Case Study of Ongc Videsh Limited Example for Free

Oil and Natural Gas Corporation Limited (ONGC) (incorporated on June 23, 1993) is an Indian public sector petroleum company. It is a Fortune Global 500 company ranked 152nd, and contributes 77% of India's crude oil production and 81% of India's natural gas production. It is the highest profit making corporation in India. It was set up as a commission on August 14, 1956. Indian government holds 74.14% equity stake in this company. ONGC is one of Asia's largest and most active companies involved in exploration and production of oil. It is involved in exploring for and exploiting hydrocarbons in 26 sedimentary basins of India. It produces about 30% of India's crude oil requirement. It owns and operates more than 11,000 kilometres of pipelines in India. Until recently (March 2007) it was the largest company in terms of market cap in India.

ONGC Videsh :

ONGC Videsh Limited (OVL) is a wholly-owned subsidiary of Oil and Natural Gas Corporation Limited (ONGC) - the flagship national oil company of India. OVL was rechristened on 15th June 1989 from the earstwhile Hydrocarbons India Private Limited, which was incorporated on 5th March, 1965. Over a period of time, OVL has grown to become the second-largest E&P company in India both in terms of oil production and oil and gas reserve holdings. The primary business of OVL is to prospect for oil and gas acreages abroad including acquisition of oil and gas fields, exploration, development, production, transportation and export of oil and gas. OVL's international oil and gas operations produced 8.78 MMT of O+OEG in 2008-09 as against 0.252 MMT of O+OEG in 2002-03. OVL's overseas cumulative investment has crossed USD 9.7 billion. OVL participates and operates in varied environments - both political and geographical, it is committed to the highest standards of Occupational Health, Safety and Environment protection and compliance to all applicable local laws and regulations. Understanding well its Corporate Social Responsibility, OVL makes valuable contributions to the communities and economies in which it operates by investing in education and training, improving employment opportunities for nationals, and providing medical, sports and/or agricultural facilities, besides payment of tax revenues to local governments.

FDI by ONGC of India: A case study of ONGC Videsh Limited (OVL)

Case :

With the pace at which India Inc is expanding its footprint abroad, the country's outward foreign direct investment (FDI) may very well catch up with inward FDI. In '04-05, Indian direct investment abroad aggregated $1.54bn on the back of a drive by manufacturing companies to expand abroad. On the other hand, total FDI into the country totalled $2.32bn. According to the RBI annual report, the phase of acquiring foreign companies, which kicked off in the information technology and related services sector, has now spread to other areas. Apart from manufacturing, the non-financial services segment accounted for outward FDI of $230.1m, followed by trading at $175.5m and financial services with $6.9m. In '00-01, India's outward FDI was just $708.3m. Maximum outward direct investments by Indian companies have been in the US during the period between April 1995 and March '05. Indian firms invested over $2 bn in the form of equity and loans in companies (IT and pharma) set up there. Russia, Mauritius, Sudan (oilfields)and the UK were other major investment destinations during the last decade. India has become an important source of FDI to the South Asian region and other countries. The most crucial destinations of Indian outward FDI till date are the United States, which accounted for 19 per cent of total cumulative outflows during fiscal years 1996-2003 and the Russian Federation, with 18 per cent of the cumulative outflows, a share that includes the $1.7 billion acquisition of a 20 per cent stake in Sakhalin Oil field by the Oil and Natural Gas Commission (ONGC) in 2001. OVL is a wholly owned subsidiary of the Oil and Natural Gas Corporation (ONGC) Limited, India's largest corporate by market capitalisation: US$ 11,039 million for 2002 - 03 (Economic Times 500) as well as its first integrated oil and gas major. ONGC is ranked 133 on the Forbes Global "Best Big Companies" list for 2002 - 2003. The wholly owned subsidiary of ONGC has been mandated to perform ONGC Videsh Limited (OVL), International Petroleum Business to accrete overseas reserves and bring the reserve replacement ratio of ONGC close to 1. OVL today is the "Second largest E&P company in India "second only to ONGC in terms of oil & gas reserves. It has 12 overseas assets and is actively seeking more opportunities across the world. With a long-term target of acquiring 60 MMTPA of equity oil and gas overseas by 2025, OVL is currently working towards a goal of 20 MMTPA by 2010. OVL's efforts have been supported wholeheartedly by the Government of India, which has allowed OVL exclusive empowerment, which provides OVL single window clearance for overseas upstream projects irrespective of investments involved. OVL has been designated as the Indian Nodal Agency for overseas petroleum business and is maintained as a permanent participant in all concerned bilateral interactions and Joint Working Groups of the Government of India. OVL has purposely been maintained as a lean and fast organisation so that functions and operations which are not of permanent nature can be outsourced to agencies within ONGC and in the industry. The functional Directors of ONGC serving on the OVL Board induces cohesion of corporate objectives and goal congruence in both organisations. OVL follows meritocracy and draws its human resource from ONGC. The finances for OVL's operations are mainly provided by ONGC in form of loans and equity. ONGC's overseas arm, ONGC Videsh, has invested more than $5 billion in foreign assets, including stakes in a gas field in Vietnam, Russia's Sakhalin-1 and Sudan's Greater Nile Project, where ONGC has a 25 percent stake. If the agreement is concluded, this would not only be the single largest foreign transaction by an Indian company in the country's 58 year independent history but also the single biggest foreign credit extended to a Russian company. ONGC has already invested US$2.77 billion in Sakhalin-1 If the loan and equity agreement goes through, ONGC will become the largest foreign direct investor in Russian Federation. Indian government has sought sovereign guarantees from Russian government over the loan because the market capitalization of Rosneft is less than half the loan amount being discussed. Even if such a guarantee does not come forth, Indian officials reportedly believe they have a natural safety net in investing in Russia because of strong strategic ties between the two countries. both sides have benefit of decades of trust and reliability. They have been partners for nearly fifty years. It is a time tested relationship and when two Russian-Indian state owned companies talk to each other, they know that commitments given are commitments kept. ONGC Videsh Limited (OVL), acquired five properties abroad for exploration in the last financial year. It operates in 14 properties in 12 countries. ONGC Videsh Ltd, the overseas arm of state-run Oil and Natural Gas Corporation has reported a six-fold jump in its net profit to Rs 428.53 cr in 2003-04, which makes it the country's second largest oil and gas exploration firm after its parent. The company, which has stakes in oil and gas properties in nine countries, earned Rs 3,502 crore revenue during last fiscal as opposed to Rs 233 crore in 2002-03. OVL produced 3.323 million tonnes of crude oil and 0.523 billion cubic metres of natural gas in 2003-04. The output compares to 3.01 million tonnes of crude production of Oil India Ltd and 2.5 million tonnes of private firms put together. At the end of 2003-04, the company owned 199 million tonnes of oil and oil equivalent reserves that were second only to ONGC's 1128 million tonnes reserves.

Key Facts :

Indian FDI aggregated $1.54bn Outward FDI $708.3bn ONGC acquires 20% stake in Russia, other destinations include Mauritius, Sudan (oilfields) and UK during the last decade OVL subsidiary of ONGC to acquire overseas reserves and bring reserve replacement ratio close to 1 ONGC has 12 overseas assets Long term target of acquiring 60 MMTPA by 2025, 20MMTPA by 2010 Strategic objective of parent and GOI Strategic direction formulated Rapidly changing nature of the global petroleum industry OVL designated Indian Nodal Agency for overseas petroleum business OVL follows meritocracy Financial directions provided by ONGC - loans; interest free advances; equity Invested more than $5bn foreign assets Nile project 25% stake gas fields in Vietnam, Russia Invested US$2.77bn in Sakhalin, Russia, if deal secured - largest FDI investor in Russia ONGC diversified into downstream sector - taking over MRPL from A V Birla Group in retailing OVL acquired 5 assets abroad for gas exploration - operating 14 assets in 12 countries OVL earned Rs. 3502 Cr revenue last fiscal through its FDI

Case Analysis :

KEY REASONS TO TAKE UP FDI ABROAD

Indian companies are increasingly buying up companies abroad as strategic acquisition. Thus, FDI now flows both ways. This two-way flow of FDI has radically altered the age-old impression that FDI means only a unidirectional flow of capital that is inwards. The best known example of Indian corporates making strategic investments abroad include Tata Steel buying Corus Inc and Aditya Birla group wrapping-up the aluminium major Novelis Inc. Of course, the latter has been for long the well-known Indian multinational. There have also been acquisitions abroad by medium-sized Indian companies such as Godrej and Marico. ONGC has been making investments in the energy sector abroad. All these point to the growing competitiveness of the Indian corporate sector, a newfound sense of confidence and of course, vaulting ambition to be a global player. So, the two-way flow of FDI means that not only is the world taking note of India's market potential, Indian companies too are constantly on the lookout for synergistic acquisitions overseas. While it may make commercial sense for Indian corporates to invest abroad, it is also an indication of the perceived inadequacy of natural resources within the country and the policy-roadblocks that stymie their exploitation. Lack of transparency and absence of long-term policies deter free flow of investments. The increasing competitiveness of Indian firms and their interest to expand globally, particularly in IT-related services and pharmaceuticals, are driving its outward FDI growth. Access to markets, natural resources, distribution networks, foreign technologies and strategic assets, such as brand names, are the main motivations. The liberalization of government policies and relaxation of regulations on FDI abroad have also helped. Indian outward FDI is expected to grow, in particular in IT and software services. India's membership in various regional integration arrangements also provides Indian firms with a favorable platform to strengthen their presence in these partner economies. Not least, the encouragement and the significant liberalization of policies by the government of India will continue to play an instrumental role in the expansion of Indian firms abroad. Indeed, the emergence of developing countries as sources of outward FDI is a new phenomenon. It suggests that enterprises in developing countries are building up the capabilities to compete in international markets. Over the past 15 years, a number of developing countries have begun exporting capital, both in the form of portfolio investments and direct investment. According to World Development Report by UNCTAD, the outward FDI stock from developing countries increased from $60 billion in 1980 to $859 billion in 2003. The share of developing countries in global outward FDI flows reached about 10%. South Korea, Malaysia and Singapore have been outward investors for some time; Brazil, China, India and South Africa are now following suit.

ONGC INSISTING EQUITY SHARING? BETTER OFF WITHOUT FOREIGN PARTNER?

Helps the company raise capital with the help of equity -less direct investment by the company. Less out flow of foreign exchange from the country. Choice of importing the raw materials of our own choice(crude and gas in this case). The foreign partner helps in understanding the market better at the host country. Also in the operations and in sharing the costs. The larger part of the dividend goes to the foreign partner. The foreign partner is trusted by the investors in the host country. The interests of the home country are saved. Often technological expertise is gained by the home country company.

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