Price Stabilisation is a Myth

Sudhir Vasudeva
Chairman & Managing Director, ONGC ,
Sudhir Vasudeva, Chairman & Managing Director, ONGC, discusses the need to prioritise the actions for India to ensure energy security. He explains the necessity of technology intensive applications in known as well as frontier basins and emphasises on the need of appropriate infrastructure, non -conventional sources and securing LNG supplies. In an exclusive interview with Mittravinda Ranjan, he says, "There is nothing more economical than exploiting a big discovery."

How do you evaluate the growth in petro-retailing space in the country? Please detail the opportunities and challenges faced by the oil marketing companies, which are state-owned and privately-owned?
The 12th Plan document of GoI envisages a Compounded Annual Growth Rate (CAGR) of 8.5 percent and 4.7 percent for MS (Petrol) and HSD (High Spirit Diesel) respectively for the period 2012-17. This impressive projection when set in the context of an expected GDP growth rate of 6-7 percent for the economy gives a promising scenario for the Indian petro-retail segment.

Currently, state-owned oil companies own about 42,000 retail outlets. Back in 2002-03, the Government issued 11,659 new licenses to the new players who were entering the market; in that offer, ONGC acquired 1100 licenses with split authorisations for both ONGC and MRPL. However, owing to the prevalent market conditions and the uncertainties associated with the sector due to regulated price regime, ONGC decided not to venture into retailing rightaway and adopted a wait and watch policy. Though management of market entry with such a large number of outlets is a marketing challenge, the margins on MS and future margins on HSD make the business lucrative.

Retail is a low risk business unless prices are artificially subsidised, it can guarantee a steady source of income. Ideally, venturing into retail business should coincide with the deregulation of HSD as in our case. Now, with the Government initiating the phased decontrol of diesel prices in the country, the market is getting sufficiently primed for the entry of new players into the retailing space like ONGC.

As far as challenges in the sector are concerned, Retail would definitely be a new arena of business for ONGC away from its core business of E & P, but in line with the company's overarching objective of being an integrated energy major with entrenched interests across the entire hydrocarbon value -chain. We would like to leverage the strengths of the ONGC brand, which has been acquired over many years of continued and excellent performance, in the oil & gas domain. With that in tow, establishing a new brand identity for ONGC in this space, with the assurance of the same levels of quality and performance, and making the business sustainable are challenges we are looking forward to.

Amid the diesel price deregulation, what inspired ONGC to re-enter into fuel retail business?
It is a market with volumes. For example, nearly 60 percent of the total transport fuel comprises of HSD. And like I said, with the Government's decision to do away with HSD subsidy, we expect reasonable profits accruing from retail. It may become a more functional and financially less uncertain market.

ONGC has already license for over 1,000 retail outlets in the country. But it does not operate yet. Are you planning to reshuffle these outlets? If yes, then how ONGC is going to fix it?
Between ONGC and MRPL, the ONGC group has licenses for 1100 outlets. However , as on date, only 3 outlets are in operation. Before moving further into this business, we are definitely undergoing a retail portfolio reassessment and outline the best possible expansion/ramp-up model for our outlets. Future strategy for this segment is under evaluation at the top management level and will be made public at an opportune moment.

Private oil companies like Essar Oil and Reliance Industries objected the Govt's change pricing model of petrol and diesel to sell fuel to PSUs. May we have your comment on it?
Such a move to force refineries to sell products to OMCs at Export Price Parity (EPP) will also adversely affect MRPL, which is an ONGC Group Company . Anyway, Ministry of Petroleum and Natural Gas (MoPNG) is looking into this issue.

Please appraise us on the company's strategic tie up with Shell for oil retailing business?
We have long-term partnership with Shell and it goes beyond petroleum retailing. We are jointly examining opportunities in the entire spectrum of hydrocarbon value-chain upstream, midstream, downstream, petrochemicals, refining, retail, and opportunities in areas such as LNG as well. We are exploring all the possible models of venturing into retailing. However, details will become clearer in the next few months.

As per media reports, ONGC is likely to operate under 'OVaL' brand, while its subsidiary MRPL will operate under 'HiQ' brand to enter the oil retailing segment. What is the significance of it?
Yes, originally that was the plan at the time we acquired the retail licenses; to operate ONGC's retail chain under the brand 'OVaL'. The strategic business unit Additional Retail Business (ARB) with a view to generate surplus income and put in place new streams of revenue also established tie-ups and associations with reputed brands of the sector.

On the other hand, the HiQ outlets of MRPL were initially positioned in the market with the proposition of cost-effectiveness coupled with quality. However, there always remains a window and scope for revisiting the strategies before starting off with the retail operations to fine-tune the earlier adopted strategies and keep them well in step with the current market realities.

The petrol & diesel prices have seen revisions at quick intervals. Do you see any stabilisation on the price front in the years to come ?
Not just the retail prices of the fuels, oil & gas industry and its business itself has an inherent volatility given that it has strong linkages with the movements in the global economy. Fuel prices in India move in tandem with international prices, so stabilisation is a myth. In fact, price revisions in order to do away with under recoveries in sensitive products - HSD, Kerosene & LPG. Actually it has become need of the hour. Only, a market determined pricing order can bring in a semblance of stability.

On the other hand, it is not always such a bad thing, market dynamics, as it captures the state of the market and the demand-supply situation and necessitates companies to bring in efficiency and service competitiveness into the business structure. But, of course, severe volatility that is a result of a host of factors, some invariably external, is something that is not conducive to the industry.

Few days back, Petroleum Minister V Moily announced that India have to achieve complete energy independence by 2030. In your view, what will be the detailed roadmap having well defined action plan to achieve it?
Ensuring energy security of the country has always been at the centre of the overall ambit of ONGC's pursuits. Especially, at a time when the rising crude import bill and the depreciating currency puts further strain on the country's fiscal health, the question of energy self-sufficiency assumes much economic and strategic significance. For the last 56-57 years, ONGC has been at the forefront of ensuring hydrocarbon availability for India, and will need to continue playing this critical role.

From our current understanding of the situation it emerges that to sustain a 7 to 8 percent GDP growth rate till 2030, India will need a 3 percent growth rate in hydrocarbon availability. A strong production growth of 4 to 5 percent is essential for ONGC to maintain its leadership in India's hydrocarbon space and provide the country hydrocarbon security. With 4 to 5 percent anticipated growth, ONGC aspires to increase its share in India's hydrocarbon consumption from the current 22 per cent to 27 percent by 203.

A production growth rate of 4 to 5 percent over a 20-year period is a challenging aspiration, comparable or better than what most global majors and other large National Oil Companies (NOCs) have achieved or aspired to. This thrust for accelerated growth across all segments of its business chain over the coming period of the next two decades forms the basis for ONGC's Perspective Plan 2030. By 2030, ONGC aspires to become a truly global E & P player and strengthen its position as India's leading energy company, by doubling its production, effecting a threefold increase in revenue, four-fold increase in market capitalisation. While doubling its total production, contribution from its overseas assets it is envisaged at 8 times of its current production.