (Gujarat), while adding new petroliferous areas in the Assam-Arakan Fold Belt and East coast basins (both inland and offshore). ONGC went offshore in early 70's and discovered a giant oil field in the form of Bombay High, now known as Mumbai High. This discovery, along with subsequent discoveries of
huge oil and gas fields in Western offshore changed the oil scenario of the country. Subsequently, over 5 billion tones of hydrocarbons, which were present in the country, were discovered. The most important contribution of ONGC, however, is its self-reliance and development of core competence in E&P activities at a globally competitive level. After 1990 The liberalized economic policy, adopted by the Government of India in July 1991, sought to deregulate and de-license the core sectors (including petroleum sector) with partial disinvestments of government equity in Public Sector Undertakings and other measures. As a consequence thereof, ONGC was re-organized as a limited Company under the Company's Act, 1956 in February 1994. After the conversion of business of the erstwhile Oil & Natural Gas Commission to that of Oil & Natural Gas Corporation Limited in 1993, the Government disinvested 2 per cent of its shares through competitive bidding. Subsequently, ONGC expanded its equity by another 2 per cent by offering shares to its employees. During March 1999, ONGC, Indian Oil Corporation (IOC) - a downstream giant and Gas Authority of India Limited (GAIL) - the only gas marketing company, agreed to have cross holding in each other's stock. This paved the way for long-term strategic alliances both for the domestic and overseas business opportunities in the energy value chain, amongst themselves. Consequent to this the Government sold off 10 per cent of its share holding in ONGC to IOC and 2.5 per cent to GAIL. With this, the Government holding in ONGC came down to 84.11 per cent. In the year 2002-03, after taking over MRPL from the A V Birla Group, ONGC diversified into the downstream sector. ONGC will soon be entering into the retailing business. ONGC has also entered the global field through its subsidiary, ONGC Videsh Ltd. (OVL). ONGC has made major investments in Vietnam, Sakhalin and Sudan and earned its first hydrocarbon revenue from its investment in Vietnam.
PROFFESIONAL ACHIEVEMENTS Global Ranking • Is Asia’s best Oil & Gas Company, as per a recent survey conducted by US-based magazine ‘Global Finance’. • Ranks as the 2nd biggest E&P company (and 1st in terms of profits), as per the Platts Energy Business Technology (EBT) Survey 2004 • Ranks 24th among Global Energy Companies by Market Capitalization in PFC Energy 50 (December 2004). [ONGC was ranked 17th till March 2004, before the shares prices dropped marginally for external reasons. • Is placed at the top of all Indian Corporate listed in Forbes 400 Global Corporates (rank 133rd) and Financial Times Global 500 (rank 326th), by Market Capitalization. • Is recognized as the Most Valuable Indian Corporate, by Market Capitalization, Net Worth and Net Profits, in current listings of Economic Times 500 (4th time in a row), Business Today 500, Business Baron 500 and Business Week. • Has created the highest-ever Market Value-Added (MVA) of Rs. 24,258 Crore and the fourth-highest Economic Value-Added (EVA) of Rs. 596 Crore, as assessed in the 5th Business Today-Stern Stewart study (April 2003), ahead of private sector leaders like Reliance and Infosys. ONGC is the only Public Sector Enterprise to achieve a positive MV A as well as EVA. • Is targeting to have all its installations (offshore and onshore) accredited (certified) by March 2005? This will make ONGC the only company in the world in this regard. • Owns and operates more than 11000 kilometers of pipelines in India, including nearly 3200 kilometers of sub-sea pipelines. No other company in India operates even 50 per cent of this route length.
Crossed the landmark of earning Net Profit exceeding Rs.10, 000 Crore, the first to do so among all Indian Corporate, and a remarkable Net Profit to Revenue ratio of 29.8 per cent. The growth in ONGC's profits is not solely due to deregulation in crude prices in India, as deregulation has affected all the oil companies, upstream as well as downstream, but it is only ONGC which has exhibited such a performance (of doubling turnover and profits).
Has paid the highest-ever dividend in the Indian corporate history. Its 10 per cent equity sale (India's highest-ever equity offer) received unprecedented Global Investor recognition. This was a landmark in Indian equity market, establishing beyond doubt, the respect ONGC's professional management commands among the global investor community.
The Market Capitalization of the ONGC Group (ONGC & MRPL) constitutes 10 per cent of the total market capitalization on the Bombay Stock Exchange (BSE). ONGC has an equity weightage of 5 per cent in Sensex; 15 per cent in the Nifty (the only Indian corporate with a two-digit presence there); ONGC commands a 7 per cent weightage in the Morgan Stanley Capital International (MSCI) Index.
The growth in ONGC's Market Capitalization (from Rs. 18,500 Crore before May 2001 to Rs.1, 25,000 Crore in January 2004) is unprecedented and except Wipro (who had a higher market capitalization temporarily), no other Indian company (either in public or private sector) has seen such a phenomenal growth.
ONGC has come a long way from the day (a few years back) when India and ONGC did not figure on the global oil and gas map. Today, ONGC Group has 14 properties in 10 foreign countries. Going by the investments (Committed: USD 2.708 billion, and Actual: USD 1.919 billion), ONGC is the biggest Indian Multinational Corporation (MNC).
ONGC ended the sectoral regime in the Indian hydrocarbon industry and benchmarked the globally- established integrated business model; it took up 71.6 per
cent equity in the Mangalore Refinery & Petrochemicals Limited (MRPL), and also took up a 23 per cent stake in the 364-km-long Mangalore-Hasan-Bangalore product Pipeline, connecting the refinery to the Karnataka hinterland. By turning around MRPL in 368 days, ONGC has set standards of public sector companies reviving joint (or private) sector companies, proving that in business, professionalism matters, not ownership. ONGC Represents India’s Energy Security
ONGC has single-handedly scripted India’s hydrocarbon saga by: • Establishing 6 billion tonnes of In-place hydrocarbon reserves with more than 300 discoveries of oil and gas; in fact, 5 out of the 6 producing basins have been discovered by ONGC: out of these In-place hydrocarbons in domestic acreage, Ultimate Reserves are 2.1 Billion Metric Tonnes (BMT) of Oil Plus Oil Equivalent Gas (O+OEG). • Cumulatively producing 685 Million Metric Tonnes (MMT) of crude and 375 Billion Cubic Meters (BCM) of Natural Gas, from 115 fields. India’s Most Valuable Company
With a market capitalization having exceeded Rs 1 trillion, ONGC retains it’s position as the most valuable company in India in various listings. As per 5th Business Today Stern-Stewart study, ONGC was the biggest Wealth Creator during 1998-2003 (Rs 226.30 billion). It was again the highest wealth creator during 1999-2004, as per Motilal Oswal Securities.
ONGC’s mega Public Offer (India’s biggest-ever equity offer worth more than Rs 100 billion was over subscribed 5.88 times.
ONGC is the only Indian company to have earned a Net Profit of over Rs 10,000 crores (2002-03).
The market capitalization of the ONGC group constitutes 8% of the market capitalization of BSE.
ONGC added 49.06 MMT of ultimate reserves of O+OEG during 2003-04 (including overseas acquisitions), maintaining the trend of positive accretion for the third consecutive year.
ONGC’s Pioneering Efforts
ONGC is the only fully–integrated petroleum company in India, operating along the entire hydrocarbon value chain : • • • • • Holds largest share (57.2 per cent) of hydrocarbon acreages in India. Contributes over 84 per cent of Indian’s oil and gas production. Every sixth LPG cylinder comes from ONGC. About one-tenth of Indian refining capacity. Created a record of sorts by turning Mangalore Refinery and Petrochemicals Limited around from being a stretcher case for referral to BIFR to among the BSE Top 30, within a year. • Owns 23% of Mangalore-Hasan-Bangalore Product Pipeline (MHBPL), connecting MRPL to the Karnataka hinterland. Competitive Strength
All crudes are sweet and most (76%) are light, with sulphur percentage ranging from 0.02-0.10, API gravity ranging from 26°-46° and hence attracts a premium in the market.
• • •
Strong intellectual property base, information, knowledge, skills and experience. Maximum number of Exploration Licenses, including competitive NELP rounds. ONGC owns and operates more than 11000 kilometers of pipelines in India, including nearly 3200 kilometers of sub-sea pipelines. No other company in India, operates even 50 per cent of this route length.
Strategic Vision: 2001-2020
Focusing on core business of E&P, ONGC has set strategic objectives of: • Doubling reserves (i.e. accreting 6 billion tonnes of O+OEG) by 2020; out of this 4 billion tonnes are targeted from the Deep-waters. • • • Improving average recovery from 28 per cent to 40 per cent. Tie-up 20 MMTPA of equity Hydrocarbon from abroad. The focus of management will be to monetise the assets as well as to assetise the money. The focus of management will be to monetise the assets as well as to assetise the money. Sagar Sammriddhi : Biggest Global Deepwater Campaign
ONGC launched ‘Sagar Sammriddhi’, the biggest deep-water exploration campaign ever undertaken by a single operator, anywhere in the world. • Strategic plan to accrete 4 billion tones of reserves by 2020.
• • •
US$0.75 million per day investment. Integrated Well Completion approach. Plans to drill 47 deepwater wells up to water depths of 3 kms.
Leveraging Technology To attain the strategic objective of improving the Recovery Factor from 28 per cent to 40 per cent, ONGC has focused on prudent reservoir management as well as effective implementation of technologies for incremental recovery to maximize production over the entire life cycle of existing fields Improved Oil Recovery (IOR) and Enhanced Oil Recovery (EOR) schemes are being implemented: • • • In 15 fields including Mumbai offshore At a total investment exceeding US $2.5 billion. Yielding incremental 120 MMT of O+OEG over 20 years
Sourcing Equity Oil Abroad
ONGC's overseas arm ONGC Videsh Limited (OVL), has laid strong foothold in a number of lucrative acreages, some of them against stiff competition from international oil majors. OVL has so far, acquired 15 properties in 14 foreign countries, and striving to reach out further
OVL’s projects are spread out in Vietnam, Russia, Sudan, Iraq, Iran, Lybia, Syria, Myanmar, Australia, and Ivory Coast. It is further pursuing Oil and gas exploration blocks in Algeria, Australia, Indonesia, Nepal, Iran, Russia, UAE and Venezuela. • Production Sharing Contract in Vietnam for gas field having reserves of 2.04 TCF, with 45 per cent stake in partnership with BP and Petro Vietnam. Gas production has commenced from January 2003. • 20 per cent holding in the Sakhalin–1 Production Sharing Agreement. The US $ 1.77 billion investment in Sakhalin offshore field is the single largest foreign investment by India in any overseas venture and the single largest foreign investment in Russia. It is scheduled to go on production during 2005-06 • Acquired 25 per cent of equity in the Greater Nile Oil Project in Sudan, the first producing oil property. ONGC Nile Ganga BV, a wholly-owned subsidiary, has been set up in the Netherlands to manage this property. Around 3 Million Tonnes of crude oil is coming to India annually from this project. This is the first time that equity crude of a group of companies in India is being imported into India for refining by the group • Discovered a world-class giant gas field ‘Shwe” in Block A-1 (where OVL has 20 per cent share) in Myanmar, with estimated recoverable reserve of 4 to 6 trillion cubic feet of gas. • Besides taking equity in oil & gas blocks and looking for stakes in E&P companies, OVL is also bagging prospective contracts (like the refinery up gradation and pipeline contracts in Sudan, awarded to OVL on nomination basis due to its performance in that country), which will increase ONGC’s equity oil basket. ONGC’s strategic objective of sourcing 20 million tones of equity oil abroad per year is likely to be fulfilled much before 2020. In fact, OVL is now eyeing a long-term target of 60 MMT of Oil equivalents per year by 2025.
Going by the investments (Committed: US $ 4.3 billion, and Actual: US $ 2.75 billion), ONGC is the biggest Indian Multinational Corporation (MNC).
Frontiers of Technology
Uses one of the Top Ten virtual Reality Interpretation facilities in the world • Rolled out ICE, one of the biggest ERP implementation facilities in the world
Best in Class Infrastructure And Facilities
ONGC’s success rate is at par with the global norm and is elevating its operations to the best-in-class level, with the modernization of its fleet of drilling rigs and related equipment, at an investment of around US $ 400 million. ONGC has adopted Best-in-class business practices for modernization, expansion and integration of all Info-com systems with investment of around US $ 125 million. Onshore • • • Production Installation :- 225 Pipeline Network (km) :- 7900 Major Offshore Terminals (including CFU, LPG, Gas, Sweetening plants, Storage Tanks) :- 2 • • • Drilling Rigs :- 75 Work Over rigs :- 66 Seismic Units :- 33
Logging Units :- 35 Offshore
• • • • • • •
Well Platforms :- 131 Well-cum-Process Platforms :- 5 Process Platforms :- 28 Drilling/ Jack-up-Rigs :- 18 Pipeline Networks (km) :- 3200 Offshore Supply Vessels :- 32 Special Application Vessels :- 4
The Road Ahead
ONGC is entering LNG (regasification), Petrochemicals, Power Generation, as well as Crude & Gas shipping, to have presence along the entire hydrocarbon value-chain. While remaining focused on its core business of oil & gas E&P, it is also looking at the future and promoting an applied R&D in alternate fuels (which can be commercially brought to market). These efforts in integration are basically to exploit the core competency of the organization – knowledge of hydrocarbons, gained over the five decades. New Business
ONGC has also ventured into Coal Bed Methane (CBM) and Underground Coal Gasification (UCG); CBM production would commence in 2006-07 and UCG in 2008-
09. ONGC is also looking at Gas Hydrates, as it is one possible source that could make India self-sufficient in energy, on a sustained basis. Continuing On the Growth Trajectory
The ONGC Group has doubled its turnover from 5 billion US dollars to 10 billion US dollars (from Rs 23,238 Crore to Rs 48,368 Crore) in the last 3 years (2001- 2004); and it aims to go to 50 billion US dollars in the next 5 years. As this implies a commendable annual growth rate (compounded) of 40-50 per cent, this objective of ONGC, when realized, would be an outstanding achievement, by any standards. ONGC Is Now Geared To Meet Its Vision To be an Indian Integrated Energy Multinational (PSU); Target: A Turnover of 50 Billion US dollars in 5 years.
MAIN DEPARTMENTS AND THEIR FUNCTION Director Offshore This department looks after the operations of discovered reservoir and basins in offshore region. The have their own asset management under different basins. Ex – Mumbai High, Heera & Neelam etc. This department also has the responsibility of their Uran and Hazira Plant all the kind of offshore Joint venture according to Product sharing contract. Director Onshore
This department looks after the operations of the discoveries made onshore in the regions of Ahmedabad, Ankleshwar, Mehsana, Assam, Karikal, Rajamundhry, Tripura. They have their own financial management system which looks after the asset base of their own blocks. Director Exploration This department looks after the exploration activities carried out in their blocks whether onshore or offshore. This department carries status report of each block and reports it to DGH. They have to maintain coordination with DGH and keep them update about different blocks and they also carry research on their blocks through 2D – 3D seismic and Geo physical and Geo chemical methods. Director HR This department looks after the recruitment of people according to the demands of different departments. This department also works towards training of employee, to keep them updated against new technology. They also look after the performance appraisal of every employee at the end of the year. This department also includes medical depts., legal depts., security depts., and corporate communication. Director technical and field services This department take care of technical matters of various blocks and field like drilling service, casing, cementing, mud requirement, appraisal, development etc. for drilling site and at the time of depletion of well, then employment of which kind of EOR(Enhanced Oil Recovery) method etc. Director Finance
This department has division like commercial & treasury group, costing, and Integrated Trading desk, taxation depts., import and export, internal audit etc. These different divisions work in an integrated manner to mage the resources of company. Business development and marketing department This department has the responsibility of business development and marketing of value added products and by products for ONGC, its refinery, its subsidiary companies (like MRPL, OVL). Products are like LSHS, Naphtha, Ethane – Propane, Natural gas etc. Material management department This department looks after the raw material requirement of company along with its management on an EOQ (Economic Order Quantity) model basis, procurement and contracting, works and civil contract, resource management, Accounting of material, stock verification, stock disposal, and inventory control are some of the activities of this department.
PRODUCTION STATUS OF CRUDE OIL
PLANNED TARGET (MMT) 26386 26175 26616 27351
ACTUAL PRODUCTION (MMT) 26065 26485 24409 26050
PERCENTAGE ACHIEVEMENT (%) 98.78 101.184 91.70 95.24
SHORTFALL / SURPLUS
%AGE CHANGE OVER LAST YEAR 0.23 1.61
2003-04 2004-05 2005-06 2006-07
- 1.21 1.184 - 8.29 - 4.756
- 7.83 6.72
SOURCE : Petroleum.nic.in
Technologies like Q – marine, Time lapse 3D Seismic are introduced for higher resolution of sub – surface and better reservoir monitoring and fluid flow.
Advanced technology were introduced in offshore/onshore for better reservoir characterization and management : o Rotary side wall coring tool o Modular Dynamic tester live fluid analyzer o Production logging in horizontal wells. o On line data transmission in offshore o Cased hole formation resistivity (CHFR) in onshore o Cased hole formation density (CHFD) and Cased hole formation porosity (CHFP) in offshore. • Field processing units and mobile processing units with latest software
or survey design and seismic quality control and to reduce API cycle time.
New air injection setup to screen reservoir. Composite material pipes being implemented for effluent/produced
water, utility water, water injection and also in ETPs. COLLABORATION WITH FOREIGN INSTITUTES / DOMAIN EXPERTS • BG, SHELL and ENI for exploration and development of blocks including CBM exploration. • Domain experts were hired for process validation of interpretation for various prospects in shallow and deep water. • Institute of petroleum technology of Norwegian, Institute of Science and Technology for reservoir modeling using Fractal Theory and 4D Seismic for Enhanced Oil Recovery (EOR). • Agarkar research Institute, IIT – Mumbai, MS University Baroda, TERI New Delhi, UNSW, Sydney, Australia, and University of Calgary, Canada are some of the institute from which ONGC has tie – up. OPERATIONAL PROCESS ONGC is the only fully-integrated petroleum company in India, operating along the entire hydrocarbon value chain. It is not only the largest E&P Company in India but also one of the most valuable companies in India. Oil and Natural Gas Corporation Limited (ONGC) (incorporated on June 23, 1993) is engaged in exploration and production activities. It is involved in exploring and exploiting hydrocarbons in 26 sedimentary basins of India. It owns and operates more than 11,000 kilometers of pipelines in India. Its main operation is in Crude oil and gas extraction, which is further sent to refinery(like Tatipaka, Hazira, Ussar) where it is refined for more value added products (e.g. Naptha, M.S., LSHS, Kerosene, HSD etc.) and from there it is again sent to further buyers(like IOCL, HPCL, BPCL, GAIL etc) and subsidiary companies(MRPL) . ONGC has agreement with IOCL, HPCL, BPCL, for supply of crude oil to them, then ONGC has 23
agreement with GAIL for supply of LNG to them. Then the remaining fractionates of Ethane – Propane, HSD, M.S. are sold either through contract, provisional government directives or through their trading desk in open market. ONGC PRODUCING AREAS
Company/Stat e ONGC a) ONSHORE Gujarat Assam Rajasthan Andhra Pradesh Tamil Nadu Tripura Nagaland b)OFFSHORE East Coast
Oil Fields 8
Gas Fields 106 7 0 4 7 32 7 7 0
Oil & Gas Fields 216 83 29 2 0 11 18 0 1
Total Fields 330 92 29 6 7 43 25 7 3
Cambay Upper Assam Assam & Assam Arakan Jodhpur K.G.Basin Cauvery Assam Arakan Fold Belt Assam & Assam Arakan Cauvery Offshore KG Offshore (Shallow) KG Offshore (Deep) Andaman Cambay Mumbai Offshore Kutch
2 0 0 0 0 0 0 2
0 0 0 0 0 4 0
1 4 9 1 0 23 4
3 5 2 0 2 59 1
4 9 11 1 2 86 5
These are the main assets of ONGC which produce Crude oil and other associated gases. These basins are sub divided into small number of well sites. Each basin have small refining plant installed over there, to do some minor refining(according to the purity level of crude) of crude at the site itself, then the refined crude and value added 24
products(derived from the plant) are stored at a “Group Gathering Station(GGS)” which are located at that basin. Each basin has different number of GGS according to their production level. Then some amount of crude oil and other value added products are send to different refinery for further process, some amount is sent to fertilizer plant for use as a feedstock for their end products, some amount is sent to power plant where it is useful for power generation, and likewise all the amount is distributed among these 3 industry (refinery, fertilizer, power plants) and some other small scale industries in their vicncity. Major of the crude oil and value added products are send to refinery. Below a table is given showing distribution of crude oil to different refinery: SALES PATTERN OF ONGC CRUDE OIL
ONGC Crude (1) Mumbai High
Refinery/Location IOC,Vadinar BPCL, Mumbai HPCL, Mumbai CPCL, Chennai KRL, Kochi HPCL, Vizag MRPL, Mangalore
Mode of Transport Tanker Pipeline Pipeline Tanker Tanker Tanker Tanker
(2) Gujarat North Crude South Crude (3) Tamil Nadu Cauvery (4) Andhra Pradesh KG Crude (5) Assam Crude
IOC, Koyali IOC, Koyali
HPCL, Vizag IOC, Guwahati BRPL, Assam NRL, Numaligarh
Tanker Pipeline Pipeline Pipeline
The maximum of sales revenue earned by ONGC is from sales of crude oil rather from the sales of other value added products (e.g. naphtha, M.S., H.S.D., S.K.O., C2 – C3, etc). This crude oil sales revenue is received periodically from clients according to the crude oil delivered and MOU (explained later) signed between them.
SALES REVENUE CONTRIBUTION BY DIFFERENT PRODUCT 1st 1st 1st 1st April April April April Percentage Percentage Percentage 02 to 03 to 04 to 05 to Product type of product of product of product 31st 31st 31st 31st sales sales sales March March March March 03 04 05 06 24413 22212 31182 31735 Crude oil 70.37 68.33 66.76 1 4 4 7 Natural Gas 49986 14.41 52039 16.01 53206 11.39 66701 LPG 19087 5.50 16352 5.03 12066 2.58 16293 Naphtha 4906 1.41 5785 1.78 6546 1.40 9876 Ethane/Propane 5837 1.68 4779 1.47 5705 1.22 7401 Aromatic Rich 17129 4.94 16753 5.15 22714 4.86 25803 Naphtha Superior 3188 0.92 2658 0.82 16896 3.62 10605 Kerosene Oil HSD 80 0.02 85 0.03 29277 6.27 23403 Motor Siprit 0 0.00 0 0.00 6846 1.47 3797 Others 995 0.29 1060 0.33 1434 0.31 617 Price Revision 1568 0.45 3461 1.06 584 0.13 156 Arrears 34690 32509 46709 48200 TOTAL 7 6 8 9
Percentage of product sales 65.84 13.84 3.38 2.05 1.54 5.35 2.20 4.86 0.79 0.13 0.03
CRUDE OIL PRICING
CRUDE OIL PRICING
IDENTIFICATION OF PROBLEM Problem Statement
1. Most of the agreements of ONGC with their buyers have expired, leading to payments received by ONGC at old rates, which are generally low. 2. Since along with the crude oil, ONGC also produces natural gas, and some other petroleum products, as the share of these products are very minor in ONGC revenue. Therefore, there hasn’t been a fixed pricing mechanism for these products.
Hypothesis, if any In this project there was no assumptions was as, such made and no hypothesis was thought to be appropriate for conducting the research investigations. LITERATURE REVIEW In order to check on the entire pricing methods adopted by ONGC for sale of their crude oil they follow list of documents which are reviewed & scrutinized. Some books and documents which are studied for taking the review are as follow: - Sale agreement of crude oil with IOCL, - Sale agreement of crude oil with BPCL, - Sale agreement of crude oil with HPCL, - MoP&NG provisional circular regarding natural gas, - Sale agreement of Methane and Ethane with IPCL.
RESEARCH DESIGN METHODOLOGY
Data sources For the collection of data various websites have been visited and the personal interviews have been done. 28
The data shown has been taken from the internal documents and their description is given in detail. No survey and sample is taken in this study, since there is no need of it.
ANALYSIS AND FINDINGS DIFFERENT PRICING METHODS 1) ADMINISTERED PRICE MECHANISM It refers to a controlled price scenario wherein a posted price is fixed which is then used to compute royalties and income tax paid to producing countries. APM ensures stability of prices by insulating domestic market from the volatility of prices in international markets. In the administered pricing mechanism, the pool price of crude is taken. This is the weighted average of world and indigenous prices. Product price adjustments help to keep the prices of some items lower and some others higher than the actual prices based on cost. 2) IMPORT PARITY PRICE Following components are added to the Free on Board (FOB) price of the respective marker crude in the international market to calculate the import parity price of domestic crude: a) ocean freight b) insurance c) customs duty d) ocean loss e) port dues f) excise duty g) freight upto depots h) marketing cost/margin
i) state specific irrecoverable levies j) delivery charges from depot to retail pump outlets k) sales tax/other local levies l) Dealers’ commission, etc. In simple words, Import Parity Price (delivered prices) is the lowest price of product sourced from different markets, plus the freight rate on the most common size vessel used for the route from the port of loading to the port of destination, plus/minus quality adjustments. The concept of import parity or alternate cost of supply essentially means allowing domestic producers to price their products at the total landed cost including import duties as if the same products are imported. However, import parity allows domestic producers to profiteer (middleman) at the cost of the consumer. 3) EXPORT PARITY PRICE Export Parity Price (fob prices) is the highest price of possible export markets, minus the freight rate in the most common size vessel used for the route from the port of loading to the port of destination, minus duty charges. 4) TRADE PARITY PRICE Trade parity pricing model is a weighted average of the import parity and export parity prices in certain ratio. In trade parity, pricing is lower than the import parity to the extent of freight cost and other taxes and duties.
5) COST PLUS FORMULA Cost plus formula includes acquisition cost of crude and other operating costs with a certain assured post tax return on net worth.
INTERNATIONAL PRICING METHODS In general, crude oil is sold through a variety of contract arrangements and in spot transactions. Oil is also traded on futures markets but not generally to supply physical volumes of oil, more as a mechanism to distribute risk. These mechanisms play an important role in providing pricing information to markets. In fact, the pricing of crude oils has become increasingly transparent from the 1990s onwards through the use of marker crude such as:
• • • •
West Texas Intermediate (WTI – USA) Brent (Europe and Africa) Dubai and Oman (Middle East) Tapis and Dubai (in Asia)
The main criteria for a marker crude is for it to be sold in sufficient volumes to provide liquidity (many buyers and sellers) in the physical market as well as having similar physical qualities of alternative crude. In addition, the marker crude should provide pricing information. WTI does this through its use on the New York Mercantile Exchange (NYMEX) as the basis of a futures contract where trade is equivalent to many hundreds of millions of barrels per day, even though physical WTI production is less than 1 million barrels per day. A futures contract for crude oil is a promise to deliver a given quantity of crude oil but this rarely occurs as participants are more interested in taking a position on the price of the crude oil. Futures markets are a financial instrument to distribute risk among participants with the side effect of providing transparency on the pricing of crude oil. Brent offers pricing information based more on the physical trading of oil through spot trading, and forward trading but also offers futures trading but not to the same extent as WTI.
In Asia there is no futures exchange where crude oil is traded and which would provide pricing information to the same extent as WTI and Brent. In Asia the pricing mechanism for say Tapis, a marker for light sweet crude in the region, is based on an independent panel approach where producers, refiners and traders are asked for information on Tapis crude trades. PRICING METHODS FOLLOWED BY SOME OF THE COUNTRIES MIDDLE EAST Most of the oil produced in the Middle East is sold via long-term contracts between national oil companies and direct users, such as ExxonMobil, TotalElfFina, ChevronTexaco, BP-Amoco, or AGIP. The oil producers also sell to large trading companies, such as Mark Rich in Switzerland or Phibro in the United States, which in turn resell to ultimate users. The contracts between the users and producers generally specify that prices be set (often quarterly) by the producer based on a standard benchmark, such as prices of Brent or Dubai light, and adapted to conditions such as distance, sweetness (level of sulfur), and gravity. The most common price benchmarks used in long-term contracts between the Gulf state oil companies and their buyers are Dubai Light for shipments to the Far East, Dated Brent (North Sea) for shipments to Europe, and West Texas Intermediate (WTI) grade for shipments to the United States. Prices of the crude oil actually shipped are modified by adding or subtracting a certain amount per barrel to reflect the grade, the quality, the distance to the market served, and the timing of the purchase relative to the benchmark quote. When a producer is ready to effect a shipment under a given contract, it contacts the user, who in turn arranges to have a tanker ready at the point of sale for loading within fortyeight hours. Shippers and users, who have quite precise expectations on when to expect loading orders, often have tankers waiting nearby the loading facilities. In the case of Gulf shipments, tankers wait near Khor Fakkan on the Gulf of Oman.
There are two mains systems used in pricing in the Middle East crude, formula pricing (price calculated with a formula) and retroactive pricing. The big difference between them is timing of pricing. The formula price is typically announced a few days in the month before loading, while the retroactive price the first few days in the month after loading.
With the formula pricing system competing crude in a given destination region are first put to relative evaluation by taking into account qualitative differential from the marker crude and transportation cost. Then the formula price is set in reflection to the delivered prices of competing crude. The formula price has three key characteristics: (1) announced in advance of loading, (2) destinationdependent, and (3) usually non-tradable.
With retroactive pricing, the price is determined after loading, destination is not designated and crude are tradable to someone else. When setting up the retroactive price, price responsiveness, fairness and confidence are taken into account. Crudes with the formula price are marketed not only in Asia but also around the world, such as the US, while those with the retroactive price trend to be sold in the East only.
AUSTRALIA • Tapis is used as the appropriate Australian crude marker because of the strong trade relationship Australia has with the region as a source for crude oil and also petroleum product imports. • • The Singapore benchmark price of unleaded petrol (MOPS95) & diesel (Gas oil) are the key petrol and diesel price benchmarks for Australia. Means of Platts Singapore. The mean of high and low components of a Platts assessment for oil cargoes loading from Singapore. Often used as a component in floating price deals. CHINA
• • •
China with its booming economy is becoming the second largest consumer of petroleum. From 30th January 2007, China adopted the new pricing policy i.e. the crude plus cost pricing mechanism. “crude price plus cost” method was based on the Brent, Dubai and Minas crude oil prices, taking into account processing costs and possible opportunities for enterprises to profit.
MALAYSIA Since 1970s, the Malaysian petroleum industry had been dominated by the national oil and gas corporation, Petronas as well as Shell along with ESSO, Mobil, BP and Caltex. The sector had been deregulated in 1983, except for automatic pricing mechanism to regulate retail selling prices for MS, HSD for transportation & LPG for domestic use. DOMESTIC PRICING METHODS Since India is a booming economy, and its oil reserves are not sufficient to meet its domestic oil demand. Therefore they import approximately 70% of their crude oil demand, for this most of Indian oil companies has long term contract with foreign producers. Indian crude oil prices are set according to the prices of Indian crude oil basket. This crude oil basket is the mixture of different variety of crude from where India imports their crude oil. This mixture can be changed according to the places from where India imports their crude. This basket is maintained according to the weight age of different types of crude oil imported.
India follow import parity prices theory for pricing of crude oil imported & for other value added products domestically produced. But for some of the value added products (e.g. M.S. & H.S.D.), India follow trade parity prices theory in the mixture of (80:20) i.e. IPP & EPP respectively. Prices of value added products are set by Indian Oil Corporation Limited which is applicable throughout the country and followed by all the companies domestically, and these prices differ on account of state levied taxes etc. in different states. Prices of crude oil produced domestically are priced differently by the companies on the basis of their usage (used domestically or exported after refining), but still they are priced on the basis of import parity prices, whereby different companies takes some marker crude (whose quality is most similar to their own crude characteristics) as their benchmark and then adjusted their prices, whether by adding premium or deducting discount on the basis of differential of their quality, then they get prices of marker crude oil on FOB basis in India then the insurance, taxes, and different other necessary charges are added.
ONGC PRICING MECHANISM
The government of India, deregulated the Oil sector effective from March’02, crude oil price became market determined from 1 April ’02. The upstream oil companies (NOCs) viz., ONGC and OIL entered in to MoU with PSU oil refineries through which crude oil is sold on the basis of negotiate pricing basis. Though the pricing is deregulated, the allocation of ONGC’s and crude oil is still regulated by the government. Based on the MoUs, all the crude of ONGC, being sweet in nature, are benchmarked to Nigerian sweet crude namely Bonny Light. The components of the crude price received by ONGC are:
Table 7 CRUDE PRICES COMPONENTS COMPONENTS OFFSHORE ONSHORE
Quality adjusted FOB price Custom Duty Sales tax
---Yes--50% @ 5% of FOB price 50% of prevalent rate
---Yes-----No--On actual basis except Assam crude
Notional Ocean ---Yes-----No--freight Octroi (applicable for Mumbai refineries of HPCL and BPCL only) Crude pipeline Only supplied to BPCL and Applicable to all except charges HPCL Assam Only 50% @ Rs. 50/MT NCCD ---No--applicable from 1 March ‘03 Special discount on North Gujarat crude only These MoUs were valid for a period of two years. Thereafter, the MoU could not be extended amongst ONGC and refineries due to non agreement in pricing terms and introduction/continuation of subsidy sharing mechanism. Therefore, as on date, the pricing and other terms for supply of crude oil by ONGC continues to be governed on the basis of these expired MoUs.
So from the above we can find out that the main components for pricing of crude oil are following: 1. Monthly average of high – low Free on Board (FOB) price of Nigerian Bonny light as per Platts Oilgram. 2. Difference in quality between Bonny Light and ONGC crude (termed as Gross Product Worth) determined on the basis of product yield and prices on 4 cut basis. 3. 4. 5. 6. Quality adjustment on account of excess Basic Sediment and Water. Freight and Pipeline / Transportation charges. Taxes and Duties. RBI reference rate for conversion to Indian Rupees
The Net Price of crude oil is calculated as shown below:1. Free on Board Price (FOB price) of ONGC crude:The price actually charged at the producing country’s port of loading. The reported price should be after deducting any rebates and discounts or adding premiums where applicable and should be the actual price paid with no adjustments for credit terms. It comprises of (a) (b) Base price i.e. FOB of marker crude in case of ONGC we are taking FOB price of Nigerian Bonny Light. Gross Product Worth (GPW) Differential based on 4 cut basis –
CARBON CONTENT Upto C4 C5 – C175 C175 – C350
PRODUCT PRICE Liquefied Petroleum Gas(Saudi Armaco) Naphtha (Singapore) Gas Oil 0.5%(Singapore)
Fuel Oil and LSWR (Singapore)
Gross Product Worth (GPW) can be defined as the multiplication of the spot price for each refined product by its percentage share in the yield of the total barrel of crude. Now to find the GPW differential we take the difference between GPW of ONGC crude and GPW of Bonny Light. GPW differential = GPW (ONGC) – GPW (Bonny Light) (c) (d) Specific Discount for NG crude - $0.75 / barrel on account of high LSHS content. Discount for excess Basic Sediment and Water (BS&W)
BS&W LEVEL (%) 0.2%<BSW<0.5% 0.5%<BSW<0.1% Increase of BS & W by every 0.5%
DISCOUNT (US $ / BARREL) $0.10 per barrel $0.15 per barrel Additional discount of $ 0.05 per barrel
FOB price = Base price + / - GPW differential – Specific discount for NG crude – Discount for excess BSW.
Ocean Freight (for Offshore crude only) Net freight is the difference between the Notional freight for bringing Crude Oil from Import port to refinery port and the freight for bringing crude from Mumbai port to refinery port.
Inwards Freight - Notional freight for bringing Crude Oil from Import port to refinery port. It is calculated on the basis of World Scale rates and AFRA rates. World Scale rates published on yearly basis and vary from Port to Port AFRA rates published on monthly basis and vary from Vessel Size
Outward Freight - Actual freight incurred by refinery for bringing crude from Mumbai port to refinery.
Net Freight = Inward Freight – Outward Freight. 3. Custom Duty & NCCD (for Offshore crude only) The Custom duty is payable on FOB price at the applicable rate and NCCD is payable at Rs 50/MT (applicable w.e.f.1st March 03). Custom Duty and NCCD are equally shared by ONGC with refineries. 4. Crude Pipeline charges for North Gujarat, South Gujarat, and Cauvery crude as per last rates approved by PPAC in 2001-02. These hold for onshore crude and for BPCL and HPCL refineries in case of offshore crude. 5. Sales Tax at applicable rate for onshore crude. In respect of offshore crude the tax amount is equally shared by ONGC and refinery. 6. Octroi is payable only in respect of MH crude supplied to BPCL and HPCL Mumbai. NET PRICE OF CRUDE OIL = FOB Price + Ocean Freight + Custom Duty + NCCD + Pipeline charges + Sales tax + Octroi Hypothetical Example
The above pricing mechanism can be explained with the help of an example of Mumbai High crude and South Gujarat crude supplied to IOC.
Particulars (1) FOB price of Bonny Light crude (b) GPW Differential (i) GPW of Marker crude (Bonny Light) (ii) GPW of ONGC crude GPW Differential = (ii) - (i) (c ) Basic Sediment and Water FOB Price of MH crude (a) - (b) - (c ) (2) Ocean Freight (a) Inward Freight (b) Outward Freight Net Freight (a) - (b) (3) Custom Duty @ 5% on FOB Price to be paid 50% by ONGC (4) NCCD @ Rs.50/MT to be paid 50% by ONGC (5) Crude Pipeline charges Assumed at Rs. 95/MT (6) Sales Tax @ 4% to be paid 50% by ONGC for MH crude 1.15 Mumbai High South Gujarat US $/ barrel 60.00 60.00
59.05 56.60 -2.45 0.00 57.55
59.05 58.75 -0.30 0.10 59.60
1.03 0.60 0.43 1.44
(7) Net Price = (1)+(2)+(3)+(4)+(5)+(6) Dollar per barrel 60.65 62.30 Rupee per barrel 2547.30 2616.60 (*) Note: It has been assumed that 1 barrel = 7.5 MT and 1 Dollar = Rs 42
SUBSIDIY SHARING MECHANISM
Though the intention of the government was to deregulate the oil sector completely, this could not be done initially in the case of LPG (supplied to Domestic sector) and SKO (supplied to PDS) and later on in respect of MS and HSD. Due to various economic compulsions, the retail selling prices of these products could not be increased, whereas the purchase prices of crude oil and these products to refineries are linked to import parity. As a result the Oil marketing companies (OMCs) started to incur substantial 40
under recoveries on selling these products. The government introduced a subsidy sharing mechanism from 2003 – 04 wherein the upstream companies i.e. ONGC, OIL, and GAIL were also asked to share the part of under recoveries of OMCs in the form of subsidy discount. The under recovery is borne by ONGC in the form of discount on crude oil, domestic LPG and SKO PDS supplied by ONGC. The amount of subsidy shared by ONGC is as follows:
Year 2003 - 04 2004– 05 2005– 06 2006- 07
Amount (Rs. Crores) 2,690 4,104 11,957 17,026
Unlike crude oil, the natural gas is not deregulated. The price of majority of gas produced and sold by ONGC to GAIL is regulated by MoP&NG. The current price of natural gas sold by ONGC to GAIL is regulated by MoP&NG’s which conveyed the approval of the government on partial rationalization of gas price effective from 1 July ’05. The government decisions inter – alia provided the following for pricing of gas produced by ONGC: 1. The determination of producer prices for gas produced by ONGC will be referred to the Tariff Commision. At present, ONGC and OIL produce about 55 MMSCMD gas (hereinafter referred to as APM gas). Till the tariff commission submits its recommendation and a decision is taken thereon, the consumer price of APM gas is fixed at Rs. 3200/MCM on adhoc basis; 2. All the available APM gas would be supplied to only power and Fertilizer sector consumers, along with specific end – users committed under court orders/small scale consumers having allocation up to 0.05 MMSCMD at the revised rate of Rs. 3200/MCM. The price would be linked to the calorific value of 10,000 K.cal/M3. However, the gas price for transport sector (CNG), Agra – Ferozabad Small Industries and small scale consumers having allocation up to 0.05
MMSCMD would be progressively increased over the next 3 – 5 years to reflect the market price. 3. Consumers, other then those mentioned in point (2) above, will be supplied gas at market price depending on the producer price being paid to JVs and private operators at landfall point subject at a ceiling of ex – Dahej RLNG price of US $ 3.86/mmbtu for the year 2005 – 06. For the NE region, Rs. 3200/MCM will be considered as market price during 2005 – 06. 4. For the year 2005 – 06, the producer price of ONGC is determined after deducting gas pool contribution of Rs. 150 Crore from the consumer price. 5. Further, ONGC will no longer bear the purchase differential which was arising as a result of selling higher JV gas at a lower price to power and fertilizer consumers. 6. Effective from 1 April’06, ONGC will get a fixed producer price of Rs. 3200/MCM till Government takes final decision on its price based on recommendations of Tariff Commission. 7. The price of gas for NE region, is pegged at 60% of the revised price of general consumers i.e. Rs. 1920/MCM. 8. subject to the determination of the producer price, based on the recommendation of the Tariff Commission, any additional gas as well as future production of gas from new fields, to be developed in future by ONGC/OIL, will be sold at market price in the context of NELP provisions. Subsequently, MoP&NG conveyed the revision in APM price for consumers other than Power & Fertilizer. MoP&NG has said to increase the price of APM gas supplied to consumers other than Power and Fertilizer sector by 20%. Accordingly, the price for general consumers was increased to Rs. 3840/MCM and price for North East consumers was increased to Rs. 2304/MCM with effect from 6 June’06. However, producer price for ONGC remains at Rs. 3200/MCM for general consumers and Rs. 1920/MCM for North East consumers. PAST PRICING POLICIES IN INDIA
The history of Crude pricing in India can be discussed in three time period as under:
FROM Till April, 1998 April, 2002
TO March, 1998 March, 2002 onwards
MECHANISM APM(Administered Price Mechanism) APM (phased dismantling being underway) and complete dismantle of cost plus formula Market determined price mechanism (MDPM) after total dismantling of APM
(A) ADMINISTERED PRICE MECHANISM (APM) The first attempt to regulate the oil prices was based on Value Stock Account (VSA) procedure agreed between the government of India and Burmah Shell in 1948. In 1958, VSA was terminated and Import parity pricing was brought on the recommendation of Dalme Committee (1961) and Talukdar Committee (1965). In 1969, the Shantilal Shah Committee examined and recommended the removal of Import Parity Pricing. Evaluation of APM On 16th March 1974, the government appointed Oil Prices Committee (OPC) under
the stewardship of Dr. K.S.Krishnaswamy, the then Executive Director of RBI. In November 1976, OPC recommended discontinuance of the import parity system and introduction of a pricing system based on domestic cost of production. The major reasons cited by OPC for a complete move away from import parity pricing to APM were as follows:1. The import of products constituted less than 10% of the total demand of the
country and with the continued increase in the domestic refining capacity; the share of imported products was expected to come further down.
The export of products from Middle East constituted only about 5% of the
total export of crude oil and products and hence, the posted price of the products did not reflect prices appropriate to Indian conditions 3. There was a time lag in the response of products posting to the changes in crude prices and also that the posting of all the individual products did not move in unison. 4. 5. There was no unique system of stable crude prices which could be linked to a The import parity principle did not take into account the inter refinery set of posting of individual products. differences in respect of type of crude oil, production pattern and size complexities of the refineries. The Administered Pricing Mechanism (APM) was put to practice as per recommendation of Oil Pricing Committee during the end of 1976 and was further strengthened with modification in the year 1984. Objective of APM 1. The pricing of petroleum products for the refining and marketing units was
based on the retention concept where under oil refineries, oil marketing companies and the pipelines were compensated operating costs and return @ 12% post tax worth. 2. 3. The ex- storage ceiling selling price were uniform at all the refineries. For consumers, the selling price of a product was arrived at by adding the
applicable freight from the oil refinery to the depot and from the depot to the retail outlet or direct consumers. Dealers commission wherever applicable was also added. 4. The prices of certain petroleum products like kerosene, LPG (domestic) and feed stocks for fertilizers units were subsidized for socio-economics reasons. Similarly, fuels like petrol, ATF, LPG for industrial use were priced above the cost of production to discourage their inessential use.
The prices of petroleum products were reviewed and revised from time to
time to see that the oil pool accounts were balanced. September 1992 to March 1998 The prices of indigenous crude oil were based on cost plus return of 15% post tax on capital employed.
Table 12 DATE OF REVISION CRUDE OIL BASIC PRICE (RS/MT)
16.9.92 1.1.93 1.4.96
1506.00 1796.00 2119.73
The “R” Group that submitted its report in September, 1996, recommended dismantling of the APM for the following main reasons:1) Cost Plus compensation did not provide strong incentive for cost reduction thereby breeding inefficiencies. 2) Absence of internationally competitive petroleum sector in the context of global economy. 3) With the entry of private sector, gold plating of the costs would be encouraged. 4) Wide distortion in consumer prices due to subsidies/ cross subsidies. 5) Adverse impact on oil companies due to huge deficits in Oil Pool Accounts as price revision was not timely. (B) DISMANTLING OF APM (April ‘1998 onwards)
In September 1997 the Government decided to dismantle Administered Price Mechanism (APM) and introduced Market Driven Pricing Mechanism in phased manner. The Cost plus system was abolished. Effective 1.4.1998, the crude oil producers had been paid a pre-announced increase in percentage of the international FOB prices on year to year basis subject to a floor of Rs1991/MT and a ceiling of Rs5570/MT
PARTICULARS Transition Phase
Year 1 (1998-99) Removal of cost plus formula and payment to crude producers as percentage of weighted average FOB price of actual imports
MODEL 4 Years
75 per cent
Sourcing of crude
Sourcing of crude to be liberalized and import to be allowed for joint and private sector refineries under actual user license
Year 2 (1999-2000) Payment to crude producers as percentage of weighted average of FOB 77.5 per cent
Year 3 (2000-01) Payment to crude producers as percentage of weighted average FOB price Year 4 (2001-02) 80 per cent
Payment of crude producers as percentage of weighted average FOB price
Withdrawal of cost plus formula for shipping of crude oil and move towards market related rates Deregulation of imports and pricing Full deregulation
Now since the APM was considered for dismantling it was proposed that it will be done in phases which were suggested by the “Expert Technical Group (ETG)” appointed by the government of India. The recommendations of ETG were:1. 2. 3. 4. There should be a phased de-regulation of the sector spread over a period of The first phase encompasses full de-regulation of upstream refineries and The customs tariff structure, which provided for a negative duty protection Changes in tariff to be done over the transition phase, keeping in mind the
four to five years, culminating in total de-regulation by 1st April 02. partial de-regulation of marketing sectors. needs to be amended so as to attract investments to the sector. equilibrium to be maintained between the Governments’ revenue needs, necessity to keep low consumer prices and need to increase the profitability of the companies. 5. Subsidies to be phased out gradually to within acceptable limits which will be provided through the budget.
In the end, on de-regulation, the duties be so positioned that the tariff
protection becomes 25%of the value addition while the government revenue is maintained. Reasons for Dismantling of APM 1. 2. 3. 4. APM cannot generate sufficient financial resources required for investments Private Capital as well as foreign direct investment would not be forthcoming APM does not provide strong incentives for investments in technological up APM has not been completely successful in achieving the primary objective
in upstream and downstream sectors. in view of the inherent regulatory controls imposed by the government. gradations or for its cost minimization. of ensuring s consumer friendly and internationally competitive vibrant petroleum sector capable of global presence to provide energy security to the country. 5. 6. Since all costs are reimbursed, there is no incentive to make profitable With the entry of the private sector, the cost plus formula will encourage investments. Therefore cost plus formula inbreeds inefficiencies. “gold plating” of the plant and inflate costs which the consumer would have to bear. The subsidies and cross subsidies have resulted in wide distortion in the consumer prices and do not reflect economic cost of petroleum products, which are not being passed on to the consumers automatically. This in turn has led to inefficient use of precious fuels and large scale misuse of highly subsidized products.
CRUDE PRICING POST APM – AFTER MARCH 2002
As per the Government notification of November 1997, the Finance Minister announced the dismantling of the Administered Price Mechanism in the petroleum sector from April1, 2002. The pricing of petroleum products will become market determined. Crude pricing became fully deregulated. Crude oil is being sold to Refineries on the basis of negotiated pricing principles. Post APM, the government of India brought Market Determined Price Mechanism, the prices of indigenous crude oil are determined on the basis of the Crude Oil Sales Agreement (COSA) between the producers and the refineries by benchmarking various indigenous crude oils to equivalent international crude oils. As far as ONGC is concerned, Memorandums of Understanding (MOUs) were signed with Public Sector Refining companies, namely, IOCL, BPCL and HPCL for two years till March 2004. Crude oil has been benchmarked to Nigerian Sweet Crude namely Bonny Light due to its similarity in quality. However ONGC does not receive full import parity and instead it receives only the FOB price adjusted for the Gross Product Worth (GPW) and discount towards Base Sediment and Water (BS&W) plus transportation charges in respect of crude oil sales to all refineries. Components of crude price The ONGC pricing Mechanism is based on the Market Determined Price Mechanism (MDPM) which was adopted after the dismantling of Administered Price Mechanism w.e.f.1st April 2002. The various components that are considered while determining the pricing of crude oil in term of Memorandum of Understanding are as under:1. 2. Monthly average of high – low Free on Board (FOB) price of Nigerian Difference in quality between Bonny Light and ONGC crude (termed as
Bonny light as per Platts Oil gram. Gross Product Worth) determined on the basis of product yield and prices on 4 cut basis. 3. Quality adjustment on account of excess Basic Sediment and Water.
4. 5. 6.
Freight and Pipeline / Transportation charges. Taxes and Duties. RBI reference rate for conversion to Indian Rupees.
PRICING OF OTHER VALUE ADDED PRODUCTS In India, prices of value added products are formulated by Indian Oil Corporation Limited on the basis of import parity and trade parity basis. Except M.S. and H.S.D, prices of all other Value added products are based on Import parity prices, whereas prices of above said two products are based on trade parity prices in the ratio of 80:20 (i.e. import parity: export parity).These prices are set as same as crude oil prices are set, but the components are different from those of crude oil price methodology.
INVESTMENT PORTFOLIO ANALYSIS
Treasury department in ONGC has been involved in different activities. It takes care of the Cash Management, Working Capital Management and Investment of short-term Surplus Funds apart from some routine nature of work like approving expenses, bills etc. Investment of short term surplus is the main function of treasury Department in ONGC while taking decision regarding investment, various other factors like maintaining proper liquidity (Cash Management), taking care of future requirements of funds etc. are kept in mind. These factors are required to be always considered to ensure availability of required funds in proper time to ensure smooth conduct of the business of the Company and to deploy the surplus funds of the Company from time-to-time to avoid idling and generate returns and making availability of funds whenever required in future.
IDENTIFICATION OF PROBLEM Problem Statement To get the maximum return on short term investments with minimum risk.
Hypothesis, if any In this project it is assumed that the investment procedure of ONGC is very secure and reliable and there can’t be any more optimal procedure then that.
LITERATURE REVIEW In order to check on the entire investment procedure adopted by ONGC for investment of their surplus fund the following list of documents which are being reviewed & scrutinized.
Some books and documents which are studied for taking the review are as follow : - Investment procedure documents of ONGC, - Cash forecasting process, - Investment notes of ONGC, - Treasury module of ONGC, - Reports of CRISIL and PricewaterhouseCopper, - Department of Public Enterprise website.
RESEARCH DESIGN METHODOLOGY
Data sources For the collection of data various websites have been visited and the personal interviews have been done. Exploratory research has been done for finding out the new avenues of investment, like UTI investment schemes. For UTI data, ANALYSIS Guidelines for investment ONGC regularly invests its short term surplus funds in accordance with the DPE (Department of Public Enterprise) Guidelines that have been issued for PSUs as well as decisions taken by the Board of Directors of ONGC. These guidelines and decisions are with respect to investment avenues, exposure limits, delegations, etc. The practices in this regard have evolved over a period of time.
So, before going in detail to the procedure of investment of surplus funds in ONGC, we need to understand the DPE guidelines with regard to investment of surplus funds and other facts.
DPE GUIDELINES FOR INVESTMENT OF SHORT TERM SURPLUS BY PUBLIC SECTOR ENTERPRISES:The GOI issued vide 14th December 1994, 1st November 1995 and 11th March 1996, 14th February 1997, 29th September 2005 detailed guidelines on investment of surplus funds by the public sector undertakings. The memorandum was prepared to ensure that no misuse of PSU funds recurs. These guidelines are in consultation with the Ministry of Finance. Principles concerning investments 1. PSU’s are not allowed to invest surplus funds in public or private mutual funds as they are equity based and are, therefore, inherently risky. 2. There should be proper commercial appreciation before any investment decision of surplus finds is taken and best estimates of availability of surplus funds may be worked out. Therefore, it has been decided to empower Central PSEs to prepare the best estimates of the availability of surplus funds for investment decisions to be taken by the Board of Central PSEs and then keep the Administrative Ministry informed. Consultation with administrative ministry may not be made necessary. 3. While one year ceiling on the remaining maturity period shall hold good for the general instruments the public enterprises can also select treasury bills and GOI securities up to three years maturity period. 4. Investment decision should be based on sound commercial judgement. The availability should be worked out based on cash flow estimates taking into account working capital requirements, replacement of asset and other foreseeable demands. 5. Funds should not be invested by the PSE’s at a particular rate of interest for a particular period of time while the PSE is resorting to borrowing at an equal or
higher rate of interest for its requirements for the same period of time. But now it is permitted to Central PSEs to take decision on all matters relating to short term cash management, as they would be the best judge of asset – liability mismatch in the short run. Eligible Investments 1. Term deposit with any scheduled commercial bank, the net worth of the bank must not be less than Rs 100 Cr i.e. paid up capital and free reserves must not be less than Rs. 100 Cr., fulfilling the capital adequacy norms as prescribed by the R.B.I. from time to time. 2. Credit ratings by agencies must be classified into investment grade and noninvestment grade. Since ‘highest credit rating’ would mean the top most in the investment grade which would limit choice and probably lower the overall yield, PSU’s will now be free to invest in instruments falling under investment credit rating . 3. Inter – corporate loans are permissible to be lent only to Central PSEs, which have obtained highest credit rating awarded by one of the established Credit Rating Agencies for borrowings for the corresponding period. The GOI has reiterated that inter-corporate borrowing programme can also be credit rated by rating agencies and the public enterprise may invest surplus funds only on the basis of such ratings. Authority Competent to Invest 1. Decision of investment of surplus funds shall be taken by the PSU board. However decisions involving investing short term surplus funds up to one year maturity may be delegated up to prescribed limits of investment to a designated group of directors. Where such delegation is made the delegation order should spell out the levels of approval.
INVESTMENT OF SURPLUS FUNDS INVOLVES THE FOLLOWING MAJOR ACTIVITIES 1. 2. 3. Preparation of Cash Forecast and determining investible surplus, if any. Inviting quotations from eligible parties, as may approved by the competent authorities from time to time. Investment decisions after necessary deliberations and recommendations by the Investment Committee if senior officials of ONGC constituted by the INGC Board and approved by the a designated Committee of Directors comprising of C&MD and Director (Finance) and Director (HR), to whom powers of investment of surplus funds up to a specified limit have been delegated by the Board. 4. 5. 6. Deployment of funds with successful bidders in line with investment decision. Settlement activities at the time of investments as well as at the time of maturity. Generating relevant MIS based on financial results of the empanelled entities/market intelligence reports or other sources and providing the same to the higher management. In particular, reporting of the investment transactions to the Board as required by DPE Guidelines and seeking Board approval/ratification, wherever required.
The objective of cash management is to maximize the ONGC’s cash position by ensuring that cash balances are sufficient to meet its obligations without foregoing investment income. Cash management is the process whereby the cash inflows and outflows are controlled so that current obligations will be met on time and any excess cash can be invested to earn income. At some points in the year, ONGC have excess cash that is not immediately required, while at other points in the year, the cash inflow may be insufficient. By exercising proper cash management, ONGC can potentially increase its interest revenue and reduce its bank service charges.
ONGC should consider use of information technology options for preparation and dissemination of information to reduce efforts and cycle time activity.
Cash forecasting is the basis of all the investing activities. Cash forecasting is one of the most important elements of cash management. Short term cash forecasting may be particularly important and it is functional to have an efficient cash management for many companies. It is used to support management decision making activities surrounding investment management activity.
• S ales receipts
The funds section of the corporate accounts department: Dehradun office has the responsibility of forecasting the cash requirement. The cash forecasting is done at two different levels: 1. Regional level 2. corporate level The forecast of the work centers are collated and consolidated at the respective regional office and submitted to Dehradun head office to prepare the corporate forecast. Cash forecast are prepared for a year with the month wise break up for first two monts. The company is using information technology to speed up the proceedings and reduce the effort and cycle time. It is envisaged that the project ICE would provide information technology options for preparation and dissemination of the cash forecast to reduce cycle time. Procedure of cash forecasting at ONGC The forecast for the year are prepared every month with details of the following two months being prepared with weekly details. Considerations are being made with regards to 1. Offshore productions 2. Statutory tax payments to be made as royalty, cess, corporate tax and payments to OVL. These estimates are made on the information available or on the estimates made from the past. Then these forecasts are checked for surplus and deficit, if there is a deficit then daily cash forecast is prepared. In case of surpluses the amount of surpluses and the period for which it is available is determined.
PROCESS OF INVITATION OF OFFERS UP TO APPROVAL OF INVESTMENT PROPOSAL AND ISSUE OF INVESTMENT AUTHORITY
Responsibility: TMG will have the responsibility to coordinate the process of invitation of offers, preparation of comparative statement, providing required assistance to the Investment Committee, and issue of investment authority to the Accounts Department for effecting the investment transactions. Invitation of Bids: 1. The Treasury Management Group (TMG) on the basis of the Cash Forecast and considering actual/anticipated changes, if any, in the fund position, will invite quotations, with the approval of Investment Committee members, from the eligible parties, as per approved list of invitees, from time to time. Offers are to be invited for investment in avenues permitted by the Board. Bids may be invited from the eligible bidders for a minimum amount of Rs.5 Crore. 2. The invitation letter will specify the indicative investment amount, indicative dates of investment, indicative tenure and the last date/time for the submission of bids. Such amount and tenures will be subject to change depending upon availability of funds, yield for various maturities, etc and approval of the competent authority for investment decision. 3. Bids will be invited from eligible parties. Invitation is send my fax/e-mail or it can be also be sent by ordinary post or handed over to authorized representative of the bidders to the extent practicable. 4. The invitation of bids will not in any way bind ONGC for placement of fund with any of the bidders. ONGC will reserve the right to reject an y bid without any further reference to the bidders. 5. The bids should be invited directly from the bidders and no broker should be involved in the transaction between the bidder and ONGC.
Submission of Bids: 1. 2. 3. 4. The bids will be requested to submit their bids within the date and time specified in the invitation letter. Bids should be submitted in office of the ONGC at New Delhi. Late offers are not being considered. The Bids should be firm and unconditional and give information requested in the invitation letter. Incomplete bids shall be rejected by the Investment Committee. If any bidder after submission of bids withdraws/amends any terms or condition and/or expresses inability in acceptance of any term/rate quoted, such bidder, with the approval of D (F) and CMD, may not be considered for future invitation of bids. Opening of Bids and Comparative Statement: 1. 2. 3. The bids will be opened by at least two members of the Investment Committee or at least one member of the Investment Committee and an official of the TMG. Bidders will be invited to depute, if they so wish, their authorized representative to be present at bid opening. A bid opening register, showing the details of bids received and duly signed by the bidder’s representative, if any, present at the time of bid opening, has to be maintained by the TMG. 4. The Comparative Statement will be prepared and signed by two officers of TMG and the same along with offers will be put up to the Investment Committee for its deliberation and recommendations. Investment Committee Proceedings: 1. 2. The Investment Committee will comprise of such officials and shall have such The deliberations and recommendations of the Investment Committee shall be
quorum as may be decided by the Board from time to time. recorded and signed by the participating members.
Guiding Principles for Investment Committee: The following guiding principles are to be kept in view by the Investment Committee:1. 2. 3. 4. Investment Committee will evaluate the offers in commercial principles. The investments shall strictly be made on the basis of tenders submitted by the Investments are to be made in accordance with the various exposure limits as Investment Committee will recommend investment up to maximum one year.
bidders and no further negotiations or matching be held. may be approved by the Board from time to time. Investment transactions for more than one year would be put up to Board for ratification. 5. Where the funds are available for a longer period but with temporary decline in availability during the fund availability period, Investment Committee may recommend investment of funds for the longer period by availing cash credit facility for such temporary deficit period where such temporary deficit will lead to investment at a higher yield and is considered commercially beneficial. However, such recommendation will normally consider maintaining at all times a cushion of Rs 100 Crore in cash credit limit for any day to day variations or unforeseen requirement of funds. Working Capital Demand Loan (WCDL) limit is not to be exposed for investments and should be kept fully available over and above the cushion in CC limit for any contingencies. 6. In case of a tie in rates, the investible amount may be distributed broadly in proportion to the net worth of the respective bidders, subject to their exposure limits and minimum/maximum amount acceptable to them. If such distributed amount falls below the minimum amount acceptable to any bidder or less than Rs.5 Crore, then no amount may be placed with the said bidder. 7. Investment Committee shall ensure that its recommendations are in accordance with the DPE Guidelines on the subject.
Approval of Director (HR) and Director (Finance) and CMD: The recommendations of the Investment Committee shall be put up to Director (HR) and Director (Finance) and CMD on immediate priority to avoid any delay in investment action. Issue of Investment Authority Note: 1. TMG will issue a request note (the Investment Authority Note) to the head of the F&A section of New Delhi office for making the investments in accordance with the approval granted by Director (HR) and Director (Finance) and CMD. Copy of the Investment Authority Note will be sent by fax to Funds Section and to Head of Corporate Accounts, Dehradun, for information/accounting purposes. 2. The Investment Authority Note will specify the amount of investment, name and address of the borrower, particulars of instrument, rate of return, date of investment, date of maturity and maturity amount. 3. 4. 5. The Investment Authority Note will be signed by any two officers of the TMG or one officer of TMG and any Investment Committee member. The Funds Section would intimate fund availability and provide drawing power for investment. The Head of Finance, Delhi Office/Head of Fund Section, Dehradun, as the case may be, will invest the surplus funds in accordance with the Investment Authority Note issued by TMG. SETTLEMENT, ACCOUNTING & RECONCILATION Settlement Function: All settlements related activities, like issuing of cheques, drawing power for clearing of cheques, custodianship of deposits, maturity advise to the parties, collecting maturity proceeds, releasing the deposit receipt at the time of maturity, informing Corporate
Accounts Dept. about investment would be managed by the Head of Finance, Delhi Office/Head of Fund Section, Dehradun, as the case may be. Documents: 1. 2. 3. In case of all investments, proper documentary evidence such as TDR receipt should be obtained expeditiously and in a reasonable time. Photocopy of all investment instruments are to be retained by the Head of Finance, Delhi office/Head of Fund Section, Dehradun, as the case may be. A register containing details of investments & maturity should be maintained b Head of Finance, Delhi Office/Head of Fund Section, Dehradun, as the case may be. 4. There should be a system of monthly reconciliation of records maintained by the Head of Finance, Delhi office/Head of Fund Section, Dehradun and TMG, wherein all information and calculations are cross checked to ensure correctness of the available data/details. Discrepancies: Within two working days of receipt of the instrument, Finance, Delhi office/Fund Section, Dehradun, as the case may be, should check up the interest and maturity value. In case of any discrepancy in the maturity amount intimated in the Investment Authority Note and the maturity amount mentioned in the instrument, the matter should be taken up with the concerned bank/institution by the Head of Finance, Delhi office/Head of Fund Section, Dehradun, as the case may be, in consultation with TMG.
MIS & REPORTING TO BOARD
Copy of every Investment Note would be invariably sent to Head of Corporate Accounts, Dehradun for information and accounting purposes.
TMG would inform, on monthly basis, the monthly investment details to the Funds Section and Corporate Budget Section regularly. TMG would also regularly put up note giving details of investments for the information/ratifications of the Board.
The investment transactions would be periodically reviewed by Internal Audit, to ensure compliance with the Board approved policy and procedures. The audit would carry out securities reconciliation, that is, reconciliation of investment documents such as TDR receipts with investment registers and accounting records.
TMG would maintain the records of Investment Committee deliberations approvals and make the same available for audit (internal as well as statutory Government) as and when required.
TMG will periodically update the panel of invitees and their financial details, audited balance sheet, exposure limits etc. Use of information technology measures such as web based bidding to increase efficiency of bidding process and reduce cycle time. INVESTMENT AVENUES 1. 2. The following investments avenues are presently available, as approved by the board from time to time. Term Deposits with scheduled commercial banks (incorporated in India) with a minimum net worth of Rs.100 Cr and also meeting the capital adequacy norms ad prescribed by RBI.
‘Investment grade’ rated “AA” or “P-2” or equivalent instruments, e.g., Certificates of Deposits, Deposit Scheme or similar instruments issued by scheduled commercial banks, term lending institutions including their subsidiaries.
Short term deposit scheme with highest credit rating (P1+ or equivalent) of Primary Dealers provided 50% or more of the equity if such Primary Dealers is held by scheduled commercial banks/financial institution duration in such windows should not exceed 14 days.
5. 6. 7.
Commercial paper having highest credit rating (from established credit rating agency) issued by central PSEs. Inter corporate loans to central ‘Navratna’ PSEs having higher credit rating from an established rating agency for borrowing for the corresponding period. Treasury bills and Government of India Securities.
The maximum investment duration shall be one year (including 1 year and one/two days). Also, if the maturity date happens to be a holiday, then investment/maturity shall be for a tenure upto the next working day, as per the banking practice. LIST OF INVITEES FOR INVESTMENT OF SURPLUS FUNDS The following parties are to be invited for investment of short term surplus funds by ONGC, subject to availability of exposure limits: 1. 2. For investment in term deposit and rated instruments issued by banks, invitees shall comprise of the list of empanelled banks, as approved by the board. For inter corporate loans, the invitees shall comprise of central navaratna PSEs having highest credit rating, Accordingly, invitees will comprise of Indian Oil, GAIL, NTPC, SAIL and BHEL, subject to the availability of highest credit rating. 3. For investment in rated bonds/ CPs as well as T-bills/Govt. securities, the invitees should comprise of primary dealers promoted by one or more scheduled commercial banks (registered in India)/financial institutions, and operating at Delhi.
In case of banks, invitation will be sent to the Zonal office at Delhi or to branch at Delhi nominated by Zonal office of the respective bank. In case of SBI, the invitation shall be made to Tel Bhawan Branch (where the banking facilities of ONGC are centralized) an New Delhi min branch (where ONGC maintains its current account). EXPOSURE LIMITS The Board has approved the following counter party exposure limits for investments by ONGC. (1) For a Public Sector Banks and Financial Institutions
Net NPAS to Net Advances ratio up to 10% Net NPAs to Net Advances ratio up to 15% Net NPAs to Net Advances ratio over 15%
40% of their Net Worth 25% of their Net Worth NIL
The above limits are subject to over all limit of Rs.1500 Cr for any single institution. (2) For Banks promoted by Financial Institutions.
Net NPAs to Net Advances ratio up to 10% Net NPAs to Net Advances ratio up to 15% Net NPAs to Net Advances ratio over 15%
25% of their Net Worth 12.5% of their Net Worth NIL
The above limits are subject to overall limits of Rs.100 Cr for any single institution. (3) For other Private Banks:
Net NPAs to Net Advances ratio up to 10% Net NPAs to Net Advances ratio over 10% (4)
Rs.25 Cr NIL
For loans to central Navratna PSEs: 25% of Net Worth. The above is subject to a limit of Rs.1000 Cr for IOC and Rs.250 Cr for others.
For short term deposit with Primary Dealers: 25% of Net Worth The above limits are subject to overall limit of Rs.100 Cr for any single institution. As an immediate and interim measure, the exposure limits of IDBI and IDBI bank have been clubbed and restricted at Rs.1500 Cr and the limits of ICICI and ICICI Bank have been restricted at the actual exposure level of Rs.1475 Cr. EXPOSURE LIMITS (in 2002) The investments are to be made subject to the following exposure limits:-
For Public Sector Banks
Net NPAs to Net Advances ratio up to 5% Net NPAs to Net Advances ratio up to 10% Net NPAs to Net Advances ratio over 10% (2) For Banks promoted by Financial Institutions
50% of their Net Worth up to 1500 Cr. 40% of their Net Worth up to 1200 Cr. NIL
Net NPAs to Net Advances ratio up to 5% Net NPAs to Net Advances ratio over 5%
25% of their Net Worth up to 250 Cr. NIL
For ICICI Bank, in view of its merger with ICICI, the limit would be calculated on the same basis as PSU bank, and (a) till financial results for 2001-02 are available based on the financials of ICICI and (b) Thereafter, on the basis of financials of ICICI Bank.
For other Private Banks:Table 19
Net NPAs to Net Advances ratio up to 5% Net NPAs to Net Advances ratio over 5%
Rs.25 Cr. NIL
For Commercial Paper of Corporate/Bonds of Central PSEs
25% of its Net Worth, subject to a cap of Rs.250 Cr.
25% of its Net worth, subject to a cap of Rs.25 Cr.
For Inter-Corporate loans to central Navratna PSEs: 25% of Net worth, subject to a cap of (a) Rs.1500 Cr. For Indian Oil Corporation and, (b) Rs.250 Cr for other PSUs.
For Short term deposit with Primary Dealers: 25% of Net worth, subject to a cap of Rs.250 Cr.
For T-Bills/G-Securities: No credit exposure limits, in view of sovereign exposure.
TDRs / STDRs of banks Rated Instruments of banks/FIs Commercial Paper/Bonds of Corporates Inter-corporate loans to central PSEs Deposits with PDs T-Bills/GOI Securities
Rs 6000 Cr. Rs 6000 Cr Rs. 2000 Cr Rs.2000 Cr Rs.500 Cr Rs.6000 Cr
Start Funds Section Dehradun forwards cash forecast to TMG Delhi through an e mail / fax. TMG Delhi in alliance with Funds Section Dehradun determines expected receipts and expenses .
No Funds available for more than 6 days ? Yes Decision taken by TMG Delhi to invest in TDR’s , PSE’s , Commercial papers , Treasury Bills , Govt Securities etc Notice of investment Notice of investment with cash forecast sent to IC IC deliberates over investment decision taken by TMG Delhi Quotation for investment of ST Surplus funds Bids are invited from the eligible parties by issuing a tender for bids Bids received within the specified time are opened by TMG Delhi in the presence of bidders Bid documents & comparative statements Quotations reviewed by TMG Delhi and comparative statement prepared IC deliberates over bid documents , comparative statement and approves the investment decision . Officer , TMG Delhi prepares the MoM of the IC meeting to document the investment decision .
Decision taken by TMG Delhi to invest in UTI liquid plan .
Notice of investment with cash forecast is sent to IC
Notice of investment
IC deliberates over investment in UTI liquid plan and MoM is recorded and signed
Minutes of meeting
TMG Delhi forwards the signed MoM of IC meeting to CMD & D(F) and D (HR) for approval . Approval of CMD & D(F) and D (HR) obtained . TMG checks unexpected receipts /payments across locations telephonically
Unforeseen payments ? No Calculation sheet MS Excel calculation sheet for determining the maturity value of investible funds prepared Initiates of entry in SAP in CFM Module and prepares an IAN IAN forwarded to Cash Bank section and Head Corporate Dehradun End
Investment cancelled with intimation to IC
Investment authority note
Fig 5 TREASURY MANAGEMENT GROUP FUNCTIONING PROCESS
APPOINTMENT OF PRICE WATERHOUSE COOPERS With the increasing risk of default by banks, ONGC also felt the need to review its investment procedure. SO, it appointed Price Waterhouse Coopers for this purpose.
Price Waterhouse Coopers (PWC) carried out review of existing investment policy of ONGC and explored areas for improving post investment monitoring and controls by ONGC, so that suitable action may be taken for recalling/existing investments in case of deterioration on financial condition of bank/FI etc. The gist of recommendations of PWC is given below: 1. ONGC should take up matter with DPE to permit investment decision making powers below Board level and also seek clarification/approval on new investment options, namely debt and money market based mutual funds, floating rate debt (with swap into fixed rate) and equity derivatives. 2. 3. 4. ONGC should consider use of information technology options for preparation and dissemination of cash forecasts to reduce efforts and cycle time of activity. ONGC should explore the prospect of automating the entire bidding process through web-based bidding. ONGC should consider setting up instrument wise exposure limits to further diversify the concentration risk and also a credit risk model be developed by the ONGC based on certain criteria and exposure limits be fixed for each counterparty individually. 5. 6. 7. ONGC may formulate a risk management policy to manage interest rate risks. ONGC should have clearly documented procedures to call back the investments in context of post-investment monitoring mechanism. While PWC considers the existing MIS to be adequate to present needs of ONGC, it has been recommended that ONGC may also consider generating more reports. Based on the recommendation given by PWC, ONGC revised the exposure limit for different counter-parties. For Public Sector Banks
Net NPAs to Net Advances ratio up to 5% Net NPAs to Net Advances ratio up to 10%
50% of their Net Worth up to 1500 Cr. 40% of their Net Worth up to 1200 Cr.
Net NPAs to Net Advances ratio over 10% For Banks promoted by Financial Institutions
Net NPAs to Net Advances ratio up to 5% Net NPAs to Net Advances ratio over 5%
25% of their Net Worth up to 250 Cr. NIL
For ICICI Bank, in view of its merger with ICICI, the limit would be calculated on the same basis as PSU bank, and (a) till financial results for 2001-02 are available based on the financials of ICICI and (b) Thereafter, on the basis of financials of ICICI Bank. For other Private Banks
Net NPAs to Net Advances ratio up to 5% Net NPAs to Net Advances ratio over 5%
Rs.25 Cr. NIL
For Commercial Paper of Corporate/Bonds of Central PSEs
Central PSEs Other Corporates
25% of its Net Worth, subject to a cap of rs.250 cr. 25% of its Net worth, subject to a cap of Rs.250 Cr.
APPOINTMENT OF CRISIL
ONGC wanted that some standardized techniques should be used to determine the limit for banks. So, it wanted some other agency for this purpose. Finally, CRISIL was appointed by ONGC to provide it Risk based limit structure for investment of shortsurplus funds. The main objectives of CRISIL were: To develop a risk-based limit structure for exposures to banks/other counterparties To redesign existing investment processes to implement risk-based limit structure To monitor the key economic and banking related risk indicators and rebalance the limit structure on a bi-monthly basis
Methodologies used by CRISIL CRISIL has used a dynamic method to reach at the risk limits of banks. It can be explained in the following steps: STEP 1 - LIST OF BANKS SATISFYING SCREENING CRITERIA The list of banks satisfying the Screening Criteria has been reviewed based on financial year 2003-04 data. Qualifying Criteria is as follows:
TYPE OF BANK Public Sector Banks
Capital Adequacy Ratio (CAR)
Minimum of Fulfilling norms as prescribed by RBI Rs.100 Cr. (The current norms of RBI require banks to
Private Sector Banks
maintain a minimum Capital to RiskMinimum of weighted Assets Ratio of 9% on an ongoing Rs. 500 Cr. basis.)
CRISIL has justified their recommendation on the ground that the credit-worthiness in the banking sector has a very strong linkage to size, and ‘Net worth’ is a very good proxy for size. The banks who qualify in Step 1 as above have only been considered for further evaluation. STEP 2: CRAMEL BASED RISK GRADING OF BANKS This is the main part of methodology used by CRISIL. Risk grades have been obtained from a CRAMEL based model developed by CRISIL. The CRAMEL based model uses financial and other business information to assess the credit-worthiness of banks. Under the CRAMEL model, following aspects are studied: Parameters for risk scoring: • • • • Capital Adequacy (Sub parameters: Capital Adequacy Ratio, Tier I Capital ratio, Net worth/ Net NPA, Advances Growth, Net worth size) Resources & Liquidity (Sub parameters: Cost of Deposits, Deposit Growth, Deposit Size) Asset Quality (Sub parameters: Average Net NPA, Advances Growth, Advances Size) Earnings (Sub parameters: Return on Assets, Operating Expenses/ Total Income, Profit After Tax size) SCALES USED FOR SCORING
PERFORMANCE SUB FACTOR Capital Adequacy Ratio (%)
VALUE OF SUB FACTOR Less than 8% Greater than 15% Between 8% to 15%
SCORE 0 10 Proportionately on a scale of 1-10
Tier I Capital Ratio
Less than 5% Greater than 14% Between 5% to 14% Less than 0.5 Greater than 5.0 Between 0.5 to 5.0 Less than 6% Greater than 10% Between 6% to 10% Less than 10% Greater than 35% Between 10% to 35% 0% Greater than 14% Between 0% to 14% Less than 0.0% Greater than 1.5% Between 0.0% to 1.5% Less than 18% Greater than 33% Between 18% to 33%
Net Worth/Net NPA
Cost of Deposits
Deposit Growth (%)
Average Net NPA
Return on Assets
Operating Expenses/Total Income
0 10 Proportionately on a scale of 1-10 0 10 Proportionately on a scale of 1-10 10 0 Proportionately on a scale of 1-10 0 10 Proportionately on a scale of 1-10 10 0 Proportionately on a scale of 1-10 0 10 Proportionately on a scale of 1-10 10 0 Proportionately on a scale of 1-10
Practical implication of CRAMEL based model Five banks have been selected conveniently and scores have been provided to them on different aspects that come under CRAMEL model. It can be understood with the help of following tables: The different performance parameters for all five banks have been presented in the following table:
PNB UCO BANK INDUSIND BANK STATE BANK OF TRAVANCO RE 1740.85 258.68 2379 24.36 31730.18 11.15 7.24 1331.66 276 4.824855072 5 7.72 1.47 0.815249078 7.3 CANARA BANK
PROFIT BEFORE TAX (RS. CRORE) PROFIT AFTER TAX (RS. CRORE) TOTAL INCOME (RS. CRORE) OPERATING EXPENSES/TOTAL INCOME TOTAL ASSETS (RS. CRORE) CAPITAL ADEQUACY RATIO (%) TIER I CAPITAL RATIO (%) NET WORTH (RS. CRORE) NET NPA (RS. CRORE) NET WORTH/NET NPA COST OF DEPOSITS (%) DEPOSIT GROWTH (%) AVERAGE NET NPA (%) RETURN ON ASSETS (%) SOLVENCY RATIO (%)
7137.9 1439.31 10126 21.01 144356.67 11.95 10.06 9073.99 810.17 11.200106 2 4.14 13.01 0.29 0.9970512 6 9.32
3044.35 196.65 3946 25.53 61158.76 11.12 6.09 1987.14 784 2.534617 3 5.01 10.26 2.1 0.321540 2 13.22
968.37 36.82 1260 27.18 17398.71 10.54 6.84 865.87 198 4.37308081 5.53 14.43 2.09 0.21162488 11.4
6818.26 1343.22 8712 22.13 131975.18 11.22 11.22 7018.86 879 7.98505119 4.69 20.71 1.12 1.01778228 16.76
Providing Scores to Selected Banks using CRAMEL Model
PROVIDING BANKS SCORES TO PUNJAB STATE BANK SUB UCO INDUSLAND CANARA NATIONAL OF FACTORS OF BANK BANK BANK BANK TRAVANCORE CRAMEL Capital Adequacy 6.05 5.11 4.39 5.21 5.53 Ratio (%) Tier I Capital 6.1 2.25 2.84 3.25 7.22 Ratio Net Worth/Net 10 5.1 8.42 8.78 10 NPA Cost of 10 10 10 10 10 75
Deposits Deposit Growth (%) Average Net NPA Return on Assets Operating Expenses/Total Income Total Score Limit provided by CRISIL
1.20 9.76 6.67 8.03 57.81 2724
0.11 8.59 2.13 4.93 41.54 463
1.77 8.58 1.40 4.02 41.42 43
0 8.87 5.4 5.69 47.2 310
4.28 9.14 6.73 7.37 60.27 2107
From this data, it is clear that Punjab National Bank and Canara Bank scored higher as compared to other banks. And, the limit provided by CRISIL is also higher for these 2 banks as compared to other banks. Though, CRISIL has also used Equity Price Based Dynamic Risk Scoring for reaching at the limit for each bank. STEP 3: RISK GRADING OF BANKS THROUGH EQUITY PRICE BASED DYNAMIC SCORING The equity price based dynamic scoring model puts reliance on the stock market prices of banks, and provides a one-year forward estimate of default probability for each bank. The process involves the following broad steps: a) b) c) Estimation of the banks’ implicit assets and business risk – proxied by asset Combination of business risk, asset value and “minimum payable” liabilities Benchmarking this measure against historical default experience of rated volatility from market prices and non-equity liabilities into a single risk measure for each bank. companies to arrive at a probability of default for each bank and ordering of banks into four grades.
Based on this measure the banks are again graded into 4 categories viz., 1,2,3,4 – in the decreasing order of credit quality. STEP 4: COMBINED GRADING OF BANKS A combined grade is obtained for each bank based on a logic which ensures that the CRAMEL model retains primacy – the combined grade cannot be better that the CRAMEL based grade but it can be lower than the CRAMEL based grade. STEP 5: TRANSFORMING RISK GRADES TO RISK LIMITS Based on the BASLE committee recommended methodology, the total portfolio has been allocated in the proportion of 70:20:10 in respect A, B & C category banks. STEP 6: ALLOCATION OF EXPOSURE LIMITS The Board has delegated power to Director (Finance) and C&MD for investment of short term surplus funds upto Rs.18000 Cr. A factor of 2 has been applied and accordingly the overall limit has been fixed at Rs. 36,000 Cr. This has been done so as to ensure that sufficient numbers of quotations are received and ONGC does not lose interest/yield on account the institution-wise investment limits imposed. Limits are allocated to each bank within a risk grade in proportion of its adjusted Net worth. For Public Sector Banks the adjusted Net worth is the same as the Net worth. For Private Sector banks the adjusted Net Worth is 0.6 times their Net worth. Additionally, the limit of small private sector banks is capped at 5% of their respective Net worth.
So, all the above six steps have been formed by CRISIL to analyze the Investment Procedure of ONGC. All these steps can also be put in the form of following two figures:
Risk Grading of Banks
CRAMEL Based Risk Scoring
Equity Price Based Dynamic Scoring
Combined CRAMEL Based Score and Equity Price Based Score to Grade.
Transforming Risk Grades to Risk Limits
Mapping CRISIL default Probability Data to the Risk Grades- A, B, C
Conversion of Default Probabilities to Risk Weights
Calculating Risk based Limits
INVESTMENT OF SURPLUS FUND IN UTI MUTUAL FUND: AN EMERGING VENUE FOR PSEs (INCLUDING ONGC) Investment in UTI Mutual Fund has been an option for PSEs since 1997. But, still PSEs are generally investing their surplus funds with banks because of safety involved and some misconception about mutual funds. They hesitate to invest surplus funds in UTI mutual fund even though DPE guideline has allowed them to invest in it. Department of Public Enterprises has changed its policy for UTI mutual fund from time to time. It has issued following guidelines for PSEs for making investment of their surplus funds in UTI mutual funds: • After the Harshad Mehta SCAM the department of Public enterprise (DPE) issued a guideline on 14/12/1994 regarding investment of surplus funds by PSEs. The main highlights of this circular were that investment should be made only in instruments with maximum safety and there should be no speculation on the yield obtaining from the investment. • • • In 1995, it was said that PSEs will not be allowed to invest in UTI because its schemes are “equity based” and therefore inherently risky. In 1996, PSEs were advised to phase out their existing holdings in schemes of UTI or other mutual funds over a period of 3 years. However, in 1997, the restrictions on Investments of surplus funds in the units of UTI were removed, both for Fresh Investments and for Disinvestments in a phased manner of existing units. This was done in view of the special nature of establishment and activities of UTI and its Units being eligible securities in Indian trust Act etc. • On 29/9/2005, DPE further clarified that Boards of PSEs can take a decision and consultation with Administrative ministry may not be made necessary. So, as per the DPE guidelines, PSEs are allowed for investment in UTIMF from 1997 onwards. But, no significant investment was made by PSEs in UTIMF till 2 years ago. But, now PSEs are considering it a good investment avenue for their surplus funds.
ONGC has also started making investment in UTIMF from March 2007 onwards. It has helped in getting use of their idle funds for less than 7 days which cannot be invested in banks. But, UTIMF is also providing other options also for PSEs which are providing better rate of return than banks. Between 1995 and 2006, MF industry has changed substantially and UTIMF has Fixed Maturity plans and Liquid Plans, both investing 100% only in debt securities, i.e., Govt. securities, Highly rated CP’s/CD’s/STD’s/Corporate Debt & Bonds apart from some other options for PSUs to invest in UTIMF. So, the basic assumption of Risk ness because of Investment in Equity is misplaced in the case of Investment made in FMP’s & Liquid Plans. While PSE banks/ NBF’s under RBI Regulations have started investing in Schemes of UTI some of the PSEs have expressed the following concerns: • The guidelines of December 1994 say that there should be no speculation on the yield obtaining from the Investment. Although in eligibility it allows investments in CD’s and CP’s having higher rating and Debt instrument with highest credit rating. • By SEBI Regulations MF’s cannot guarantee the rate of return but have instruments such as FMP’s where an indicative return is given in advance. UTIMF has always given a return higher than the indicative return. Besides Investment is 100% in Govt. Bonds or highly rated corporate debt/bonds., the entire portfolio can be shown to the PSEs. • As per the December 1994 guidelines, PSEs can make investments in CP’s issued by corporate but they are not investing in UTIMF FMP’s or Liquid Plans which are investing 100% in Govt. Bonds/ Highly Rated Corporate Debt. The problem from this ironical situation is that a PSE (either 100% owned by Govt. or listed on the stock exchange ) which has to compete with another corporate in the same area of operation is at a disadvantage in “Treasury Management”. This is because FMPs of UTIMF have given better returns than fixed deposits of banks. Not only that, there is
differential tax treatment for investments in MF’s in case of bank deposits. As such PSEs have got further disadvantage. If a PSE with an active of Rs. 500 Crores loses even 100 bps in Treasury Operations compares to a private sector, the it’s profitability is affected by Rs. 50 Crores in a year. This is serving nobody’s purpose except that of Banks- mostly Private Sector Banks and Foreign Banks. Now a day, many PSEs have started investing in UTIMF and many are on the way of it. Following PSEs are already investing with UTI: • • • • • • • • • • • Oil India Ltd. MRPL Nuclear Power Corporation Ltd. Indian Rare Earths Ltd. Power Trading Corporation Petronet LNG Agricultural Insurance Corporation Ltd. Securities Printing and Mining Corporation of India Ltd. BPCL Chennai petroleum Corporation Numaigarh Refineries
UTI has been providing different options to PSEs to invest in UTIMF according to requirement of PSEs. Following are the some plans of UTI which are suitable for all PSEs and which take into consideration the DPE guidelines:
UTI LIQUID FUND CASH PLAN
UTI liquid fund provides PSUs to use their idle funds for less than 7 days. Because investment can’t be made in banks for less than 7 days. The main features of UTI Liquid plan are following: • • • It is an open ended debt scheme. It means it can be redeemed any time with fulfilling specified conditions. It has Direct Debit/Credit facility with various banks It provides tax-free dividends in the hands of investors as the MF pays the DDT(Dividend distribution Tax) It provides following benefits to PSEs: • • • • • • • • Investment can be done even for 1 day Redemption can be done through fax before 3 p.m. and the amount will be credited to the investor’s bank a/c and the next working day It is a highly tax efficient scheme It has a well diversified portfolio where money is invested by UTI. Better monitoring of investment performance Constant NAV under Daily Dividend Option Ease of Operation It doesn’t involve any kind of entry/exit load
Why investment is safe in UTI Liquid Plan? • • Investments are made in only AAA/Equivalent papers of short term nature Dividend is declared out of the appreciated surplus generated on a daily basis
Daily reinvestment of the Dividend is declared It has a constant NAV which means the invested amount remains the same
If we compare the average return of UTI Liquid Plan with Bank’s Deposit, we get the following data regarding them:
Gross return (%) 8.22 8.28 8.31 8.40 8.36
Tax Free Dividend Income (%)/ Post Tax Returns 6.4050 6.4518 6.4752 6.5453 6.5141
Effective Pre Tax for Corporate being taxed @ 33.99% 9.7031 9.7739 9.8094 9.9156 9.8684
1 day 3 days 1 week 2 weeeks 1 month
Fixed Deposit Returns for Period less than 15 days 0.0 0.0 7.0 7.5 8.0
Effective Post tax Returns from Bank 0.000 0.000 4.644 4.976 5.307
From this table, it is obvious that UTI Liquid Fund has been providing better returns than Bank Deposit. UTIMF pays only 22.66% Dividend Distribution Tax (DDT), while bank Deposits attracts 33.99% tax. No TDS at the time of repurchase under UTIMF. Thus, even overnight post tax return of UTI Liquid Fund is higher than Deposits with Banks. Fear from Indicative Rate of Return given by UTIMF PSUs have certain doubt regarding rate of return given by PSUs on investments. They say that the rate of return mentioned by UTIMF is only indicative. So, in realty, it may be less too. But their doubt has no ground. Because, if we look at the history of UTIMF, we find that it has always provided better returns than indicative return mentioned by them. It is also clear from following example:
NAV 1019.4457 1019.4457 1019.4387 1019.4321 1019.4155 1019.3989 1019.3824 1019.3656 1019.3466 1019.3294 1019.3122 1019.2951 1019.2781 1019.2611 1019.2477 1019.2314 1019.2191 1019.2045 1019.1876 1019.1707 1019.1541 1019.1376 1019.1237 1019.1091 1019.0958 1019.079 1019.062 1019.0444 1019.03 1019.017 1019.0032 1018.9899 1018.9767 1018.9632
Date 19/07/2006 18/07/2006 17/07/2006 16/07/2006 15/07/2006 14/07/2006 13/07/2006 12/07/2006 11/07/2006 10/07/2006 09/07/2006 08/07/2006 07/07/2006 06/07/2006 05/07/2006 04/07/2006 03/07/2006 02/07/2006 01/07/2006 30/06/2006 29/06/2006 28/06/2006 27/06/2006 26/06/2006 25/06/2006 24/06/2006 23/06/2006 22/06/2006 21/06/2006 20/06/2006 19/06/2006 18/06/2006 17/06/2006 16/06/2006
These figure show that the NAV of any particular day is always at least equal to or higher than yesterday’s NAV. It means that it also provides a return equal to or higher than indicative return.
Similarly following figures show the asset allocation and credit profile of UTI Liquid Fund Cash Plan: Asset Allocation:
UTI Liquid Fund Cash Plan
1.80% 1.19% 11.98% 7.22% 25.04% NCDs NCA FRBs Deposit 52.77% CP/CDs Securitized Debt
Credit Profile of UTI Liquid Fund Cash Plan
1.16% NCA/Others AAA/Equivalent AA+ 68.93% STD
UTI FIXED MATURITY PLAN (FMP)
It is a close ended fixed tenure debt scheme comprising several investment plans with portfolio of debt/money market and Govt. securities normally maturing in line with the time profile of each plan. The investment objective of the scheme and plans launched thereafter is to seek regular returns by investing in a portfolio of fixed income securities normally maturing in line with the time profile of respective plans, thereby enabling the investors to nearly eliminate interest rate risk by remaining invested in the Plan till the maturity or final redemption. The Scheme seeks to generate regular income through investments in Debt / Money Market instruments and Government securities with suitable maturity. The scheme is not a money market mutual fund. The Scheme comprises of three series viz., Quarterly Series (QFMP), Half-Yearly Series (HFMP) and Yearly Series (YFMP) and) each plan offers Dividend and Growth options. The Scheme proposes to launch 2 QFMPs, 1 HFMP and 1 YFMP every month. Each FMP shall be identified by a distinct number, will have a portfolio of Debt / Money Market Instruments and Government securities normally maturing in line with the time profile of each FMPs . UTI is also going to launch 1month FMP soon. Key Features of UTI FMP • • It is available with the initial offer price of Rs. 10 per unit Load: it involves Exit load. As money is locked till maturity of portfolio, premature withdrawal is allowed only at exit load. It has been done so to prohibit the interest of other investors and restricting investors from taking benefit of changes in market rate at the cost of other investors. • • • • • It is available with Growth Option and Dividend Option It provides a predictable Returns It has a very Transparent Portfolio construction process It is also Tax efficient Transparency involved
The FMP plan involves greater transparency. The AMC calculates and discloses the first Net Asset Value of the respective Plan not later than 15 business days from the closure of Initial Offer Period. Subsequently, the NAV will be calculated and disclosed at the close of every Business Day. In addition the AMC will disclose details of the portfolio of the Scheme on a half-yearly basis. • Liquidity in the Scheme
The Scheme being offered through this Offer Document is a closed ended Scheme. The Scheme offers for Repurchase of Units at NAV based prices (subject to exit load as detailed below) on every Business Day on an ongoing basis, (before the Maturity Date / Final Redemption Date) commencing not later than 15 business days from the closure of the respective Plans. Under normal circumstances, the Mutual Fund will endeavor to dispatch the Redemption cheque within 3 Business Days from the acceptance of the Redemption request • Safety
UTI FMP scheme has chosen a portfolio of only rated instruments from debt/money market and Govt. securities. The safety is also clearly indicated with the modal portfolio of the plan. The safety involved with investing in UTI FMP is clearly indicated with the modal portfolio which involves following securities: Model portfolio of Quarterly FMP
SECURITY ABN Amro Bank Allahabad Bank Canbank Factors Citicorp India Finance Ltd. Citifinancial Consumer Finance India Ltd. Corporation Bank Ltd. DBS Choramandlam Finance Ltd. DSP Merill Lych Capital Ltd. GE Capital Services India 89
RATING A1+ P1+ P1+ P1+ P1+ P1+ P1+ P1+ P1+
HDFC Bank Ltd. HDFC Ltd. ICICI Bank Ltd. Indian Bank ING Vysya Bank Ltd. Jammu & Kashmir Bank Ltd. Kotak Bank Ltd. Kotak Mahindra Prime Ltd. L&T Finace Ltd. Rabo India Finance Ltd. Shriram Transport Finance Ltd. Standard Chartered Bank TGS Investment & Trade Pvt. Ltd. UCO Bank Ltd. UTI Bank Ltd. Yes Bank • Redemption of the Scheme
PR1+ A1+ A1+ P1+ P1+ P1+ P1+ P1+ PR1+ P1+ P1+ P1+ A1+ P1+ P1+ P1+
Each Plan has a Maturity Date / Final Redemption Date. Each Plan is compulsorily and without any further act by the Unit holder(s) being redeemed on the Maturity / Final Redemption Date. On Maturity / Final Redemption Date of the Plan, the Units under the Plan are redeemed at the Applicable NAV. For Redemptions made on the Maturity Date / Final Redemption Date, the AMC does not intend to charge any Exit Load. The Unitholder(s) may also redeem their investments on any other Business Day (before the Maturity Date / Final Redemption Date) subject to payment of applicable Exit Load. • SEBI clause for minimum number of investors in schemes/plan of Mutual Funds:
This scheme also takes into consideration SEBI guidelines which say that each scheme and individual plan(s) under the schemes should have a minimum of 20 investors and no single investor should account for more than 25% of the corpus of such scheme/plan(s). In respect of Fixed Maturity Plans (FMPs), the above conditions are required to be complied immediately after the close of the IPO itself i.e. at the time of allotment, failing which the provisions of Regulation 39 (2) (c) of SEBI (Mutual Funds) Regulations, 1996 would become applicable automatically without any reference from SEBI. Accordingly, schemes /plans shall be wound up by following the guidelines laid down by SEBI.
This FMP is available with following tenure:
TENOR QFMP(0507) Launch Date Closing Date Re-Opening For Redemption
TENOR 94 DAYS HFMP (05/07) Launch Date Closing Date 186 DAYS
TENOR YFMP (05/07) Launch Date Closing Date 396 DAYS
16th,May,2007 29th May,2007
1st May,2007 28th May,2007
16th May,2007 11th June,2007
1.0% if redeemed within 90 days of closure and no load thereafter
1.0% if redeemed within 180 days of closure and no load thereafter
2.00% of the NAV, if redeemed within a period of 365 days from the date of closure of the said plan
UTI is also going to launch 1 month FMP soon that can attract more PSEs towards this scheme. Comparison of UTI FMP with Bank Deposit with regards to Illustrative Returns and Tax Impact:
QUARTERLY FMP Gross Returns (%) Tax Incidence (%) Net Return (%) Equivalent Pre Tax Returns (Assumed Tax 9.00 22.66 7.34 _
3 MONTH BANK DEPOSIT 9.00 33.99 5.94 11.115521
YEARLY FMP 10.50 11.33 9.31 _
YEARLY BANK DEPOSIT 10.50 33.99 6.93 14.104454
Rate 33.99%) • • • Dividend distribution tax is @22.66%; the net income is tax-free in the hands of the investor. Corporate tax is applicable on the interest earned on bank deposits. Long term capital gain tax is @11.33% for corporate without indexation.
So, it is obvious from the above chart that UTI FMP provides much better return as compared to Bank Deposit. Hence, PSEs should also consider this option while making investment of their surplus funds. The contents of a UTI FMP scheme can be understood with the help of a recently launched scheme by UTI:
Indicative yield(for IP) 9.80% Brokerage(for IP) 0.15 % Upfront Indicative yield(for retail) 9.30% Brokerage(for retail) 0.50 % Upfront Date of opening 16/05/2007 Date of closing 11/06/2007 Date of allotment 11/06/2007 Date of opening for repurchase 15/06/2007 Maturity date 11/07/2008(Tues day) Load structure 2% if redeemed within 365 days No load Period From 11/06/2008(Tuesday) Performance of UTI Fixed Maturity Plan during last few 2 years:
NAME OF PLAN Yearly FMP 07/05 Yearly FMP 09/05 Quarterl y FMP 11/05 Quarterl y FMP 12/05 Quarterl
OPTION PERIOD(DAYS) Yearly Yearly Quarterly Quarterly Quarterly 396 396 94 94 94
CLOSING DATE 8/10/2005 10/5/2005 11/23/2005 12/19/2005 2/6/2006
MATURITY INDICATIVE DATE RATE (%) 9/10/2006 11/5/2006 2/25/2006 3/23/2006 5/11/2006 6 6.15-6.20 6.00-6.05 6.20-6.25 7.25
ACTUAL RETURNS (%) 6.04 6.29 6.09 6.30 7.34
y FMP 1/06 Quarterl y FMP 12/06 FTIF Q4
Quarterly 18 months
94 18 months 94 94 94 94 94
2/23/2006 3/7/2006 5/29/2006 8/29/2006 10/19/2006 11/7/2006 11/28/2006 12/20/2006
5/28/2006 9/6/2007 8/31/2006 12/1/2006 1/21/2007 2/9/2007 3/2/2007 19/4/2007 3/31/2007
7.55-7.60 8.10 6.65-6.70 7.25 7.55 7.65 7.70 8.35 8.75
7.62 8.30 6.72 7.25 7.57 7.66 7.70 8.41 8.82
Quarterl y FMP Quarterly 05/06 Quarterl y FMP Quarterly 08/06 Quarterl y FMP Quarterly 10/06 Quarterl y FMP Quarterly 11/06 Quarterl y FMP Quarterly 11/06(II) HFMP 6 months 12/06 Quarterl y FMP Quarterly 12/06(II) UTI G-SEC FUND:
This fund invests money only in government securities. Thus, investment is highly safe. Various features of the scheme: • • Nature of scheme: An open end gilt fund. Scheme Objective: To generate risk free return in the form of capital appreciation through investments in Central government securities including Call money, Treasury Bills, Call Money Repos and Money Market instruments. • • Investment Pattern: 100% investment in Central government securities, Treasury Bills, Call Money Repos and Money Market Instruments. Face value of Units: Rs.10 per Unit.
Minimum Amount of Initial Investment: Growth Option Rs.1000, Income Option Rs. 10000. Sale/Repurchase price: Both sale and Repurchase at Net Asset Value.
Risk factors in particulars to G-sec In order to understand the Risk factors that are associated with this fund we need to understand how this fund is operated. The corpus of the fund invests in Govt. Securities. The investments in these securities are made keeping in mind the future interest rates for risk free investments. Now since the securities are issued by the Govt. of India hence there is no default risk. But there certainty lies the risk associated with the interest rate movements suppose security that is giving a return at 6% and is due to mature after 10 years. Thus if this security is trading on its face value of Rs.1000 because risk free rate is 6% but if this risk free rate rises by 0.5% to 6.5% the face value of the security shall fall because the prevailing interest rate is higher than the coupon rate of the security. So if we now sell the security we will receive an amount less than Rs.1000 i.e. Rs.964 now this of Rs.36 is because of the poor estimate of the interest rate movement. Now if the interest rates fall the say by 0.5% to 5.5% the face value of the security becomes Rs.1037.68 this profit of Rs.36 is a profit to the security holder in our case the fund. Thus the fund which invests in a large number of securities with varied coupon rates. Though these securities are traded in the secondary market for resale thus the market tries to accommodate future interest rates as they perceive them to be. Thus it is important for the fund manager’s assessment to be in line with actual interest movement, thus there lays an element of speculation that is inherent with this fund. For e.g. in November 2003 RBI Governor was going to announce the new Interest rates and it was expected that interest rates would fall so the price of the securities were rising but there was no such announcements thus there was a loss on the securities that were purchased at price higher than the face value. This was the reason for the fall of the NAV of the UTI G-Sec Fund during November 2003.
In case of the non volatility of the interest rates the regular coupon accruals is going to provide return to the investor.
Initiatives taken by ONGC with regards to Investment in UTI Mutual Fund
ONGC has started investing in UTIMF this year. A detailed presentation was given by UTI to ONGC for both UTI Liquid Fund as well as UTI FMP. The matter regarding investment in UTI Schemes was deliberated at the 2nd CFO meet held at Jaipur in November 2006 and a consensus emerged that PSEs may explore the possibility of investment in UTI Schemes. Accordingly a presentation by UTI on the Schemes available with them for investment by PSEs was arranged. After the presentation it was agreed to by all PSEs present that to start with ONGC may also invest in the UTI Liquid Plan and approach DPE for issuing guidelines for investment in the Fixed Maturity Plan. An agenda for authorizing the designated Committee of Directors to invest in the UTI Liquid Plan upto a limit of Rs.1000 Crores was submitted for Board’s consideration and approval which was accepted by the board.
Finally ONGC invested its surplus funds into UTI Liquid Fund for the first time on March 13, 2007. The details of which are following: Date of Investment Amount Invested (Rs.) March13, 2007 200 Crores Tenure 2 days Maturity Amount (Rs.) 200.07 Crores
After this, ONGC has been consistently investing in UTI Liquid Fund with the maximum limit of Rs. 1000 Crores. Till April 30, ONGC has been able to earn total dividend worth Rs. 100.30 lacs through this scheme.
Observation of all 3 schemes of UTI Mutual Fund: UTI Liquid Plan UTI Liquid plan is a good scheme that has been launched as per the requirement of PSEs. It helps PSEs to make utilize its funds for less than 7 days which generally remain idle because banks don’t accept deposit for less than 7 days. So, UTI Liquid Plan is providing a great opportunity to PSEs for making utilization of surplus funds of less than 7 days. Many PSEs have started investing their surplus funds in this plan and they are also earning a good return on it. Apart from it, this plan is taking care of DPE guidelines that put many restrictions on PSEs regarding investment. This plan also provides full freedom
to PSEs for investment because it doesn’t involve any kind of entry or exit barrier. So, overall, this plan is a good investment avenue for PSEs for investment. UTI Fixed Maturity Plan UTI Fixed Maturity Plan is another scheme that has been prepared by taking care of requirements of PSEs and it also follows DPE guidelines. It has been providing a higher rate of return as compared to bank deposits. But, the one major drawback of this scheme is that it involves exit barrier. This is a reason because of which PSEs are hesitating to invest in this scheme. But, the argument of UTI in this regard also seems right that this exit barrier has been attached with it for safeguarding the interest of other investors in the scheme who may be on the loser side if exit is allowed without any load. But because of a better rate of return, PSEs has started taking into consideration this scheme too. For example, GAIL has started investing their surplus funds in UTIFMP. So, after analysing this scheme, we can say that PSEs should look at this option for making investment. But they should investment only if they are assured that they are not withdrawing it prematurely because in that case, it may result in loss of interest for them. UTI G-SEC FUND This scheme also provides full safety to PSEs with regard to investment and take care f DPE guidelines. It doesn’t involve any kind of entry or exit load. But still this scheme is not serving to the best interest of PSEs. It is so because it provides a lower rate of return as compared to other schemes. Another reason is that its fund size is very small just Rs. 122.53 Crores so it is not much suitable as per the requirement of PSEs. Other Possible Investment Option by ONGC At present, ONGC invests its surplus funds only in ‘AAA’ rated papers and banks that are considered to be safest from the point of view of investment and least chances of default.
However, if we compare the return of ‘AA’ rated instruments and other rated instruments with ‘AAA’ rated instruments, we find that these instruments provide higher return as compared to ‘AAA’ rated instruments. It is also clearly understood from following figures:
Excess Return as compared to 'AAA' Rated Instruments
0.8 Additional Return for Portfolio with Limited Exposure 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 5% 10% 15% 20% 25% % Exposure in Portfolio Excess Return on 3 Year Deposit Excess Return on 'AA' rated Instruments Excess Return on 'A' rated Instruments Excess Return on 'BBB' rated Instruments
So, it is clear that ‘AA’ and other rated instruments provide higher return as compared to ‘AAA’ rated instruments. However, along with increasing returns, the risk of the investment also increases. The analysis regarding default probabilities of different rated paper in India and US financial markets has been done to explain it. It has been presented in the following way:
CORPORATE RATING, INDIA (19932003) AAA AA
Default in 1 Year 0% 0%
PROBABILITY OF Falling below Falling below Investment Current Level in Grade in 1 Year 1 Year 0% 3% 0% 11% 98
CORPORATE RATING, USA (1993-2003) AAA AA A BBB
Default in 1 Year 0.00% 0.01% 0.04% 0.24%
PROBABILITY OF Falling below Falling below Investment Current Level in Grade in 1 Year 1 Year 0.03% 6.34% 0.18% 7.61% 0.74% 5.92% 5.63% 5.63%
Source: Standard & Poor Agency Observation from given data: There is very little probability of ‘AAA’ or ‘AA’ rated Corporate defaulting in one year. The probability of ‘AAA’ or ‘AA’ corporate falling below investment grade is also very low. However in India, the rating transition of ratings at lower end of investment grade (A and BBB) falling below investment grade is fairly high. Since, the DPE guidelines don’t allow investments below investment grade, investments in ‘A’ rated or ‘BBB’ rated options will expose the portfolio to additional risks.
But, if we look at the investment made by ONGC, it is obvious that it is taking investment decisions from the commercial point pf view and as per the DPE guidelines. It has been able to earn a higher return as compared to SBI card rates during last three years on the investment of surplus funds. It can be understood from the following table:
INTEREST EARNED ON INVESTED AMOUNT IN COMPARISON TO SBI CARD RATE
AMOUNT INVESTED (RS/ CRORE) 13,775 19,712 16,072
WEIGHTED AV. RATE OF INTEREST EARNED 5.71% 6.91% 7.93%
SBI CARD RATE 4.96% 4.87% 5.64%
INTEREST EARNED ABOVE SBI CARD RATES 0.75% 2.04% 2.29%
2004-05 2005-06 2006-07 (H1)
FINDINGS After analyzing the whole investment procedure of ONGC with existing investment avenues and other emerging avenues like UTI Mutual Fund, we can say that ONGC has been following a good investment procedure by keeping in mind the DPE guidelines.
There was a CFO meet of all oil companies was conducted in March 2007, in which all companies agreed that ONGC has a best procedure for investment of surplus funds. ONGC has been taking investment decision on pure commercial basis. It is because of such sound policy that ONGC has been increasing a higher return on its investment as compared to SBI card rates. • ONGC is earning a good rate of return higher than SBI rate. It has appointed many agencies like PWC and CRISIL to review its investment procedure. CRISIL has used a formalized procedure to review the investment policy of ONGC and it has been quite satisfactory for ONGC. • It is also going to implement E-bidding process for investment of surplus funds that will save a lot of time and paper work and will make the process more efficient. ONGC has also sought some changes in the investment procedure from the government on following aspects: • Investment in debt funds: ONGC has sought clarification from DPE that considering the change in scenario of mutual funds, existence of specialized mutual funds, whether investment in debt funds, in particular gilt funds (other than units/schemes of UTI) is permissible or not. • Investment in floating rate instruments: ONGC has asked for request from DPE on the aspect that surplus funds can be invested in floating rate debt instruments (such as linked to MIBOR) by locking in the yield through a floating to fixed rate interest rate swap. • Inter corporate short term loan to central PSE with highest rating: ONGC had also sought approval for it. Based on ONGC’s request, the same has been allowed by DPE. ONGC currently has following six PSEs (three of them are Oil companies) on the invitee list for investment. These are IOC, BPCL, HPCL, NTPC, and BHEL & SAIL.
ONGC has also started making investment in other investment avenues such as UTI Mutual Fund and it has helped ONGC to utilize its idle funds for less than seven days and it has earned good return on this investment. Now, ONGC is also looking to make investment in other schemes of UTI Mutual Fund.
The present investment policy of ONGC doesn’t involve any major shortcoming. But still some changes are required for it:
ONGC should explore the opportunity to invest in other schemes of UTIMF apart from UTI Liquid Plan. For example, UTI Fixed Maturity Plan is a good scheme that has been launched by UTIMF by taking care of needs of PSEs. But ONGC needs to be careful while investing in this scheme because it involves exit load. So, ONGC should invest only that surplus in this scheme for which it is sure that it won’t take it prematurely. So, a good step will be to start investing in this scheme with a small amount to get the inside of this scheme. GAIL has also started investing in it by Rs. 25 Crores only.
UTI is thinking to come with 1 month UTI fixed maturity Plan. This plan can be well suited to the needs of ONGC. So, if this plan comes, ONGC should take the opportunity to invest in that plan.
ONGC, at present, is investing in only ‘AAA’ rated papers and banks. But if we compare the rate of interest of these with ‘AA’ and others, we find a significant difference in the rate of interest in them. So, ONGC should look for approval from DPE for making investment in AA rated paper and banks though certain criteria should be fixed for them also.
CRISIL is following a good procedure to determine the risk limit for each bank. But there are certain factors that have not taken into consideration by it and which have a major impact on the financial soundness of banks. For example:
Solvency Ratio ONGC needs to implement a proper mechanism for cash forecasting. Because there have been incidence in the past that there was a large difference between the forecast and actual figure of cash in a year. So, it may result in withdrawing investment prematurely or taking loan. In both cases, it will have to lose on interest and ONGC has faced a lot of problem because of poor cash forecasting.
ONGC is going to implement E-bidding process from June 2007 onwards. It will clearly save a lot of time and paper work. But it needs to have trained personnel and also need to have implemented it in respective banks; otherwise it may not produce the desired result.
IDENTIFICATION OF PROBLEM
Problem Statement To identify the potential risk factors for the firm, and to provide optimum solution not only for them, but also to any other risk management procedure followed by ONGC.
Hypothesis, if any In this project there was no assumptions was as, such made and no hypothesis was thought to be appropriate for conducting the research investigations.
LITERATURE REVIEW In order to check on the entire risk factors adopted by ONGC in their different deparments the following list of documents which are being reviewed & scrutinised.
Some books and documents which are studied for taking the review are as follow : Risk management in Treasury – S.K. Baggachi. Risk Management procedure of British Petroleum Risk Management procedure of Exxon Mobil. Risk Management procedure of Exxon Mobil
RESEARCH DESIGN METHODOLOGY
For the collection of data various websites have been visited and the personal interviews have been done with different department heads, for their risk strategy, and knowing their department process and functionality. Exploratory research has been done for finding out the new risk factors particularly in relation to ONGC and some in general faced by every company.
ANALYSIS In this business world, risk is everywhere – fires, natural disasters, exchange – rate fluctuations, changes in interest rates, credit ratings and commodity prices. It’s the wild card that can upset even the most carefully crafted business plan. So it is not surprising that over the past couple of decades, executives have become ever more adept at neutralizing risk with a battery of instruments, including not just insurance but a variety of derivatives based on currencies, securities and credit ratings, as well as customized contracts with counterparties. It’s even possible to hedge the weather. As per revised clause 49 of the SEBI notified Listing Agreement (effective 01, Jan 2006) all listed companies are required to assess the business risk and steps taken to minimize the same. Accordingly, every company shall lay down procedures to inform Board members about the risk assessment and minimization procedures. These procedures shall be periodically reviewed to ensure that executive management controls risk through properly defined framework. As of now oil and gas industry is of very hazardous nature due to its volume of transaction and its importance because of its limited resources. Therefore in recognition of possible risk to which this industry is exposed, many companies has started to mitigate their risk through a proper route of risk management Therefore, risk management is the process of defining and analyzing risks, and then deciding on the appropriate course of action in order to minimize these risks, whilst still achieving business goals. The current scenario of risk management in ONGC is in a decentralized way, which is handled by different departments depending on the risk faced by them.
Therefore the object of this report is to: • • • Identify the potential risk factors of ONGC specifically. Redesign the existing risk management policy on a centralized basis. Provide a solution for existing risk factors with any alternatives.
The limitation faced by Oil and Natural Gas Corporation in risk management until now are: • • • Decentralization of responsibilities and power which create hurdle in immediate decision making. Lack of creative decision making ability, because of centralized decision making power. Structural limitations, due to high no. of hierarchy level which create difficulties in proper communication. All commercial organizations are exposed to different types of business risks. Assessment and management of these risks are essential to insulate / mitigate the effects of these risks on the financial heath of the organization. ONGC is predominantly exposed to following types of risks. (1) (2) (3) (4) Operational Risk Financial Risk Regulatory Risk Economic and Industry risk
OPERATIONAL RISK Exploration Risk E&P industry world over is fraught with the basic exploration risk which refers to the probability of success in exploration endeavors. In this industry the inputs are 107
deterministic but output is probabilistic. Before making any hydrocarbon discovery and establishment of reserves substantial cost are incurred in survey, processing and interpretation of data to firm up a prospect and exploratory drilling which may or may not result into hydrocarbon discovery. At times, such costs is enormous particularly in frontier areas, deep water and logistically tough terrain. Reservoir Behavior Risk The reservoir is delineated and assessed based on the result of survey, exploratory drilling, initial production testing results and data obtained through sustained production. The reservoir behavior is largely unknown at initial assessment, but becomes clearer with continued exploitation. The reservoir is affected by a host of factors, controllable and non-controllable, which may impact the recoverability factor. Production Life Cycle Risk During production life cycle, of a field, it is a common phenomenon that some wells get de-optimized with respect to intended/expected production, which has its own bearing on the targeted production. Then at any point of time, production field has certain percentage of wells as non flowing wells i.e. the wells which don’t flow at all. Efforts to optimize them as well as making them flow warrants further investment which is normally unplanned in nature. These unplanned expenditures have a risk associated with it in the sense that it may not fetch us targeted return. During the production life cycle of a field, we also witness some risk arising out of non-compliance of benchmark and standard and not adopting the change management philosophy in its entirety. All this has significant bearing on the utilization of the available capacity within field and within the company and thereby putting pressure on the investment/expenditures of the company. Input Cost Fluctuation Risk ONGC is a capital intensive company and the oil industry is technology intensive.
Thus the variation in the coat of inputs associated with equipments, stores and spares and manpower cost affects the future probability of the company. The cost of input increases substantially when the crude oil prices in the international market are high and vice – versa. Damage to property risk ONGC has operations spread over a vast geographical area covering both offshore and onshore. It may not be possible to provide foolproof security to each and every installation. This exposes ONGC to the risk of damage on account of fire, earthquakes, hurricane, terrorist/miscreants attacks, accidents etc.
Project Execution Risk Project Execution Risk refers to the probability of time and cost over an attached to the project execution. In case of and integrated E&P company like ONGC each activity like survey, drilling, testing, platform installation etc. is a project by itself. Therefore the time or cost overrun in any one of such activity can have cascading effect on the company’s exploration and exploitation plan. Employee Turnover Risk Every organization is faced with the risk of employee’s turnover. With the NELP regime in vogue, more private players are entering the E&P industry and therefore the chances of existing employees leaving the organization are more. Higher employee attrition rate has impact on the bottom-line on account of increased cost towards training, relocation of employees etc. E&P activities, particularly related to reservoir engineering and drilling, highly specialized ONGC employees have gained this expertise he last few decades. Employees leaving from the core areas expose ONGC to a great risk. Directors’ & Officers Liability
In case of any Corporate, registered under the Companies Act, 1956, day-to-day management of the entity is divested from the shareholders and rests with professional management team consisting of Directors and Executives. ONGC is a listed company and the shares are widely held within India and abroad. The shares are held by FIs, FIIs and High Net worth Individuals (HNI) across many countries. Therefore the company is exposed to risks arising out of commission and omission of the management team. Similarly, Directors and officers are also exposed personal liability for loses/liability arising in discharge of their official duties. Risk pertaining to safety and occupational health Risk arising out of unsafe operations is enormous and is well understood by each one of us. Managing occupational health too has an element of risk in it-the risk which is rather intangible. Stress, fatigue & other work –related ailments along with loss of confidence and associated non-deliverability has its own bearing on the “Productivity” of an employee (and on other employee as it works in contagious fashion) and on productivity of an organization. This ha more relevance in a company like ours particularly in offshore. Environmental Risk Risk arising out of pipeline ruptures, oil spills, produced water over boarding, flaring of gas above and below technical flaring level etc. This also needs to be reflected while deciding for the policy on risk management. Technical risk Since upstream industry is very capital intensive and technical savvy industry, so there is always a risk of technical faults and difficulties (including technical problem that may delay start – up or interrupt production from an upstream project or that may lead to unexpected downtime of refineries or petrochemical plants). The outcome of negotiations with co-ventures, governments, suppliers, customers or others (including, for example, our ability to negotiate favorable long-term contracts
with customers, or the development of reliable spot markets, that may be necessary to support the development of particular production projects) FINANCIAL RISK Commodity Price Risk Prices of ONGC products, i.e., Crude oil and Value added products are linked to import parity. The fluctuations in the price of crude oil and Value added products have impact on the sales revenue of the company which on turn affects the profitability. Foreign Exchange Risk The functional currency of ONGC is Indian Rupees (INR). However, ONGC is exposed to foreign currency risk, both directly as well as indirectly. Direct exposure refers to those liabilities which are settled in foreign currencies. This includes the requirement arising out of Debt-serving as well as Import transactions (includes goods and services). Indirect exposure refers to those foreign currency transactions which are settled in INR but the underlying currency is a foreign currency (viz USD). This includes the sales receipts from refineries which are benchmarked to international prices in dollar terms but are ultimately paid in INR. Interest Rate Risk Interest rate risk can be defined as the risk to the profitability or value of a company resulting from changes in interest rates. ONGC is exposed to Interest rate risk on following counts: • • Interest rate applicable to long-term debt obligations. Interest rate applicable on short term investments made by ONGC.
Liquidity, financial, capacity and financial exposure The group has established a financial framework to ensure that it is able to maintain an appropriate level of liquidity and financial capacity and to constrain the level of assessed capital at risk for the purposes of positions taken in financial instruments.
Failure to operate within our financial framework could lead to the group becoming financially distressed leading to a loss of shareholder value. Commercial credit risk is measured and controlled to determine the group’s total credit risk. Inability to adequately determine ONGC credit exposure could lead to financial loss. REGULATORY RISKS Fiscal Regime Risk E&P industry in India is affected by the changes in the tax and royalty regimes. Tax includes both direct taxes like corporate tax as well as indirect taxes like sales tax, service tax, turnover tax etc. In addition, the tax regime can also affect the cost of inputs. Royalty is governed by the provisions of Oilfield (Regulation and Development) Act, 1948 under which royalty can be charged upto 20% of the wellhead value in case of Crude oil and Natural gas production. At present royalty is charged @10 % in respect of natural gas and offshore crude oil production. In case of deep-water production of oil & natural gas, the royalty is 50 % of the rate specified for offshore production. However, Govt. can increase the royalty rates if it so desires. Any such increase will have a direct bearing on the profitability of ONGC since the crude oil prices are linked to international prices. Other Regulatory Risks ONGC is subject to regulation and supervision by the Government of India and its departments. ONGC is a Public Sector Undertaking (PSU) and is subject to mandates of GOI. The award of licences for exploration, production, transportation and sale of hydrocarbons are dependent on the policies of the Govt. Existing Indian regulations require that ONGC has to apply for and obtain Govt. licences and other approvals, including extensions of exploration licences awarded in some cases, grant and renewal of mining leases, which are basic requirements of E&P industry. Any change in the Govt. policies/regulations can affect ONGC’s operations. ECONOMIC AND INDUSTRY RISK
Economic disruptions Slow down in expected economic growth rates and the occurrence of economic recessions, can bring down slow down in demand and supply, this unexpected occurrence can be very harmful for industry. Weather risk This risk is very common in every country. Since ONGC is multinational company it operates in many countries, this kind of risk is very common for it. This kind of risk involves seasonal variation in supply, at the time of regular demand. This includes seasonal patterns that affect regional energy demand (such as demand for heating oil or gas in winter) as well as severe weather events (such as hurricane) that can disrupt supplies or interrupt the operations of ONGC facilities. Alternate energy source The competitiveness of alternate hydrocarbon and energy source can be a risk factor for ONGC as there can be an introduction of new alternate fuel source, comparatively cheaper and less hazardous and easy to access, where as at same time ONGC can loss a fortune of revenue because of decrease in sales and consumers will switch over to low cost of fuel source. MANAGEMENT OF OPERATIONAL RISKS The various risks listed above have so far been addressed as follows:
Exploration Risk Exploration risk at best can be mitigated and cannot be eliminated in totality. ONGC is reducing the risk in exploration through knowledge and technology enhancement. Geoscientists are being trained and retained through in-house and foreign faculties for
knowledge enhancement and through collaborative assignments with technology leaders. Technology Hubs are created through collaboration with Schlumberger, Halliburton, and Baker Hughes etc. State-of-the art technologies are inducted through acquisition like Virtual reality Centre advanced geological and geophysical modeling system, workstations for interpretation of data, reservoir evaluation software for better reservoir characterization etc. ONGC is going for more and latest technique of surveys such as 3D data acquisition, Q-marine seismic surveys, Sea bed logging and others. Also ONGC is consulting domain experts for interpretation of data as and when required and also consultancy projects are rewarded to have second opinion on interpretation to minimize the risk. In case of deep water activities Joint Ventures are formed to share the risk and also to have latest technology from partners. Reservoir Behaviour Risk As brought out in the Para above, hydrocarbon reservoirs are affected by both controllable and uncontrollable factors. While the controllable factors are addressed by reservoir engineers and geo-scientists, the impact of uncontrollable factors are mitigated through continuous monitoring of various reservoir parameters and through an early detection system so that extensive damage is avoided with appropriate preemptive measures. Requisite mid-course corrective actions during life of the field by maintaining appropriate well parameters help in controlling reservoir fluid dynamics in the drainage area, resulting in optimization of production rates and maximizing of achievable recoveries. Of the factors which are uncontrollable, micro and macro reservoir heterogeneities and drive mechanisms are perhaps the most important. Tackling heterogenties is an important aspect like hydro-fracturing and techniques for maximizing reservoir contact through the use of drain holes/horizontal wells, multilaterals etc. Production Life Cycle risks These risks are inherent to E&P industry and are mainly addressed through continuous monitoring of critical parameters and through training o field executives.
Input cost fluctuation risks In the E&P industry, the costs of owing/hiring of equipments generally move in tandem with the crude oil prices. The prices of inputs/equipment normally increase when the crude oil prices. Therefore E&P companies enjoy a natural hedge in form of higher realization which compensates the increase in input costs. Damage to Property risk The risk of loss/damage to property is addressed by taking appropriate insurance cover. All offshore equipments, platforms & facilities are insured against all risk of physical damage of loss under a comprehensive offshore package insurance policy. The total value of the property covered under this policy is about US$.12.72bn. However, loss of profit is not covered under the present policy. To this extent the company is self insured Project execution Risk Project execution risk is essentially addressed through deployment of Project Evaluation and Review Techniques (PERT). The projects are monitored at different levels depending upon the criticality of the project. In case project execution through contractual services, appropriate liquidated damages clause is incorporated in the contract to stress the importance of timely completion. Since most of the projects are executed through hired services, wherein the rates are frozen during the validity period, it is also ensured that cost overrun is controlled.
Employee Turnover Risk 1) The attrition rate in ONGC has been relatively low compared to private sector on account of the fact the salary structure and the other social security benefits extended to employees are comparable to the best in Indian PSU scenario.
2). It is also ensured that appropriate succession planning is done in advance in respect of all critical areas so that eventualities like death/resignation are absorbed with minimal impact in the operations. Directors & Officers Liability The risk arising out of commission and omission of employees are addressed by the fraud detection mechanism in place. At present, the actions of employees are subjected to checks and verification by both internal control systems, periodic review is carried out by specified agencies like internal audit, statutory audit, Govt audit, etc. Internal audit dept has been strengthened with tenure based posting of technical executives so that scope of audit includes technical aspects as well. Executives and Directors are also protected against personal liability arising in discharge of their official duties. As per the ONGC Board’s decision in its 124th meeting held on 26th March 2004. Directors & Officers Liability Insurance Policy for a limit if Rs 100 cr is being taken to cover aforesaid liability. MANAGEMENT OF FINANCIAL RISKS Commodity Price Risk 1) Effective from April 2002, the Government introduced full de-regulation in the petroleum sector. As a result of the decision of the government, the crude prices and prices of petroleum products are linked to international prices. 2) As witnessed over the past one year of price movements, both the crude prices and prices of petroleum products are highly volatile and subsequent to the de-regulation, the revenues and cash flows of ONGC are thus directly exposed to volatility in the international prices. 3) So far the crude oil prices have increased consistently and the same has not affected the bottom line. Instead, it has improved the profitability by enabling full realization in tandem with international prices (except for the Govt. imposed subsidy burden). However the price level has reached a level from where it can move both ways (i.e. upward as well as downward) thereby resulting in volatility. The
necessities the formulation of a corporate risk management policy to protect the company from underlying commodity risk management policy to protect the company from underlying commodity price exposures. 4) As of now, ONGC has no hedging against the fluctuation on crude oil or value added products prices. However, ONGC is contemplating to appoint a professionally competent Agency (consultant) to undertake this study and advise ONGC suitably as hedging itself exposes the company to risk and cost. Foreign Exchange Risk 1) Foreign Exchange risk management is generally done on “Net basis”. In other words, the exposure on both receivables and payables are considered and the risk management is limited to the net exposure so as to minimize the cost ONGC is having a natural hedge, in respect of USD, in the form if sales receipts linked to international prices in dollar terms. 2) However, ONGC is also having exposure to other currencies like Euro, GBP, JPY etc arising on account of import of goods and services. Further, the effect of Commodity Price risk and Foreign Exchange risk are to be considered together before deciding on the hedging strategies. 3) The job of establishing a frame-work for Commodity Price risk and Foreign Exchange risk may be mandated to a consultant as mentioned at Para. above. Interest Rate Risk 1) ONGC, at present, is having only one foreign-currency loan, denominated in Japanese Yen, drawn from State Bank of India at a fixed interest rate of 2.60% and maturity is scheduled in 2010. The outstanding as on 31st March 2005 was JPY 2160.78 million (equivalent INR being Rs.88.29 Cr). The domestic interest rates on deposits are averaging above 6% for a one year deposit. Further the fluctuation is JPY: INR conversion is less than the interest rate differential. Therefore, it is would not be beneficial to pre-pay the loan. 2) The investment portfolio mainly consists of investment in short term deposits with banks. Generally the investments under the portfolio are held till maturity and the
time horizon is limited to one year. Hedging was not considered necessary in view of the short investment tenure and the associated hedging costs. MANAGEMENT OF REGULATORY RISKS Fiscal Regime Risk Fiscal policies of the Govt. are drawn up in the light of macro-economic scenario and the structural adjustment which the Govt. intends to bringing out the possible impact on its operation and profitability. Other regulatory risks Regulatory framework is decided by the Govt. and ONGC has limited say. However, as and when any regulatory change is contemplated, ONGC takes up from time to time with administrative Ministry (MoP&NG) (through QPRM etc) detailing the possible impact on its operation and profitability Interests of ONGC, being the National Oil Company where GOI hold majority stake, are likely to be adequately protected. MANAGEMENT OF ECONOMIC AND INDUSTRY RISK Economic disruptions General economic disruptions and economic recession can be forecasted which help ONGC to reduce their production in time, and generally these recessions are not for long so ONGC can easily face it, if they change their production policy according to the market conditions. Weather risk This kind of risk is very common, but ONGC has started recognizing its ills, so for this risk separate insurance covers are now provided by insurance companies, and not only that weather insurance contracts are now traded on exchange in developed countries, on whose standard Indian commodity exchanges are also in line to launch
such kind of contract which would be helpful for ONGC in future to mitigate their risk at low cost. Alternate energy source This kind of risk can be fought by enhancing their research technique, and by keeping themselves updated with new techniques of production. Management of Foreign Exchange and Interest rate Risks 1. In this context, in Jan ’98, Government of India appointed a Committee (Reddy Committee) under the chairmanship of Dr, Y.V.Reddy, the then Deputy Governor of RBI, along with Directors (Finance) of ONGC, SAIL, BHEL, NTPC, and NALCO and representatives of C&AG, DEA, Ministry of Industry, IDBI, Bank of Baroda and FEDAI as members. 2. The committee laid down broad guidelines for management of exchange rate and interest rate risk associated with foreign currency exposure, which may be adopted by Public Sector Enterprises. The Committee submitted its report in Aug 1998. 3. The committee laid down broad guidelines for management of exchange rate and interest rate risk associated with foreign currency exposures, which may be adopted by Public Sector Enterprises. The committee submitted its report in August 1998. 4. Based on the approach suggested by Reddy Committee to manage foreign exchange risk, an Agenda was placed before 62nd meeting of the board held on 15 March 2000. The board approved the Foreign Exchange Risk Management Policy with following policy approach: (i) (ii) (iii) ONGC to follow active approach to management of foreign exchange rate and interest rate risk, with an objective to balance risk and cost. Exposures are to be managed on a net basis (i.e. net inflows/outflows) with hedging horizon for one year. Benchmark hedge ratio of 50% to be followed, with leeway for covering minimum 33.3% exposure and maximum 80% exposure, depending on views from time to time. Such benchmark ratios to be subject to review by Finance Management Committee of the Board.
(iv) (v) (vi) (vii) (viii) (ix)
Decision making Authority for hedging transactions be delegated to Director (Finance) and C&MD for instruments like forwards, SWAPS, options etc. Structured/complex derivative products to be used with the Board Approval. Transactions to be reported regularly to the Board. Periodic review by Internal Audit to ensure compliance with Board approved framework. Policy to be annually reviewed, preferably at the time of annual budget. To engage professional agency to advice the company in the area of exchange risk management strategies.
PRESENT PRACTISES FOLOWED BY ONGC As of now there is no such uniform policy for risk management. ONGC has decentralized system risk management, where different offices, assets all over India have their own departments, which have their own policies to manage their potential risk factors by themselves. Due to this there has been uneven cost expenditure for risk management, and this lead to high variable cost. This method has also not been effective due to lack of knowledge of risk factors of different process handled by their respective departments; employees are not given proper training for handling any unforeseen risk.
CONCLUSION The Corporation size, strong capital structure, geographic diversity and the complementary nature of the Upstream, Downstream and Petrochemical business reduce the Corporation enterprise wide risk from changes in interest rates, currency rates and commodity prices. As a result, the Corporation makes limited use of
derivative instruments to mitigate the impact of such changes. The corporation does not engage in speculative derivative activities or derivative trading activities nor does it use derivatives with leveraged features. The Corporation maintains a system of controls that includes the authorization, reporting and monitoring of derivative activity. The corporation limited derivative activities pose no material credit or market risks to ONGC operations, financial condition or liquidity. The corporation is not much exposed to changes in interest rates, primarily because all its short term debt has fixed interest rates. The corporation conducts business in many foreign currencies and is subject to exchange rate risk on cash flows related to sales, expenses, financing, and investment transactions. The impact of fluctuation in exchange rates on ONGC geographically and functionally diverse operations are varies and often offsetting in amount. The Corporation makes limited use of currency exchange contracts, commodity forwards, swaps and futures contracts to mitigate the impact of changes in currency values and commodity prices. Exposures related to the corporation limited use of the above contracts are not material. Above all there is need to have a centralized risk management wing that should work in coordination with all other departments. This wing will have specialized people who will form strategies for respective departments, which will be followed uniformly nation wide,
MMT – Million Metric Tonne OVL – ONGC Videsh Limited LNG – Liquified Natural Gas
PSU – Public Sector Undertaking MS – Motor Spirit HSD – High Speed Diesel SKO – Superior Kerosene Oil C2 – Ethane C3 – Propane MOU – Memorandum of Understanding IPP – Import Parity Prices EPP – Export Parity Prices LSHS – Low Sulphur Heavy Stock NCCD – National Calamity Contingency Duty PPAC – Petroleum Planning Analysis Cell OMC – Oil Marketing Companies MoP&NG – Ministry of Petroleum and Natural Gas IRR – Internal Rate of Return ROC – Return on Capital MDPM – Market Determined Pricing Mechanism TMG – Treasury Management Group NPA – Non Performing Asset DPE – Department of Public Enterprise E&P – Exploration and Production
WEBSITES 1. ppac.org 2. investopedia.com 122
3. ongcindia.com 4. petroleum.nic.in 5. google.co.in 6. petroindia.com 7. eia.doe.gov 8. utimf.com 9. dpe.nic.in 10. ongcreports.in Annual Report of ONGC 2005 -06 CMIE (PROWESS) Database Baggachi SC, Treasury risk management
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