Indian oil industry: Rise of domestic players

The first article of this series on petroleum had focussed on the formative phase of the industry (1889-1969). Oil sector in those eight decades was primarily dominated by foreign companies. From 1960 to 1969, the government consolidated its position in the industry — exploration activities by national oil companies increased, new refineries were built and pricing committees were formed to control foreign marketing companies. However, the major corporate houses in India were still not prepared to take the risk of either oil exploration or refining.

In this piece, we shall narrate the development of India's oil sector during 1979-90

Achievements

In 1970, the institutions involved in this field were Oil and Natural Gas Commission (ONGC), Assam Oil Company (AOC) and Oil India Ltd (OIL). The market share of ONGC was 53.2% and that of OIL and AOC together was 46.8%. In 1989, ONGC and OIL remained the only two companies engaged in this sector as AOC was nationalised by then. Additionally, few foreign companies were also involved in exploratory work on contract basis.

From a modest production of 6,818 thousand tonnes in 1969-70, the production rose to 34,692 thousand tonnes in 1989-90 (refer to Table). Though the total production grew by over 400%, onshore production grew by less than 90% in two decades. In the 1980s, imports started to decline

While in 1969-70, the entire crude oil was produced from the onshore fields of Assam and Gujarat, in 1989-90, the share of offshore oilfields in total crude oil production was nearly 64.33% whereas the share of onshore crude came down to 35.67%.

In 1989-90, onshore oil production was concentrated in the fields of Assam and Gujarat whose shares were 49.93% and 49.46% respectively. Together these two states contributed to 99.39% of onshore production.

Move to offshore

Just after the founding of Bombay High in 1964, KD Malaviya had to quit the Cabinet. After his exit, not much attention was paid to Bombay. Ashok Mehta became the new Minister of Petroleum.

A debate was simmering in the government between the proponents of existing oil policy to develop the offshore oilfields through ONGC and those who proposed setting up of foreign oil companies on the ground that public sector units lacked knowhow around undersea mining. Ashok Mehta belonged to the latter category.

The Soviets were kept out on the ground that their offshore technology was limited to the shallow waters of the Caspian Sea. No credit was given to ONGC's capacity either to acquire know-how or hire it. Only Americans were acknowledged with requisite technology. By 1968, at least four concrete proposals — two from the US, one from FRG and the fourth one from a Japan-US consortium — were received by the government on Bombay High. However, debate on the issue delayed the decision.

Meanwhile, Triguna Sen joined the Union Cabinet of Indira Gandhi in 1969. It was then decided that joint ventures with foreign companies would not be desirable for developing a sound exploration programme. ONGC was asked to re-examine the oil prospects of the Bombay High area and to outline a programme for exploration. The Commission's technical appraisal indicated that the prospects of the area were as good as to warrant the taking up of entire risk by themselves, and to give the exploration the highest priority.

But Prime Minister Indira Gandhi, while taking a decision on future oil exploration policy, said in 1970. "...our onshore oil reserves appear to be limited... We have a fairly prominent structure in continental shelf. Once we go for ownership operation and acquire the necessary expertise as well as equipment, we would explore every promising area. All these point to the need to go ahead with our own plan for assisted ownership operation without further loss of time."

This observation gave an edge to the US companies over the Soviet firms as the former had acquired better offshore technical skills at that time. Simultaneously, an idea had been generated that the land areas were not good prospects.

Meanwhile, a ten-volume techno-economic study carried out by ONGC and USSR experts in 1971 gave more stress on onshore drilling compared to offshore. Keeping in line with the findings of the report, chairman of the ONGC had submitted before the Committee on Public Undertakings that it was not the correct approach to confine ONGC to the areas where oil had already been found, namely Gujarat and Assam. He felt it necessary to spread ONGC's activities to all other sedimentary regions like Jaisalmer, Cauvery Basin, Bengal, Tripura, Andhra Pradesh, Mahanadi Delta etc.

So, it is clear that while one group wanted to push exploratory activities offshore, the other suggested vigorous onshore exploration. The government tried to balance different groups at different periods of time.

In January 1971, an agreement was signed by the Government of India with Mitsubishi and the Offshore Company of America to provide the self-propelled jack-up unit as well as drilling contract services for the first year of operation.

However, the government's policy of 'assisted ownership operations' for offshore projects had changed within a few years. In March 1974, the government announced in the Rajya Sabha that all offshore areas other than the area in Bombay High had been thrown open for foreign collaborations.

In mid-1974, an offshore exploration and production contract was signed between Natomas Carlsburg Company, USA and ONGC. Soon afterwards, a second contract covering an area in the Kutch basin was signed with a group headed by Readings and Bates of USA. Both were production-sharing contracts and, in the event of success, the companies were to recover costs from the first 40% of eventual production. The government would take 65% of the remainder and companies the rest 35%.

In 1980, foreign companies were again invited to explore potential basins — both onshore and offshore. However, this time, unlike the previous cases in the 1970s, the government took a long-term approach in a more organised manner, selecting parties through global tenders.

In ONGC's budget, the planned expenditure as a percentage of gross revenue declined steadily in the 1980s, from 94.3% in 1980-81 to 31% in 1987-88. In case of exploration, it declined from 20.4% to 9.7%. This clearly indicates ONGC's low priority on exploration.

With the increased output of Bombay High, geologists had lost their importance in ONGC. In the mid-seventies, the then Chairman NB Prasad abolished both the geology and geophysics directorates. Thus, geo-scientific exploration — the key activity of any exploration and production organisation — lost its due importance. The next chairman (1981-89), an ex-military man Col. SP Wahi, was primarily interested in meeting the production targets for Bombay High and thus the production group emerged as the primary policy makers of ONGC

The Committee on Public Undertakings was surprised to hear from ONGC Chairman that till 1985, ONGC had not carried about 75% of the exploration work though GSI had identified 26 sedimentary basins as early as 1920.

The Chairman in 1985 submitted before the Committee that in the next 20 years, the rest of the work would not be completed. In this context it may be recalled that in 1970, the then Prime Minister of India took the policy decision to venture into offshore areas as India's onshore oil resources appeared to be limited.

OIL also moved offshore: The joint venture oil company, OIL, was also planning to get out of the Assam Arakan basin. By 1978, it entered into the critical areas of offshore drilling. Mahanadi offshore area was their first assignment. On October 14, 1981, OIL was nationalised. Subsequently, Andaman offshore (1986), and Saurashtra offshore (1987-88) were offered to the OIL for exploration.

Role of the World Bank and Soviet Fund

The World Bank started to show interest in direct involvement in India's petroleum exploration only in the 1970s when prospects of Bombay High became brighter.

In June 1977 and in December 1980, two loans of a total amount of USD 550 million were approved for the development of Bombay High. Again, in October 1982, a loan of USD 165.5 million was provided for exploration in Krishna-Godavari delta.

The government's decision in the early 1980s to systematically open its sedimentary basins to the international oil companies through global tender coincided with the World Bank loans. The World Bank has been associated with Bombay High development since the early stages of the project. The development of Bombay High field had proceeded largely according to the plans formulated by the Bank. Before granting the loan, the Bank took an undertaking from the Government of India regarding the adoption of oil and gas pricing policies which would enable ONGC to earn satisfactory profit.

From 1980 onwards, the World Bank directly influenced the petroleum exploration and pricing policy of the country. In that decade, the World Bank extended more loans to other projects of ONGC. Till March 1990, ONGC had drawn loans of USD 139.3 million for South Basin, USD 213.5 million for Cambay Basin and USD 283.25 million for WG Development.

In the late 1980s, OIL also took massive loans from the World Bank. As on March 31, 1989, OIL's loaned amount was Rs. 20 crore which increased to Rs 50 crore in March 1990.

Soviet fund: An agreement was signed between ONGC and Techno Export of the USSR in 1985. As per the agreement, two major projects on a turnkey basis had been taken up by the Soviets for intensive integrated exploration (IIE) of hydrocarbons. The areas covered

under those projects were North Cambay Basin and Cauvery Basin. Subsequently, another agreement was signed with the Soviet on November 27, 1986 for West Bengal onshore exploration. About 70% of the costs of those turnkey projects were to be financed out of a long-term Soviet loan.

It is interesting to note that the government offered most potential (Category I & II) onshore blocks to the Soviets. But the Soviet oil exploration ventures in those basins turned out to be among the costliest in the world.

In 1989, an officer of ONGC commented that "the Soviets are wasting our time and money." It was reported that the Soviet's performance in the West Bengal basin, where they had been working for over eight years since 1981, was equally dismal.

Insiders alleged that IIEP was forced on a reluctant ONGC by the government. The ONGC did not want to part with any area in Cambay and Cauvery where it had already discovered a number of oil and gas fields.

Participation of Indian private companies

The government, by the end of 1980s, planned to involve Indian companies in the next round of bidding for exploration. The Secretary, Ministry of Petroleum & Natural Gas, in a seminar on February 8, 1989, announced: "we are extremely keen that Indian companies in collaboration with experts from outside should take up exploration and drilling within the country. We are prepared to offer them maximum cooperation in this field."

By then, a few Indian companies also started putting pressure on the Government for an opportunity to prove their ability. Since the mid-eighties, Indian companies have been increasingly involved in various capacities in the oilfield services. Houses like Essars, Tatas, Mahindras and many small companies chartered/leased oil rigs to ONGC. Such services were profitable due to various incentive schemes extended by the government to indigenous companies. But those companies had no right to discover crude as it was the property of ONGC.

Few companies considered to involve themselves into direct exploration of crude. A new company, Hindustan Oil Exploration Company Ltd. (HOEC), formed in 1983, formally approached the government for such an opportunity.

In addition to HOEC, other companies which had shown interest and enjoyed considerable financial strength were:

⁕ High Tech Drilling Services India: A joint venture between Tatas and Sedco Forex International Drilling Inc, a Schlumberger group company.

⁕ Essar Gujarat Ltd: By 1989, it earned considerable expertise in oil exploration and owned both onshore and offshore drilling rigs.

⁕ Reliance Industries Ltd: In the late 1980s, it opened an oil division and applied for a 6 million tons refinery in Western India.

Understanding the mood of the government, several foreign oil companies, including British Petroleum of the UK and CFP Total of France started negotiations with Indian companies for possible joint ventures to participate in the fourth round of exploration.

Controversies

(i) Oil prospects in the Bengal basin gave rise to severe controversies with political overtones. It may be recalled that even before the birth of ONGC, the Bengal basin was explored superficially by Stanvac — an US company. After a long gap, the basin was explored by the Soviets. In the mid-1980s, ONGC had put the Bengal basin in category II area. But the activities of ONGC in that basin reflected their casual approach. Till the end of 1989, only 2.2 wells on an average were drilled for every 10,000 sq. km in Bengal basin against the national average of 11.6. Moreover, it was also alleged that the drilled wells were shallow and not properly directed to the oil-bearing rocks.

(ii) The announcement for the fourth round of bidding was delayed due to change in the ministry in late 1989. ONGC also opposed the proposal of an expert group to open certain blocks of Bombay offshore region to international oil companies. ONGC argued that it would undermine national security and create operational problems in adjoining areas of Bombay High.

It alleged that in the previous rounds, foreign oil companies abandoned the offered blocks of Kutch, Cauvery and Saurashtra when they failed to find oil after drilling a couple of wild cat wells. In the changed political situation, opposition from ONGC added a new dimension to the debate. The new Petroleum Secretary then decided to refer the expert committee report to the Committee of Secretaries. Their recommendation would be placed before the cabinet for final decision. He conceded that a decision on exploration bids would have to be taken at the 'political level'.

(iii) The most serious allegation against ONGC was that when the international oil price was declining, the oil production in India started to pick up steadily till 1989. The very high negative value (-0.848) of correlation coefficient between imported crude price (USD/tonne) paid by the government of India and production of domestic crude for the period 1982-89, implies that international price and production moved in opposite directions.

It was later alleged that to meet the production target, the wells were overused unscientifically by ONGC between 1987-89. Subsequently, oil production fell drastically which coincided with the rise of international oil prices. After the retirement of ONGC Chairman SP Wahi in December 1989, the government instituted an enquiry committee on April 26, 1990 under the Chairmanship of AB Dasgupta — former Managing Director of OIL.

Soon after the formation of the AB Dasgupta Committee, the World Bank had sent, in May 1990, a three page note to the ministry and ONGC alleging that an 'irrecoverable loss' of 75 million tonnes of crude had already occurred from Bombay High. The Bank had also said that it feared a loss of similar magnitude in the coming years, and painted a dismal picture about India's oil prospects.

The timing of the World Bank report raised controversy in the petroleum industry about the motive of the Bank. ONGC experts considered the Bank's note to be motivated and aimed at influencing the government to open Bombay offshore and Gulf of Cambay to multinationals

In December 1990, the AB Dasgupta Committee's report was submitted to the Ministry of Petroleum and Chemicals. Some of the important findings were:

⁕ Reckless flogging of Bombay High oil fields despite warning by Indian and internationally reputed experts had damaged many wells.

⁕ Repairing those wells would take a minimum of five years and involve expenditure running into hundreds of crores of rupees. The expenditure would go up substantially in case production was not stopped immediately.

⁕ There was a danger of irreversible loss of recoverable oil from the reservoir.

⁕ The production loss due to the closure of damaged wells would be 2.6 million tonnes of oil annually.

The CFP of France, which was one of the consultants to ONGC for the development of Bombay High, had estimated the loss at 120 million tonnes

In the 1990s, ONGC's production had to be cut down drastically on the advice of the World Bank and its foreign consultants when international crude prices started to rise during the Gulf War. Eventually, India faced a severe balance of payment crisis and had to take massive loans from the IMF again.

Conclusion

Notwithstanding the State's substantial involvement in petroleum exploration and production, its dependence on foreign countries and transnational companies did not decrease. Though in the later years, Indian private capital got involved in this sector, it was also dependent on foreign technology in critical operational areas.

Views expressed are personal