The Slick Veneer

He's probably the most powerful PSU chief ever. He can take on bureaucrats, pull political strings, get policies changed, make hacks eat out of his hand, even force his minister to backtrack on issues. In fact, Subir Raha, the CEO of India's largest company, ONGC, has done all of these in the past few weeks. A close watcher admits: "He listens to his own logic and does what he wants to do." Instead of changing himself to suit the needs of the company or policymakers, Raha has changed the mindset of both ONGC and the petroleum ministry to suit his style of functioning.

But his days may be numbered. For one, he has just nine months to go before he finishes his five-year tenure at ONGC. A few insiders are pointing fingers at Raha and questioning the latter's business decisions. The ministry too is busy preparing a dossier on the PSU chieftain for obvious reasons. "He's probably thinking he's above the government. The government appointed him and it has the power to sack him," says an angry ministry official. But the question is, can Union petroleum minister Mani Shankar Aiyar stand up to Raha?

In private conversations, Aiyar talks about getting rid of Raha. The minister has told friends he feels the ONGC CEO has become too big for his own boots. However, when it comes to action, Aiyar quietly wriggles out of the situation. A recent example was the face-off between Raha and the ministry on the latter's decision to appoint two more government directors, apart from the existing two on ONGC's board. Raha refused and threatened to resign. As the battle was being fought in the media, Aiyar said he didn't want a competent person like Raha, who had raised valid issues, to resign. He added mildly that the PSU chief should have restrained himself.

Everyone saw it as a victory for Raha. It became apparent when sources told Outlook that the new appointments wouldn't be considered at the ONGC's annual general meeting this week. It almost became a certainty when the department of public enterprises agreed that the number of government nominees on ONGC's board shouldn't exceed the existing figure of two. The petroleum ministry is still hoping to clip Raha's wings if it can get a favourable response from the law ministry, which has been asked to give its views on the issue.

The episode has obviously emboldened Raha. "We have to accept the fact that whenever someone does something, he has his logic for doing so. I had mine. Quite a few statements that are being made (against me) are presumptions, not facts. But then public sector bashing is a national pastime and any PSU that's doing well gets attention," says a confident Raha. ONGC has certainly got a lot of attention in the recent past. "Raha has taken many decisions that haven't gone down well with either his employees or senior ministry bureaucrats," admits an ex-ONGC employee now based in Mumbai.

More importantly, Raha's performance has been deemed a failure. For example, V.K. Sibal—chief of the directorate general of hydrocarbons (DGH), and one of the two directors that Aiyar wanted to appoint on the ONGC board—has talked about ONGC's poor exploration performance. In written exchanges between Sibal and ONGC officials, the former has said ONGC has drilled 13 dry wells without any success in the blocks that were offered under the New Exploration Licensing Policy (NELP) announced in March 1997. In comparison, the smaller—some of them relatively new—private firms like Cairns Energy, Niko Resources and Reliance Industries have had a better record.

"Starting from the year 2000, so far, 70 wells have been drilled under the NELP PSCs (production-sharing contracts). Out of these, 29 wells have been successful....The success ratio is (over) 40 per cent which is very encouraging," states a DGH release based on data up to March 2005.In 2001-02 and 2002-03, the ratio was much higher at 65 per cent, with 13 of the 20 drilled wells striking hydrocarbons. DGH officials add that ONGC's production has been nearly stagnant in the past decade. Their crude production dropped from over 31 million tonnes in 1995-96 to below 28 million tonnes in 2003-04. However, gas production went up in the same period.

Raha vehemently disagrees. "This is a canard. In India, we have six oil and gas basins. While the first was discovered a long time ago, the remaining five were discovered by ONGC. No other company has discovered any new basin, and private firms are only drilling in basins discovered by us. In the exploration business, wells do go dry. But our (overall) success rate is 1:2.5, compared to 1:3 for others," he explains taking a dig at the DGH. ONGC officials also point to the PSU's successes in the global arena.

"In 2001, we had only one project abroad. Today, we have 18 properties in 14 countries with an investment of $5 billion," says a senior ONGC manager. Another praises the company's aggressive forays into Sudan, Russia and several African countries. Even Aiyar has supported ONGC in this endeavour. The minister has jet-setted across the globe to lobby for oil and gas fields. He has initiated moves so that India and China can bid as a consortium for fields instead of competing with each other. ONGC has lost out several times to the China National Petroleum Corporation in the past five years.

However, Raha's rivals pick holes in ONGC's global strategy. "Again, look at the success rate when it comes to new fields abroad. It's very low and the only oil and gas that India is getting is from the existing fields that ONGC had purchased. Also, consider the countries where it's going. Almost all of them have a hostile environment—either internally or externally. Why can't ONGC go to nations that are known to be friendly to India like Canada or those in Middle East?" questions one of them. Ministry officials add that Canada has been wooing India to invest in its oil sector.

For once, Raha admits that ONGC Videsh Ltd (OVL), or the global arm of ONGC, is "lagging behind". While nations like China have been scouting for global fields for over a decade, OVL has lost opportunities. But he quickly adds, "We have also won a lot of bids. I went to Sudan in 2002 and came to realise we were late as the CNPC had already been operating there since 1994. That was the time when we were debating about the future or the survival of ONGC."

He's quick to rebut allegations that OVL has been venturing into sensitive geographical regions. "Many countries in the Middle East don't offer production-sharing contracts. They insist on buyback (of oil or gas), in which case you become just a service contractor. If I go as a buyback contractor, the returns will be much lower and doesn't make economic sense. But we are looking at Canada, Argentina and Venezuela. But we will not bid below the cost of money, and we don't want to take risks beyond certain limits," he explains.

A moot question: should ONGC merely look at its bottomline or should it be an active participant in ensuring the country's energy security? At a time when India's energy demand is rising and the country is importing the bulk of its requirements, it sounds odd that the CEO of an oil exploration PSU is walking out of potential contracts only because it will yield lower returns! Raha's argument seems more curious when one realises that Aiyar has been vigorously lobbying with Middle East countries to offer discounted crude prices toIndia. Hypothetically, if ONGC had signed buyback contracts with Middle Eastern nations a couple of years ago, it would have earned higher profits (at current crude prices) than what it might make from the PSCs for new global fields which will yield oil or gas later (when prices may have fallen).

Investment strategies should ideally be driven by what'll happen in the future, not what's happening now. And in the case of a PSU operating in the energy sector, they should also be linked to issues like economic security and diplomacy. Given this context, experts are debating whether it's the right time for ONGC to buy fields abroad, when global crude prices are hovering near the $70-a-barrel mark. "It's clear that a buyer will overpay now. So ONGC needs to be slightly careful rather than aggressively pursue oil and gas properties at this stage. It also needs to figure out what'll happen to prices over the next few years to decide its strategy," says one of them.

For similar reasons, it doesn't make sense for ONGC to enter the domestic retail (petrol pumps) segment now. Most marketing companies have seen a dip in their profitability especially as the government has been cagey about increasing retail prices of petroleum products. Last quarter, Indian Oil incurred a loss for the first time in its operational history. Even the recent hike in petrol and diesel prices, say oil PSUs, isn't enough. The Indian Oil chairman has categorically said that the last increase will only help his company to reduce its quarterly loss, not eliminate it.

But Raha feels there's nothing wrong with ONGC's entry into retailing. One, he maintains that the retail segment is still profitable, although margins have come down. "If retailing is not profitable, then all the existing companies should close down. Moreover, retail is not a major thrust for us. By next year, we plan to have 50 outlets, but definitely not a huge network of, say, 2,000 outlets," he explains. ONGC's idea is to use the retail outlets to interface with the public and create a brand identity. Probably it may work better for Raha in the short run to make attempts to improve his image with the DGH and the petroleum ministry.