Oil And Natural Gas Commission Business Information, Profile, and History

History of Oil And Natural Gas Commission

The Oil and Natural Gas Commission (ONGC), India's largest petroleum exploration and production entity, is organized as a state statutory body rather than a public company, but is run on a profit-making basis with these revenues flowing to the Indian Exchequer. In 1989-1990 ONGC claimed to have posted the biggest profit in "India's corporate world."

ONGC and the state-owned company, Oil India Ltd., are responsible for most of the exploration and production of crude oil and gas in the country. A separate state-owned company, the huge Indian Oil Corporation, is predominant in refining, trading, and marketing.

The ONGC and other state-owned oil companies trace their origins back to a 1948 resolution by India's newly independent government. The Industrial Policy Resolution of 1948 specified that all new units in the Indian oil industry would be government-owned, unless specifically authorized.

In December 1955 an Oil and Natural Gas Directorate was set up within the Ministry of Natural Resources and Scientific Research to specialize in exploration. Early in 1956 its status was changed to a commission. In October 1959 the ONGC was made a statutory body by an act of parliament.

The decision to create ONGC as a state-controlled body and, eventually, to bring most of the rest of the oil industry under government control, was based not just on ideology, but on the need to prevent a drain on foreign exchange and control by a group of foreign-owned oil companies that were predominant in the country. Before independence and immediately afterward foreign companies exercised a powerful control over the production and supply of petroleum substances vital to the country's industrial development.

Prior to independence, it was widely believed that India lacked large-scale commercial deposits of oil and gas. Many of India's needs were supplied by other parts of the British Empire, Persia, the Dutch East Indies, and Russia. Kerosene was the most important petroleum product in a country with few cars. Burma, then an administrative part of India, was known to have significant deposits, which sometimes derived from shallow, hand-dug wells. In 1947 both Burma and Pakistan--the latter with one discovered field--went their own ways.

India was left with only one major producing field--Digboi, Assam--which had been discovered in 1890. Despite extensive surveys throughout Assam, no other fields of any significance had been discovered. Digboi and its local refinery had been of profound strategic significance after the fall of Burma in 1942. It had furnished oil to Allied air bases from which supplies were flown to China. It would take several years for India's new leaders to learn the strategic and economic importance of domestic oil supplies.

During World War II, petroleum supplies were regulated by a committee in London, and prices were set in India by a committee chaired by Burmah-Shell. Wartime rationing continued until 1950, and a shortage of oil products continued to be exacerbated by the limited domestic production and refining facilities. Relations with Burmah-Shell and other foreign companies continued to sour after independence in 1947. They advised India against building its own refinery on the grounds that it could only be run at a financial loss. India's vulnerability to the pressures of the international oil market became clear after 1950, when the Iranian political leader Mussadegh nationalized a huge refinery at Abadan that Burmah-Shell had previously used to supply much of India's needs. Iran was in the sterling area, and when this source was cut off India was forced to use its scarce dollar reserves to buy oil elsewhere.

The foreign companies were then persuaded to build two refineries, but the government remained skeptical about the costs of oil exploration. After the war, the Assam Oil Company, a subsidiary of British-owned Burmah Oil, had resumed exploration with little success. Assam finally achieved a major find at Nakhortiya in 1953, but a row ensued between Burmah and the government. The government refused Burmah any right to refine or market this oil and would only allow the company joint ownership in production. As a result Burmah refused to undertake further exploration. Soon afterward, the government claimed Burmah-Shell and other foreign companies were charging excessive prices for imported oil. A controversy ensued over the companies' refusal to refine imported Soviet oil.

These controversies helped lead to the creation of ONGC. Burmah retained control of Digboi but development in the other Assam fields was taken over by a new company, Oil India Ltd., of which the government owned one-third and Assam Oil held two-thirds. By 1981, the Indian government had acquired 100% of Oil India.

Burmah and Oil India were originally confined to the Assam fields, where ONGC was excluded. After 1956 no new concessions were granted to foreign companies for onshore exploration. ONGC became the principal exploration company in India. A Soviet consultant and several Soviet geophysicists were engaged. At first, exploration and drilling with equipment provided by the Soviet and Romanian governments yielded disappointing results. The Indian financial press criticized ONGC and the government for wasting the taxpayers' money. But this attitude began to change after an important find at Cambay, Gujurat, in 1958. A chain of new finds followed.

Soviet and Romanian experts became enthusiastic about India's potential reserves. They estimated that 42% of the country's land area was composed of oil-yielding sedimentary rock with even more lucrative possibilities offshore. Soviet-supplied exploration and production technology, however, was widely regarded as inferior, and the government looked for other sources of assistance, especially after a 1963 offshore exploration revealed promising structures beneath the Gulf of Cambay.

In 1959, the government had revised legislation to make it easier for foreign companies to undertake exploration work in some areas without the participation of ONGC. However, the government's preference for agreements in which explorers accepted a majority government stake in the crude-producing company was known. The government launched a campaign to persuade foreign companies to undertake exploration.

The French Institute of Petroleum provided some assistance, and some contracts were given to French and Italian firms. Press reports indicated that Shell, Caltex, Gulf, and Esso were interested, but in the end there were no major deals. There were more lucrative fields elsewhere, with fewer government conditions made.

With limited technology and Soviet help, ONGC's progress in developing new wells and in production was slow during the 1960s. The government's inability to attract foreign investment came under frequent criticism. More promising offshore geological structures were found during systematic surveys by the Soviet ship Akademic Arkhangeleisky during the period 1964-1967.

Finally, in 1974, ONGC discovered the major Bombay High offshore field with a strike from the advanced Japanese-built Sagar Samrat drilling platform. The strain on foreign exchange caused by the 1973 Arab oil boycott brought a redoubling of exploration efforts. Further offshore oil and gas was discovered at Godavari and gas off Portonovo and the Andaman islands in 1980.

The importance of ONGC's new gas discoveries was underscored by the government's decision in 1984 to set up the separate Gas Authority of India Ltd. (GAIL) to process, market, and distribute all forms of natural gas. After the government acquired the remaining foreign interests of Burmah in the Assam Oil Company in 1981, Oil India Ltd. was given an expanded role as the second public sector undertaking engaged in oil exploration and production. Previously, Oil India had been restricted to eastern areas of the country.

ONGC seeks to help the country achieve self-reliance in oil-related equipment, materials, and services. ONGC has tried to speed up this indigenization by working with a consortium of Indian firms that includes Hindustan Shipyard Ltd., Burn Standard Company Ltd., Confederation of Engineering Industry, and Larsen & Toubro. The company reports that this progress has resulted in the domestic industry supply of over 50% of the oil industry's equipment and materials requirements.

In its early days, ONGC experienced difficulties in obtaining up-to-date petroleum technology. It has assigned a high priority to research and technology, which the company states are now on a level with that used in explorations anywhere in the world. ONGC's research efforts date back to the founding of its Kashava Malaviya Institute of Petroleum Exploration in Dehra dun in 1963. The Malaviya Institute is responsible for applied research in petroleum geology, geophysics, and well logging techniques. ONGC has six other research bodies. ONGC's policy is to run these institutes as profit centers.

Exploration efforts have been expanded to many new areas including Krishna-Godavari, Cauvery, Tripura, Cachar, Dhansiri Valley, and Ravasan. The number of active rigs grew from 41 in 1981 to 144 in 1990. Future plans include the Ganges Valley, Himalayan foothills, Bengal, Kerala, and Konikan. Offshore, the firm's deep water unit has been formed to function as the central agency for planning, programming, and implementing exploration in deep water along India's coasts.

As the government's agency, ONGC has presided over an increasingly liberalized policy of encouraging foreign oil companies to explore offshore and they have responded with increasing interest. In 1987, the Indian government invited foreign oil companies to bid for 27 offshore exploration blocks in the third round of initiatives to encourage foreign investment in India's offshore industry. This effort was made more successful than the previous rounds in which many companies refused to participate because they alleged that the government had reserved the most favorable sites for ONGC and Oil India. Twelve bids for nine blocks covering a total of 121,000 square kilometers were received from seven companies. Chevron, Texaco, Broken Hill Proprietary of Australia, and International Petroleum of Canada eventually signed deals allowing them to put 40% equity in a joint venture or to pull out if seismic data were not promising. In 1990, the government announced plans for a fourth round. Private Indian companies would be allowed to acquire concessions for the first time, but there are no current plans to privatize ONGC itself. In 1989 ONGC signed a joint exploration agreement in the Gulf of Thailand, signed drilling contracts with National Iraqi Oil Company, and raised money in the Tokyo and Swiss bond markets.

In 1981-1982, the ONGC redefined its goals and objectives and prepared a corporate plan spanning 20 years from 1985 to 2005; more recently, this plan has been updated to 2015. The emphasis is on accelerated exploration and production strategies. From 1990 production levels of about 30 million tons of crude oil it envisages by 2015 production of 75 million tons.

Over the 1980s and early 1990s, ONGC has shown steady growth in crude oil and gas production, rig counts, profits, and contributions to India's exchequer. India hopes to achieve self-sufficiency in fuel by the year 2005. As the company most active in the western offshore, India's most important oil and gas area, ONGC is essential to this task.