We understand that M&A will be key strategy for ONGC Videsh to reach its production targets by 2020. But the way crude oil prices have rebounded, what does it mean for the value of the assets that you are looking to buy? I would reckon that there would be a revision in asset prices as well and they will not come cheap?
M&A is one of the critical element of our growth strategy but at the same time, we are having quite a strong portfolio with around 15 projects at different stages on which we are working. Recently, we have added two more in Namibia offshore. So, value creation through exploration and organic route is very important for us on a long-term basis but definitely, there was a call by honourable prime minister to cut down the import by 10% by 2022.
At a group level, we have taken cognisance of that and we are working in the domestic as well as the international front whatever best we can do to bring the equity oil and gas to India. Recently, in two years we have added around 60% production through one of the major M&A deals with Rosneft wherein we have taken 26% in a company called Rosneft Vankorneft. We are hoping to continue with the same in the short term because the short-term targets cannot be met by the exploration projects which will be contributing in a medium and long-term basis. That is the strategy because it has to be mixed.
If you see the international scenario on exploration and production, there are a couple of trends because there is a huge cut in the exploration capex in last three years, close to a trillion dollar and as on date, the Greenfield barrels is costlier than M&A barrels. That is one important criteria and this is a window available to us for capitalising on that. So we are doing that and as the prices go up, definitely that window will be going away from us.
Which geographies have you set your eyes on for good productive assets and how are you looking to make these acquisitions? What are the cash levels and what is the muscle that you have to go ahead and buy these assets?
As such we are concentrating on hot areas like Africa and Latin America and of course CIS has been a good contributor in our production streams. If any deal brings value to our portfolio, we will be looking forward to capitalise on that. As far as financial strength is concerned, we primarily bank on the balance sheet of our parent company and recently there have been a number of acquisitions being targeted by ONGC in domestic front as well as huge capex commitment for development. That is putting some limitation in the headroom but we can get the international financing for our acquisition, a couple of billion dollars in coming years.
Once our existing portfolio element start producing, that position will be comfortable.
Analysts believe that your company's overall volumes can rise about 35% in the next four years and a large part of that would be coming from ONGC Videsh's M&A moves. Is that a fair estimate?
Actually, ONGC Videsh has moved from 8.3 in 2015 to now close to 14 MMT oil and gas equivalent and that actually gives us more than 60% jump. We hope to sustain this growth in the coming years through M&A as well as from organic routes. One more thing I want to share with you is if you see that global trends of the exploration successes and R/P ratio, it has decreased significantly from 50% R/P ratios in 2011 to around 11% now. That means the exploration investments are much more riskier and the discovery size also dwindled down from 150 million barrels average to 100 million barrels. This means exploration investment in greenfield areas and frontier areas are riskier as compared to the past. We we need to factor all this in.
In India on the domestic front also, similar trends are observed. We have to take a judicious view on the exploration versus barrels because globally the major companies and equity funds are getting hold of the resources on fast track. We are also looking forward to consolidate our position on similar lines.
Structurally, what is it your call is on crude oil prices given the current surge because of the production disruptions in Libya? Where do you see prices settle in the medium term because we are already seeing Brent escalating to $65 to a barrel?
It is a difficult question to project the oil prices in future but major analysts figures are there and I think they are hovering around $65-70 on the long-term basis. But you are right, there are a couple of producing corridors which are facing a lot of challenges and a financial crunch, security crunch and the geopolitical triggers. Any one or two short-term triggers may disrupt this price projection trends abruptly. Of course, OPEC and Russia sustained production cuts also.
What is your expectation on oil prices for 2018?
In 2018, we are hoping anything between $60-70 in between, maybe around $65-66 but anything can happen depending on the emerging global scenarios because OPEC and Russia have made sustained production cuts and that has eliminated the supply overhang and is actually pushing the prices up. But more important, that is sentiments and long term projections are governed primarily by geopolitical triggers and the production situation and disruptions.
I do not know whether you clarified on my earlier question about the size of the assets that you are looking to buy overseas in terms of the value of the assets that you are scouting for?
It is not a linear projection. It depends on which stage of the discovery we are entering into. If it is a fully developed production asset, then the prices are different and if you are entering an early stage of discovery, then prices are different.
We are looking for both and primarily the early stage of discovery and appraisal is more the preferred window we will be looking for because that will give us the longer production lifecycle for us. And also, the upfront payment cost will be less as compared to fully developed oilfields.
We have got a target to double our production, target milestone for us which actually stipulates doubling the production from erstwhile 9 MMT. We are trying to reach 20 MMT by 2018 or 2020 and we are working towards that and right now are engaged with a couple of M&A projects. As soon as they are crystallised, we will definitely share the news with you.
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