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OVL-II may stay on drawing board

Pradeep Puri in New Delhi | November 22, 2003 12:55 IST

The petroleum ministry's plans of floating a second version of ONGC Videsh Limited with participation from five public sector downstream companies are likely to remain on the drawing board. This is primarily because of the inherent difficulties in effectively running a joint venture of five companies.

"There are fundamental difficulties in making it a success. Take the case of Petronet LNG, which also has equity from five companies. It has not been able to achieve a single financial closure so far, though its projects are much smaller in size than those of OVL," Subir Raha, chairman and managing director of Oil and Natural Gas Corporation, said.

Similar sentiments are expressed by industry experts who feel the government should look at other options to give state-owned oil companies a piece of the action in OVL.

From a sleepy company just three years ago, with just two properties in two countries, OVL has transformed itself into a true multinational with 10 properties in eight countries.

This wholly owned subsidiary of ONGC, which was on the verge of closure seven years ago, is expected to record a net profit of over Rs 1,000 crore (Rs 10 billion) this year. By 2010, its profits are expected to cross Rs 5,000 crore (Rs 50 billion) if international crude prices remain above $20 a barrel.

OVL's success caught the eye of downstream oil companies struggling to sustain their profits after the dismantling of the administered pricing mechanism in the petroleum sector in April 1, 2002. The companies, which had enjoyed assured profits and cost reimbursements under the APM regime, started to seek vertical integration to retain their bottomlines.

The petroleum ministry decided to play ball and prepared a strategy paper to restructure OVL, and get state-owned refining companies into the venture. When ONGC resisted all attempts to part with its existing assets in OVL, the idea of OVL-II was floated. It received wide acceptance.

"While taking this decision, no consideration seems to have gone into the factors responsible for OVL's success. Prominent among these being the fast track mechanism provided to OVL, the awareness of the importance of oil equity abroad and the help extended to it by the external affairs ministry in the form of diplomatic initiative and support," an industry expert said.

Even if the government allows a fast track mechanism for OVL-II, its investment proposals will still have to be vetted and approved by the boards of the five companies.

Speeding up the decision process can be a daunting task indeed if one goes by the experience of Petronet LNG, where the petroleum secretary, sensing the lack of coordination between the different participating companies, had to appoint himself as its chairman to make the things move faster.

The second and more important aspects of doing business abroad is maintaining confidentiality of all the deals under negotiation. In case of OVL-II, at least the boards of the five constituent firms will have to be taken into confidence while finalising any deal. In such a case, maintaining secrecy could be a difficult proposition.

Right now, OVL has only one balance sheet. For the purposes of due diligence, only the balance sheet of ONGC has to be studied. In case of OVL-II, those wanting to deal with it will have to study the balance sheets of all the five parent companies -- another big hurdle.

Even as the government has been considering ways to meet the aspirations of state-owned oil companies, private sector oil companies have also started demanding that they get a piece of the action.

According to an industry expert, the solution for this is to make OVL a private sector company as recommended in Hydrocarbon Vision 2025.

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