Monday, Jan 17, 2005

Executives in India might today be among the world's most optimistic when talking about the prospects for their country's big businesses. Most would agree there is not yet an Indian company that has achieved scale or branding that is truly global.

Perhaps the fast-growing companies in its high-profile information technology services sector may become the first conspicuously Indian brands, although they lack the scale of multinational rivals.

However, Oil and Natural Gas Corporation, or ONGC, is one Indian energy company that has assets which span national borders and ambitions to compete alongside global heavyweights.

Analysts say the state-controlled company is poised to invest up to Rs114bn in oil and gas exploration and production in the year to March 2006 as part of an emerging race with neighbouring China to secure energy assets.

India's growing economy is hungry for energy. Demand for oil is set to grow at a rate of 3.6 per cent a year during 2005-2007, according to estimates by New Delhi's Planning Commission. But India imports 70 per cent of its crude oil, a dependency that is driving a frenetic search for energy security from exploration blocks in 10 countries.

A key to India's energy security lies in ONGC's ambitions to become a larger company. By Indian standards, it is already a behemoth. ONGC is the largest company listed on the Bombay Stock Exchange and accounts for 10 per cent of total market capitalisation. Its earnings, before interest and tax in the financial year to March 2004, were Rs125.36bn and are forecast to rise to Rs168.4bn this financial year.

Yet, ONGC is still about 25 times smaller than global energy giants such as ExxonMobil. "We need to have companies in this country that are globalised . . . which are in the Fortune 500 or FTSE 500," says Subir Raha, chairman and managing director of ONGC. "I have to be globalised. I may not be equal to the size of Exxon or BP but the process of business has to be similar."

In order to reach global scale, ONGC would need to integrate its core energy exploration business "downstream" with crude oil refining and petroleum product marketing.

These businesses are currently run by separate state enterprises, such as Hindustan Petroleum, Bharat Petroleum and the Gas Authority of India Ltd (GAIL).

"Either you are a niche company and therefore a small company, or you are an integrated company. You cannot become a globalised player of any consequence if you are not integrated," Mr Raha told the FT. "Clearly, we have to integrate. We are perhaps the only country where the major oil and gas companies are sectoral."

Energy analysts say the options before ONGC are to grow organically or, possibly, to merge with Hindustan, Bharat and Gail, which was spun off from ONGC. "There is a tremendous amount of commonality in the roots and the culture, in the way things are done. So that makes a merger and acquisition very feasible," says Mr Raha.

However, the decision to merge does not rest with ONGC's managers. As a company that is 74 per cent owned by the government, the ultimate say over the company's direction rests with Mani Shankar Aiyar, the minister for petroleum. Officials from his ministry are considering the issue and are expected to report early this year.

ONGC's plight is not unique. Although Mr Raha says government ownership has not impeded the company's day-to-day operations, unlike those of state-owned Air India, which has not been able to upgrade its aircraft fleet for 20 years.

Nevertheless, there is constant pressure from investors for the government to "unlock" its equity in ONGC through a fresh offering of shares. There is also the nagging reminder that the government can veto management decisions. For instance, the company and the government disagree over wholesale gas prices, which ONGC subsidises.

Raising gas prices in line with market rates would boost ONGC's earnings by up to Rs21bn, according to estimates by Merrill Lynch. But it is considered politically risky for a new government which champions the poor to raise prices on retail petroleum products.

"When there is an increase in the prices of steel, cement and medicine, nobody raises any question. Why is it that when the price of kerosene is raised, waves are created?" Mr Raha told a business conference this month. "Only when the user pays directly, energy wastage will reduce, energy intensity will come down."

However the issue of gas prices is resolved, the tension between ONGC's managers and the government remains.

"If you expect the management to compete in the marketplace and create wealth, and, at the same time, intervene as an instrument of the state, then you come to a basic conflict," says Mr Raha.

"Are you a department of the government or are you a listed company?"

By RAY MARCELO

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