India’s top oil and gas producer ONGC has scripted a sharp turnaround in the fortunes of its subsidiaries with its petrochemical unit reporting its first-ever profit, a top official said.
ONGC Petro additions Ltd (OPaL), the venture ONGC floated for downward integration and expansion into the petrochemical field by utilizing its naphtha stream from Hazira and Uran and C2+ components from imported LNG, has been steadily seeing operational profit or EBITDA improvement since 2016-17 but the lopsided capital structure with high-debt servicing cost and high depreciation during the initial period of capitalisation led to incurring net losses.
“During the first half of the current fiscal (April to September), OPaL made a profit after tax of Rs 18 crore,” ONGC Chairman and Managing Director Subhash Kumar said.
Kumar, who pivoted the turnaround story with his finance background, said OPaL is in the process of exiting from the SEZ which would improve the profitability by Rs 800 crore per annum, and about Rs, 600 crores of more profits will be added if the government were to approve a proposal for the company becoming a unit of ONGC or is merged with it.
Oil and Natural Gas Corporation (ONGC) during 2002 to 2006 conceptualized several joint ventures to diversify in other than exploration and production (E&P) business with an objective of value addition, downstream integration, and monetisation of its own stranded gas assets. These projects – OPaL, ONGC Mangalore Petrochemicals Ltd (OMPL) and ONGC Tripura Power Company (OTPC) were successfully implemented and are now operating at full capacity.
ONGC as promoter played a lead role in the selection of LSTK/PMC contractors, execution of various feedstock and off-take agreements, resolution of various complex techno-commercial, regulatory, and taxation issues crept during execution and commissioning of these projects. Besides resolving operational, financial, and regulatory issues, it let the joint ventures be headed by professional domain experts best from the industry.
Kumar said as per ONGC 2040 Strategy, going forward 70 percent of revenue is expected from the refinery and petrochemical business and 10 percent profit will be contributed from the non-oil and gas sector, and so the role of these non-E&P JVs will continue to play a crucial role in the Group.
ONGC holds a 49.36 percent stake in the 1.1 million tons per annum capacity OPaL, GAIL has 49.21 per cent, and GSPC the remaining 1.43 per cent.
“ONGC has played a crucial role in OPaL’s turnaround story starting from support during the construction phase, its stabilization and continuous supply of feedstock from its plant which is crucial to the profitability of any petrochemical venture. In addition to an equity contribution of Rs 998 crore, ONGC has also subscribed to share warrants issued by OPaL amounting to Rs 3,451 crore,” he said.
The firm also single-handedly backstopped Rs 7,778 crore CCDs and provided comfort letters amounting to Rs 9,500 crore for the loans, he said.
OTPC, in which ONGC holds a 50% stake, set up a 726.6 MW gas-based power plant in Tripura. The plant started operation in March 2014.
Kumar said OTPC is a classic case of an efficiently managed entity. During the project phase in order to avoid delays, entire oversized cargo (ODC) was routed through Bangladesh. The plant has been generating profit since inception and is one of a few gas-based companies paying dividends.
OTPC caters to about 30% of the electricity requirement of the entire North-Eastern region at a competitive tariff. It is the anchor customer for offtake of ONGC’s gas from Tripura, off-taking about 60% of total gas production and thus utilizing the stranded gas in the region unlocking the value of Rs 700 crore per annum.
With these investments, the state of Tripura has become a power surplus from a power deficient state, enabling exporting electricity to Bangladesh.
To date with an equity investment of Rs 560 crore, ONGC has received about Rs 310 crore as dividend and Rs 106 crore premium on the sale of residual equity to GIP in 2015.
Petronet MHB Ltd is another classic turnaround story where ONGC as a promoter played a crucial role in turning a loss-making entity into a profit-making dividend-paying entity. With continuous guidance at the Board level and effective management, the company is consistently making profits even during the Pandemic period. ONGC has earned a total dividend of Rs 208 crore out of the total investment of Rs 274 crore.
In the case of OMPL, the standalone petchem unit was subject to low spreads due to cyclic nature due to supply/demand dynamics in the region. To tide over this, ONGC has initiated a merger of the company with its refinery subsidiary Mangalore Refinery and Petrochemicals Ltd (MRPL).
“ONGC’s presence across the value chain and beyond the E&P business is also an effective way to mitigate risk. ONGC Group is able to better shield itself from volatile crude markets as the combined entity will have exposure across commodity cycles,” he said.
The company had acquired the government’s 51.11% equity stake in HPCL to expand its presence into midstream and downstream sectors. “Going forward, ONGC’s major stake in HPCL and MRPL will become the dominant driving factor for maximizing the shareholding value,” he added.