ONGC to sign strategic exploration deal with ExxonMobil

ONGC, India’s largest oil and gas explorer, confirmed that it had signed a “Heads of Agreement” with ExxonMobil of the US for deep-water exploration of the easter and the western coast of India. First, what exactly is a heads of agreement? The heads of agreement is a document summarizing the terms of a proposed agreement like a property sale, partnerships or a joint venture. Typically, a heads of agreement is non-binding, which means that neither party is obligated to agree to the terms listed in the document.

The agreement was signed between ONGC and ExxonMobil in the presence of Pankaj Jain, Secretary, Ministry of Petroleum & Natural Gas. This makes it an agreement with tripartite implications where the government is also a party to the agreement. The focus areas of deep-water exploration on the east coast with the Krishna Godavari (KG) basin and the Cauvery basin. On the west coast of India, the deep-water drilling to explore oil and gas will be focussed in the Kutch-Mumbai region. Both are major focus areas for India.

In the last few years, there had already been substantial scientific exchange of exploration data between ONGC and ExxonMobil. While ONGC will bring the local area expertise due to its long experience in this region, ExxonMobil will bring in the most updated technologies, the global best practices in drilling and exploration, advanced mapping techniques etc. This is seen as a strategic fit between two leaders in oil exploration and production in their respective geographies. The specific terms are yet to be finalized.

According to the Petroleum Secretary, the partnership between ONGC and ExxonMobil will combine the tangible benefits of the entire energy value chain. For ONGC, the partnership with ExxonMobil will open up new vistas to Exploration and Production paradigm. ONGC is keenly looking at deep-water exploration off the east coast of India due to the higher capital required and also due to the more lucrative pricing for oil and gas that the government offers currently for drilling oil and gas from the more difficult and deep-water sources.

In India, the biggest challenge has been the early and adequate monetization of the massive investments that deep-water exploration entails. The advantage that ExxonMobil brings to the table is that it brings specific expertise in the deep-water drilling area. According to the statements made by ExxonMobil, over a quarter of its brain power is engaged in evaluating the prospects of Indian deep-water drilling story. From the ExxonMobil side, the enthusiasm appears to be very high to take this relationship to the next level.

A big boost to exploration is absolute essential for India for two reasons. Firstly, India still relies on imported crude for meeting more than 85% of its daily crude oil needs. This makes the Indian economy extremely vulnerable to the vagaries of global crude prices. In the last one year when oil prices are up more than 60% on a yoy basis, the Indian trade deficit has almost doubled and the current account deficit threatens to get closer to the rather precarious 5% mark. Domestic oil can act as a hedge against such price fluctuations.

There is also one more major reason for this collaboration. India is the world's third biggest oil importer and consumer of crude. However, Indian domestic crude production is paltry and falling. While India is only able to meet 10-15% of its daily crude oil needs through local crude, the situation is worsened by ONGC’s ageing wells. In June, India's crude oil output fell 1.6% to about 600,000 barrels per day on a yoy basis. On a sequential basis, the output is nearly 4% lower over previous month. 

The moral of the story is that, India not only needs domestic crude output to pick up, but also needs the right ecosystem that will encourage timely monetization of investments. The onus is on the government to make this segment attractive to ExxonMobil.