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Oil & Natural Gas Corporation (ONGC)
Energy
All is well, operationally. We see the certification on ONGC’s reserves through an
independent audit as allaying any concerns on the quantum of the company’s reserves.
We do not see risks to our volume estimates which are significantly below the
management guidance. We would be watchful of ONGC’s EOR/IOR and redevelopment
projects which have been material in stemming the decline from its mature fields. We
reiterate our BUY rating on the stock with a target price of `355.
7 bn bbls of 1P reserves and 10 bn bbls of 2P reserves, as per ONGC’s revised estimates
We see ONGC’s revised estimate of its reserves based on audit by independent consultants (D&M
and GCA) as allaying any potential concerns on ONGC’s reserves potential. Exhibit 1 gives details
of ONGC’s estimates and audited estimates. We highlight that the independent experts audited
ONGC’s Mumbai High and 63 other fields. There are some difference in ONGC’s official estimates
and the audited estimates which have been detailed later in the note. ONGC’s revised estimates
put its consolidated (including JVs and OVL) 1P reserves at 943 mn tons (6.9 bn bbls) and 2P
reserves at 1.4 bn tons (10.2 bn bbls) versus 923 mn tons (6.7 bn bbls) and 1.3 bn tons (9.7 bn
bbls) previously (see Exhibit 2).
Potential upside to our volume assumptions exists
We highlight that we estimate a modest increase of 1 mn tons in crude sales and flat natural gas
production from ONGC’s domestic fields (excluding JV) by FY2014E. This is significantly lower
versus management’s production targets of (1) crude oil production of over 28 mn tons by
FY2014E versus 25 mn tons currently and (2) gas production of 72 mcm/d by FY2014E and 100
mcm/d by FY2016E versus 63 mcm/d currently.
EOR/IOR and redevelopment projects will mitigate decline from mature fields
ONGC has been undertaking several activities including (1) implementation of EOR/IOR techniques,
(2) redevelopment projects, (3) monetization of marginal fields and (4) production from new fields
which will help in boosting its production levels. In all, 21 such projects have been undertaken (15
completed and 6 under implementation) which have resulted in a cumulative gain of 56 mn tons.
These projects have enabled it to improve the recovery factor from its fields to 33.5% in FY2010
versus 28% in FY2000. Some of the key redevelopment projects being undertaken include (1)
Mumbai High South redevelopment Phase II, (2) Mumbai High North redevelopment Phase II and
(3) Heera and South Heera redevelopment projects.
Maintain BUY with a target price of `355
We maintain our BUY rating on the stock with a target price of `355 given potential upside of
34% from current levels. However, we would be wary of (1) rising crude oil prices and (2)
government action on the same. Please see our note ‘It’s not just about a few oil companies’
released on February 24 for details on the same.
Update on key projects
Mumbai High South redevelopment Phase II. This project envisages an incremental oil
production of 18.31 mn tons and 2.7 bcm of gas by 2029-30. The project involves drilling
of 75 new wells and 39 side-track wells. The project outlay is Rs88 bn with an anticipated
completion by March 2013. The overall progress on the project was 80.6% by December
2010.
Mumbai High North redevelopment Phase II. This project envisages an incremental oil
production of 17.35 mn tons and 2.98 bcm of gas by 2029-30. The project involves
drilling of 73 new wells and 38 side-track wells. The project outlay is Rs66 bn with an
anticipated completion by September 2012. The overall progress on the project was
30.8% by December 2010.
Heera and South Heera redevelopment projects. This redevelopment projects will
result in additional oil production of 10.9 mn tons and gas production of 2.3 bcm until
FY2030. The overall progress on the project was 82.8% by December 2010.
G1 and GS-15 fields. The production from G1 and GS-15 fields is scheduled to
commence from April 2011 and expect to produce 1.5-2 mcm/d in the initial phase which
is expected to reach 3 mcm/d in two years.
C-series fields. ONGC has commenced production from its C-series fields. The peak level
of production to be achieved from this field is 3 mcm/d.
Daman Offshore. The development of this shallow-water natural gas development is
centered on B-12, C-23 and C-24 prospects. The production is expected to start from
FY2014 at the rate of 7 mcm/d and is expected to ramp up to 15 mcm/d. These prospects
have estimated reserves of 97 bcm with a recoverable base of 42 bcm.
B-22 and B-193 cluster fields. The B-22 cluster comprises of B-22, adjoining BS-12, BS-
13, B-149 marginal fields/ pools on the western side of Bassein Field. This project is
estimated to enhance production of oil by 8,190 b/d, condensate by 6,680 b/d and gas
by 4.5 mcm/d. The cumulative production is likely to be 2.46 mn tons of oil, 1.13 mn tons
of condensate and 6.56 bcm of gas over 10 years. The overall progress was 51.27% by
December 2010.
The B-193 project consists of eight marginal fields (B-193, B-172, B-178, B-179, B-180, B-
28A, B-23A and B-28). The peak oil production is estimated at 28,150 b/d, with
condensate production of 1,870 b/d and gas production of 1.52 mcm/d, which would
enable cumulative production of 5.57 mn tons, 0.75 mn tons of condensate and 5.12
bcm of gas in 15 years. The facilities of B-22 and B-193 have been combined and the
project is scheduled to be completed by FY2012 at an estimated cost of US$1.7 bn.
B-46 cluster fields. The project involves the development of four small gas fields (B-46,
B-48, B-105, and B-188) with a cumulative production of 4.5 bcm of gas in 11 years. The
project is expected to be completed by May 2012 at an estimated cost of Rs14.3 bn.
Details of reserves
We provide below details of ONGC’s estimates and compare the same with the reserve
estimates of Degoyler & MacNaughton (D&M) and Gaffney Cline & Associates. We also
provide an explanation of the variation between the two estimates as provided by the
management.
Mumbai High. ONGC’s estimates of 1P, 2P and 3P reserves for Mumbai High field are
174 mn tons, 195 mn tons and 264 mn tons versus GCA’s audited estimates of 177 mn
tons, 308 mn tons and 350 mn tons.
GCA’s estimates for 2P and 3P reserves are higher as it has considered aggressive water
injection which would enhance the life of the field and result into higher recovery rate.
However, ONGC has decided to stick its own estimates.
Other fields. ONGC’s estimates of 1P, 2P and 3P reserves for 63 other fields are 469 mn
tons, 605 mn tons and 702 mn tons versus D&M’s audited estimates of 436 mn tons,
580 mn tons and 712 mn tons.
D&M’s estimates for 1P reserves are lower than ONGC’s estimates due to scheduled
delays in implementation of the company’s development plans for ageing fields in Assam.
ONGC has already approved an investment of `27.7 bn for IOR projects in Assam and has
justified its higher estimates on the same ground.
Sakhalin-1. OVL’s estimates of 1P, 2P and 3P reserves for Sakhalin-1 field are 106 mn
tons, 139 mn tons and 139 mn tons versus D&M’s audited estimates of 47 mn tons, 98
mn tons and 142 mn tons.
D&M’s estimates for 1P reserves are lower than OVL’s estimates as (1) OVL has prepared
estimates in accordance with Russian reserves estimation methods as opposed to the
more conservative SPE-PRMS 2007 classification used by D&M, (2) OVL has assumed
contract extensions till 2054 versus D&M’s production forecasts till 2041, and (3) OVL has
assumed proposed future extensions given investments to be undertaken to develop gas
infrastructure.
Imperial Energy assets. OVL’s estimates of 1P, 2P and 3P reserves for Imperial Energy
assets are 21 mn tons, 112 mn tons and 115 mn tons versus D&M’s audited estimates of
27 mn tons, 107 mn tons and 384 mn tons.
OVL’s estimates for 3P reserves are lower as it has not undertaken a full evaluation and
approval of certain 3P reserves included in D&M’s estimates.
Sudan. OVL’s estimates of 1P, 2P and 3P reserves for blocks in Sudan are 23 mn tons, 31
mn tons and 44 mn tons versus Sproule’s audited estimates of 13 mn tons, 19 mn tons
and 29 mn tons.
Sproule’s estimates are lower than OVL’s estimates as Sproule has reduced undeveloped
reserves from its estimates.
Block A1 and A3, Myanmar. OVL’s estimates of 1P, 2P and 3P reserves for Myanmar
blocks are 0 mn tons, 26 mn tons and 44 mn tons versus D&M’s audited estimates of 11
mn tons, 23 mn tons and 34 mn tons.
D&M’s estimates for 2P and 3P reserves are lower than OVL’s estimates due to differences
in mapping interpretation and petro-physical parameters.
Fair value of ONGC (`/share)
FY2012E EPS 33
Less: income from investments valued separately 0
Adjusted EPS for FY2012E 32
P/E (X) 10
Valuation 321
Investments 17
Indian Oil Corp. 12
GAIL 4
Petronet LNG 1
New discoveries 16
Fair value 355
Source: Kotak Institutional Equities estimates
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oil & Natural Gas Corporation (ONGC)
Energy
All is well, operationally. We see the certification on ONGC’s reserves through an
independent audit as allaying any concerns on the quantum of the company’s reserves.
We do not see risks to our volume estimates which are significantly below the
management guidance. We would be watchful of ONGC’s EOR/IOR and redevelopment
projects which have been material in stemming the decline from its mature fields. We
reiterate our BUY rating on the stock with a target price of `355.
7 bn bbls of 1P reserves and 10 bn bbls of 2P reserves, as per ONGC’s revised estimates
We see ONGC’s revised estimate of its reserves based on audit by independent consultants (D&M
and GCA) as allaying any potential concerns on ONGC’s reserves potential. Exhibit 1 gives details
of ONGC’s estimates and audited estimates. We highlight that the independent experts audited
ONGC’s Mumbai High and 63 other fields. There are some difference in ONGC’s official estimates
and the audited estimates which have been detailed later in the note. ONGC’s revised estimates
put its consolidated (including JVs and OVL) 1P reserves at 943 mn tons (6.9 bn bbls) and 2P
reserves at 1.4 bn tons (10.2 bn bbls) versus 923 mn tons (6.7 bn bbls) and 1.3 bn tons (9.7 bn
bbls) previously (see Exhibit 2).
Potential upside to our volume assumptions exists
We highlight that we estimate a modest increase of 1 mn tons in crude sales and flat natural gas
production from ONGC’s domestic fields (excluding JV) by FY2014E. This is significantly lower
versus management’s production targets of (1) crude oil production of over 28 mn tons by
FY2014E versus 25 mn tons currently and (2) gas production of 72 mcm/d by FY2014E and 100
mcm/d by FY2016E versus 63 mcm/d currently.
EOR/IOR and redevelopment projects will mitigate decline from mature fields
ONGC has been undertaking several activities including (1) implementation of EOR/IOR techniques,
(2) redevelopment projects, (3) monetization of marginal fields and (4) production from new fields
which will help in boosting its production levels. In all, 21 such projects have been undertaken (15
completed and 6 under implementation) which have resulted in a cumulative gain of 56 mn tons.
These projects have enabled it to improve the recovery factor from its fields to 33.5% in FY2010
versus 28% in FY2000. Some of the key redevelopment projects being undertaken include (1)
Mumbai High South redevelopment Phase II, (2) Mumbai High North redevelopment Phase II and
(3) Heera and South Heera redevelopment projects.
Maintain BUY with a target price of `355
We maintain our BUY rating on the stock with a target price of `355 given potential upside of
34% from current levels. However, we would be wary of (1) rising crude oil prices and (2)
government action on the same. Please see our note ‘It’s not just about a few oil companies’
released on February 24 for details on the same.
Update on key projects
Mumbai High South redevelopment Phase II. This project envisages an incremental oil
production of 18.31 mn tons and 2.7 bcm of gas by 2029-30. The project involves drilling
of 75 new wells and 39 side-track wells. The project outlay is Rs88 bn with an anticipated
completion by March 2013. The overall progress on the project was 80.6% by December
2010.
Mumbai High North redevelopment Phase II. This project envisages an incremental oil
production of 17.35 mn tons and 2.98 bcm of gas by 2029-30. The project involves
drilling of 73 new wells and 38 side-track wells. The project outlay is Rs66 bn with an
anticipated completion by September 2012. The overall progress on the project was
30.8% by December 2010.
Heera and South Heera redevelopment projects. This redevelopment projects will
result in additional oil production of 10.9 mn tons and gas production of 2.3 bcm until
FY2030. The overall progress on the project was 82.8% by December 2010.
G1 and GS-15 fields. The production from G1 and GS-15 fields is scheduled to
commence from April 2011 and expect to produce 1.5-2 mcm/d in the initial phase which
is expected to reach 3 mcm/d in two years.
C-series fields. ONGC has commenced production from its C-series fields. The peak level
of production to be achieved from this field is 3 mcm/d.
Daman Offshore. The development of this shallow-water natural gas development is
centered on B-12, C-23 and C-24 prospects. The production is expected to start from
FY2014 at the rate of 7 mcm/d and is expected to ramp up to 15 mcm/d. These prospects
have estimated reserves of 97 bcm with a recoverable base of 42 bcm.
B-22 and B-193 cluster fields. The B-22 cluster comprises of B-22, adjoining BS-12, BS-
13, B-149 marginal fields/ pools on the western side of Bassein Field. This project is
estimated to enhance production of oil by 8,190 b/d, condensate by 6,680 b/d and gas
by 4.5 mcm/d. The cumulative production is likely to be 2.46 mn tons of oil, 1.13 mn tons
of condensate and 6.56 bcm of gas over 10 years. The overall progress was 51.27% by
December 2010.
The B-193 project consists of eight marginal fields (B-193, B-172, B-178, B-179, B-180, B-
28A, B-23A and B-28). The peak oil production is estimated at 28,150 b/d, with
condensate production of 1,870 b/d and gas production of 1.52 mcm/d, which would
enable cumulative production of 5.57 mn tons, 0.75 mn tons of condensate and 5.12
bcm of gas in 15 years. The facilities of B-22 and B-193 have been combined and the
project is scheduled to be completed by FY2012 at an estimated cost of US$1.7 bn.
B-46 cluster fields. The project involves the development of four small gas fields (B-46,
B-48, B-105, and B-188) with a cumulative production of 4.5 bcm of gas in 11 years. The
project is expected to be completed by May 2012 at an estimated cost of Rs14.3 bn.
Details of reserves
We provide below details of ONGC’s estimates and compare the same with the reserve
estimates of Degoyler & MacNaughton (D&M) and Gaffney Cline & Associates. We also
provide an explanation of the variation between the two estimates as provided by the
management.
Mumbai High. ONGC’s estimates of 1P, 2P and 3P reserves for Mumbai High field are
174 mn tons, 195 mn tons and 264 mn tons versus GCA’s audited estimates of 177 mn
tons, 308 mn tons and 350 mn tons.
GCA’s estimates for 2P and 3P reserves are higher as it has considered aggressive water
injection which would enhance the life of the field and result into higher recovery rate.
However, ONGC has decided to stick its own estimates.
Other fields. ONGC’s estimates of 1P, 2P and 3P reserves for 63 other fields are 469 mn
tons, 605 mn tons and 702 mn tons versus D&M’s audited estimates of 436 mn tons,
580 mn tons and 712 mn tons.
D&M’s estimates for 1P reserves are lower than ONGC’s estimates due to scheduled
delays in implementation of the company’s development plans for ageing fields in Assam.
ONGC has already approved an investment of `27.7 bn for IOR projects in Assam and has
justified its higher estimates on the same ground.
Sakhalin-1. OVL’s estimates of 1P, 2P and 3P reserves for Sakhalin-1 field are 106 mn
tons, 139 mn tons and 139 mn tons versus D&M’s audited estimates of 47 mn tons, 98
mn tons and 142 mn tons.
D&M’s estimates for 1P reserves are lower than OVL’s estimates as (1) OVL has prepared
estimates in accordance with Russian reserves estimation methods as opposed to the
more conservative SPE-PRMS 2007 classification used by D&M, (2) OVL has assumed
contract extensions till 2054 versus D&M’s production forecasts till 2041, and (3) OVL has
assumed proposed future extensions given investments to be undertaken to develop gas
infrastructure.
Imperial Energy assets. OVL’s estimates of 1P, 2P and 3P reserves for Imperial Energy
assets are 21 mn tons, 112 mn tons and 115 mn tons versus D&M’s audited estimates of
27 mn tons, 107 mn tons and 384 mn tons.
OVL’s estimates for 3P reserves are lower as it has not undertaken a full evaluation and
approval of certain 3P reserves included in D&M’s estimates.
Sudan. OVL’s estimates of 1P, 2P and 3P reserves for blocks in Sudan are 23 mn tons, 31
mn tons and 44 mn tons versus Sproule’s audited estimates of 13 mn tons, 19 mn tons
and 29 mn tons.
Sproule’s estimates are lower than OVL’s estimates as Sproule has reduced undeveloped
reserves from its estimates.
Block A1 and A3, Myanmar. OVL’s estimates of 1P, 2P and 3P reserves for Myanmar
blocks are 0 mn tons, 26 mn tons and 44 mn tons versus D&M’s audited estimates of 11
mn tons, 23 mn tons and 34 mn tons.
D&M’s estimates for 2P and 3P reserves are lower than OVL’s estimates due to differences
in mapping interpretation and petro-physical parameters.
Fair value of ONGC (`/share)
FY2012E EPS 33
Less: income from investments valued separately 0
Adjusted EPS for FY2012E 32
P/E (X) 10
Valuation 321
Investments 17
Indian Oil Corp. 12
GAIL 4
Petronet LNG 1
New discoveries 16
Fair value 355
Source: Kotak Institutional Equities estimates
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