Executive Viewpoint

“A variety of factors contribute to the price of gasoline in the United States. These factors include worldwide supply, demand, competition for crude oil, taxes, regional differences in access to gasoline supplies, and environmental regulations.”

—Gary Miller

Mr. Miller neglected to mention speculation in oil futures, geopolitical risk, technology premium, pressures from competing fuels and the so-called “soft issues,” such as human rights, ethical labor practices, responsible investment and anti-corruption, as a few more factors that contribute to the mix. Clearly, the cauldron producing oil and gas is simmering with a rich variety of “ingredients” that determine the final broth. So how then does one take a gambit on the future while firmly rooted in the present?

One way is to look into the past, determine a trend and then use it to prognosticate the future. Another is to use complex algorithms that enable modeling of a problem with a variety of inputs that produce a probability-based outcome. This needs a lot of number crunching, yes; but no sweat, we now have supercomputers, so problem solved. Another concept uses “fuzzy logic;” I am not quite sure how this works, but it’s there, if one wishes to use it.  Then, finally, there is the “oracle”, a la matrix revolutions, as the final recourse.

Each one of these models of forecasting the future operates under caveats and has a list of “however,” “if,” “else,” “thereafter” and “therefore” attached to it. Granting the practitioners of these forecasting tools the intellectual license and seriousness of their enterprise, the apex manager of an oil and gas company nevertheless dwells in a miasma of half-truths, nebular information, unpredictable outcomes and confusing options. Yet, he must take a decision today that will have repercussions well into the future. Let me illustrate this perspective with only one example.

Shale gas is big in the U.S., and global shale gas reserves are estimated to be of the order of 5,760 Tcf in 32 countries, excluding the U.S. So let’s all get into shale gas then? Surely, if it worked in the U.S., it would work elsewhere, as well. Well, not quite. Let us examine a few attendant issues. Are large tracts of barren, flat land available, below which shale gas deposits lie? Who owns the natural resources below these lands? Is it the owner of the land or the state? If it is the state, is it the local or the federal government that controls these rights? Are large reservoirs of water available in the vicinity for hydro fracturing? If not, where is the water to come from? How is the effluent to be handled, as per the prevailing environmental law? If local laws are lax, do we still need to comply with international best standards? Are service providers available locally to render support? If no, are they available globally and at affordable rates? Will the gas produced have an assured market with stable prices? Are our reservoirs similar to the ones in the U.S. and if they are different, how much so? Will the reservoir behave as predicted, so that a stable supply is assured?

We are yet to build a decision tree for all the “ifs” discussed above, but be assured that it will run into reams of paper.  No wonder then, that apart from the U.S. and Canada, other countries with shale gas deposits are still in the “contemplating” zone.

Illustrative, as it is, apex managers in the oil and gas space routinely handle these issues. That the hydrocarbon business per se is inherently risky is a given, but so substantial are the payoffs that such risk is acceptable. The question that begs an answer is, are apex managers of oil and gas companies “super managers” with an uncanny ability to navigate through a maze of nebular boundaries? I would like to say yes and pat myself on the back, as well. But, while such affirmation would be largely untrue and self-congratulatory, it does illustrate the difficulty level that an oil and gas company head routinely manages.

Typical strategies to hedge risk on account of these factors have been to enter relatively stable businesses and integrate vertically and horizontally so as to even-off business cycles. However, most of us have realized that one can be good at only one thing and that it is better to invest more and more in learning more and more about it so that less and less of it remains in the realm of the unknown. Let us call this “super-specialization.” This takes years, sustained and focused effort and substantial investment, but has commensurate payoffs. Petrobras’ investment into deepwater technology, and its management, is paying the firm rich dividends in monetizing its presalt discoveries and prising access to deepwater reserves overseas. Statoil’s focus on deepwater and subsea completion systems and its expertise in CCS is yet another example of focused strategies adopted by national oil companies. Cairn Energy, with its exploration focus, finds oil in places abandoned by others.

We too, in ONGC, are going through this phase of developing focused strategies. Our rich experience in monetizing onshore and shallow-water exploration and exploitation is well established; but the era of “easy oil” traditionally found in these domains seems to be over. In this prevailing regime of “exigent hydrocarbons,” deep and ultradeep, arctic exploration, and unconventional oil and gas, we will have to develop a focus and invest substantially to build up world-class capability. Deep water is one such domain, and in the near term, we intend to focus on this area, as well as subsea completions, even in our shallow-water developments. Our efforts toward monetizing unconventional gas reserves are yet in the R&D/pilot stages. As we proceed further on the experience curve, we will surely develop a focus and invest in it aggressively.