Analysis of ONGC Group of Companies

INTRODUCTION

“Not only had India…. set up his own machinery for oil exploration and exploitation…. an efficient oil commission had been build where a large number of bright young men and women had been trained and they were doing good work. ” -Pandit Janwarlal Nehru to Lord Mountbatten, on ONGC (1959)

ONGC Group of Companies comprising of ONGC Limited, and its subsidiaries ONGC Videsh Limited (OVL), ONGC Nile Ganga BV (ONGBV) and Mangalore Refinery and Petrochemicals Limited (MRPL) organize Import/International Sale of Crude Oil, Export of Petroleum Products and Petrochemical Products through Tendering Procedure for all the Group Companies of ONGC. ONGC Group presents a lot of business opportunities to prospective Business Partners in the area of international sale/import of Crude Oil and Export of Petroleum Products and Petrochemical Products.

ONGC Group is one of the fast growing groups in the world and its parent company ONGC is the only fully-integrated petroleum company in India, operating along the entire hydrocarbon value chain. It is not only the largest E&P Company in India but also one of the most valuable companies in India. Moody’s has assigned ONGC Baa1-highest ever credit rating to any Indian corporate. Highest ever profit company in India since last many years, it produces value added products like Naphtha from its own plants, which are available for export. ONGC Videsh Limited (OVL) is an overseas arm of ONGC, engaged in Exploration & Production Activities.

It trans-nationally operates E Business in various countries across the globe. OVL has so far, acquired several properties in more than 12 countries across the globe, and striving to reach out further OVL’s projects are spread out in Vietnam, Russia, Sudan, Iraq, Iran, Lybia, Syria, Myanmar, Australia, Brazil, Cuba and Ivory Coast. It is further pursuing Oil and gas exploration blocks in Algeria, Australia, Indonesia, Nepal, Iran, Russia, UAE and Venezuela. Nile Blend Crude Oil from its Sudan Project and SOKOL Crude Oil from its Sakhalin 1 Project in Russia are available for sale in International Market.

Mangalore Refinery and Petrochemicals Limited (MRPL), located in a beautiful hilly terrain north of Mangalore city on west coast of India, have a State of Art Grass root Refinery at Mangalore and is a subsidiary of ONGC. The Refinery has got a versatile design with high flexibility to process Crude oils of various API and with high degree of Automation. MRPL has a design capacity to process 9. 69 million metric tones per annum and is the only Refinery in India to have 2 Hydro crackers producing Premium Diesel (High Cetane).

It is also the only Refinery in India to have 2 CCRs producing Unleaded Petrol of High Octane. Lately it is venturing into production of Petrochemicals Products (Mixed Xylene, Para Xylene, Propylene, Benzene) LOBS and Petroleum Coke, which are in addition to its production of the whole range of Petroleum Products ( Naphtha, Jet Kero, HSD/Gas Oil, FO, Reformat, etc. ). In future, it has plans to expand its capacity. Currently all type of Petroleum Products viz. Naphtha, Jet Kero, HSD/Gas Oil, FO, Reformat, VGO and Mixed Xylene under Petrochemical Products are available for export.

THE COMPANY COMPANY HISTORY 

During the pre-independence period, the Assam Oil Company in the northeastern and Attock Oil company in northwestern part of the undivided India were the only oil companies producing oil in the country, with minimal exploration input.

The major part of Indian sedimentary basins was deemed to be unfit for development of oil and gas resources. After independence, the national Government realized the importance oil and gas for rapid industrial development and its strategic role in defense. Consequently, while framing the Industrial Policy Statement of 1948, the development of petroleum industry in the country was considered to be of utmost necessity. Until 1955, private oil companies mainly carried out exploration of hydrocarbon resources of India.

In Assam, the Assam Oil Company was producing oil at Digboi (discovered in 1889) and the Oil India Ltd. a 50% joint venture between Government of India and Burma Oil Company) was engaged in developing two newly discovered large fields Naharkatiya and Moran in Assam. In West Bengal, the Indo-Stanvac Petroleum project (a joint venture between Government of India and Standard Vacuum Oil Company of USA) was engaged in exploration work. The vast sedimentary tract in other parts of India and adjoining offshore remained largely unexplored. In 1955, Government of India decided to develop the oil and natural gas resources in the various regions of the country as part of the Public Sector development.

With this objective, an Oil and Natural Gas Directorate was set up towards the end of 1955, as a subordinate office under the then Ministry of Natural Resources and Scientific Research. The department was constituted with a nucleus of geoscientists from the Geological survey of India. A delegation under the leadership of Mr. K D Malviya, the then Minister of Natural Resources, visited several European countries to study the status of oil industry in those countries and to facilitate the training of Indian professionals for exploring potential oil and gas reserves.

Foreign experts from USA, West Germany, Romania and erstwhile U. S. S. R visited India and helped the government with their expertise. Finally, the visiting Soviet experts drew up a detailed plan for geological and geophysical surveys and drilling operations to be carried out in the 2nd Five Year Plan (1956-57 to 1960-61). In April 1956, the Government of India adopted the Industrial Policy Resolution, which placed mineral oil industry among the schedule ‘A’ industries, the future development of which was to be the sole and exclusive responsibility of the state.

Soon, after the formation of the Oil and Natural Gas Directorate, it became apparent that it would not be possible for the Directorate with its limited financial and administrative powers as subordinate office of the Government, to function efficiently. So in August, 1956, the Directorate was raised to the status of a commission with enhanced powers, although it continued to be under the government. In October 1959, the Commission was converted into a statutory body by an act of the Indian Parliament, which enhanced powers of the commission further.

The main functions of the Oil and Natural Gas Commission subject to the provisions of the Act, were “to plan, promote, organize and implement programmes for development of Petroleum Resources and the production and sale of petroleum and petroleum products produced by it, and to perform such other functions as the Central Government may, from time to time, assign to it “. The act further outlined the activities and steps to be taken by ONGC in fulfilling its mandate.

Since its inception, ONGC has been instrumental in transforming the country’s limited upstream sector into a large viable playing field, with its activities spread throughout India and significantly in overseas territories. In the inland areas, ONGC not only found new resources in Assam but also established new oil province in Cambay basin (Gujarat), while adding new petroliferous areas in the Assam-Arakan Fold Belt and East coast basins (both inland and offshore). ONGC went offshore in early 70’s and discovered a giant oil field in the form of Bombay High, now known as Mumbai High.

This discovery, along with subsequent discoveries of huge oil and gas fields in Western offshore changed the oil scenario of the country. Subsequently, over 5 billion tones of hydrocarbons, which were present in the country, were discovered. After 1990 The liberalized economic policy, adopted by the Government of India in July 1991, sought to deregulate and de-license the core sectors (including petroleum sector) with partial disinvestments of government equity in Public Sector Undertakings and other measures. As a consequence thereof, ONGC was re-organized as a limited Company under the Company’s Act, 1956 in February 1994.

After the conversion of business of the erstwhile Oil & Natural Gas Commission to that of Oil & Natural Gas Corporation Limited in 1993, the Government disinvested 2 per cent of its shares through competitive bidding. Subsequently, ONGC expanded its equity by another 2 per cent by offering shares to its employees. During March 1999, ONGC, Indian Oil Corporation (IOC) – a downstream giant and Gas Authority of India Limited (GAIL) – the only gas marketing company, agreed to have cross holding in each other’s stock.

HR – GENERAL ADMINISTRATION

The work of the Administration in an organization as large as ONGC in particular and Ahmedabad Asset in general, has its own challenges as it involves dealing with complex administrative affairs and maintaining cordial relationship among the employees as well as with other interfaces of the company.

• The various functions of General Administration are as under
• Allotment and vacating orders for colony accommodation.
• Maintenance of Asset Estate.
• Requisition of new office or housing accommodation.
• Hospitality which includes arrangements for official parties, meetings, seminars, hotel bookings, air / train ticket bookings, and smooth functioning of transit accommodation.
• Preparation of Indent for new articles, machinery, office / residential accommodation, Kits & Liveries, job contracts etc along with the support of MM, Finance, and concerned department.
• Monitoring of house keeping, garbage disposal, and horticulture contractual workers.

FINANCE AND ACCOUNTS FINANCE DEPARTMENT OF ONGC

ONGC consists of many departments i. e, “Production department, HR department, Finance deparment, Marketing department”. Finance department have its own importance in the organization. All the activities related to the salary of the employees,or allocation of cost, posting the entries of daily transactions, all the data’s related to the Sales of product etc. Hence finance has its vital importance in the functioning of the organization.

The main function of Finance section is to reduce the cost of the organization. The first work is done by the Incharge of budget because firstly the budget has to be prepared on that basis only the target can be decided and exploration or production can be done by the Onshore or Offshore Employees. And after the production had been done then after that the selling of the product is done. As ONGC deals with the selling of two products only Oil & Gas. Sales accounts are prepared on the basis of sold quantities. The PCS(Personal Claim Section) department deals with the earnings of employees like Salary, Loan,Advances etc.

Costing section deals with the allocation of costs, when the production work is done the cost of each activity is allocated to the cost center. Ahmedabad finance has developed in house website (www 10. 205. 67. 54) which gives useful information regarding PCS claims, circulars etc. As every Asset prepares its financial report and send it to the main Head quarter Dehradun and the consolidated balancesheet is prepared after compiling all the different asset’s financial balancesheet is prepared and it is shown in the annual report as ONGC’s financial status. Finance & Controlling

Finance & Controlling module of SAP is divided into two main sections- (1) Financial Accounting (2) Controlling. The financial accounting module handles the financial transactions for the organization. Balance Sheets are traditionally produced from this module in SAP, as this is where the legal entity is registered. The controlling module handles the cost and profitability accounting for the organization. It specifically caters to internal management reporting requirements on areas of cost analysis and control, evaluating profitability of business segments, variance analysis and budgeting.

DIFERENT FINACIAL SECTION IN ONGC

• General Ledger
• Cash & Bank
• Costing – Material & Asset
• Sale Accounting & Receivable Management
• Pre-Audit Section 6. Asset Accounting
• Budget

Virtual Corporate will work out Activity wise Financial Outlays corresponding to approved Physical targets based on the per unit cost of the inputs required to be used in accomplishing the activities of Survey, Exploratory drilling, Development drilling and Operating cost. Actual cost as per finalized accounts for F. Y, 2008-09 will form the basis for working out financial outlays for RE 2009-10 and BE 2010-11. However, in case of uncontrollable exigencies like increase in charter hire rates as per Contracts already finalized, etc, higher increase may be considered with detailed reasons to be furnished for While allocation of additional resources. Working out activity wise financial outlays, cost of services provided by services/expenditure incurred by other locations also need to be considered and the same will form the basis of resource allocation to services.

Accordingly, it is suggested, that service cost considered in activity wise financial outlays be arrived at after due deliberations between the service providers and service users and approved by respective Asset/Basin Managers. Virtual Corporate will also work out total financial outlays for funds allocations after adjusting for inter unit transfers. The information is required for allocation of financial outlays to Virtual Corporate for expenditure sanction and availability control. Activity wise financial outlays for funds allocation and details of Opex were submitted by Virtual Corporate to Corporate Budget Cell latest by 15th June’ 2009. Examination of Activity wise Financial Outlays by Corporate Budget:

Activity wise Financial Outlays submitted by Virtual Corporate will be examined by Corporate Budget Cell considering approved physical work programmed, cost of activities, availability of resources, etc. Based on above parameters, Corporate Budget Cell will communicate level of indicative financial outlays to Virtual Corporate after obtaining approval from Director (Finance). Item wise Financial Outlays: Virtual Corporate will work out item wise budget requirements under Natural heads within the limits of recommended activity wise financial outlays. Line item wise budget proposals under natural head will be converted into activity wise budget outlays and per unit budgeted cost of activities by allocation of common costs to the activities through the budget software.

Line item wise budget requirements will be iteratively reviewed and moderated at the work centres so that budgeted cost of activities fall within the acceptable level of last year’s actual costs and also that natural head budget remains within the limits of recommended activity wise financial outlays. It is reiterated here that for working out budgeted cost of activities, consumption of stores and spares during the financial year is to be considered and inventory variation will be reflected as working capital changes. Similarly, in case of Contractual services spreading beyond one financial year, actual utilization of services during the budget period will be considered while working out the budgeted cost of activities.

Accordingly, phasing of expenditure should be carried out to RE 09-10, BE 10-11 and CBE 11-12 and beyond so that budget outlays and budgeted activity costs are kept at realistic levels. After review and moderations, final budget proposals will be approved by respective Asset Managers/Basin Managers/ Heads of Institutes/chief of Services. After approval by Virtual Corporate, item wise financial budgets under natural heads, corresponding activity outlays and budgeted cost of activities will be submitted to Corporate Budget Cell.

DEFINA TION OF BUDGET

According to Shubin, “A budget is a comprehensive overall plan in which management on the basis of estimated sales volumes and receipts establishes cost and expense allowances for future operations. In this way effectively integrating and directing activities towards carefully determined goals”.

According to Cost and Management Accountants, England “A budget is a financial and/ or quantitative statement, prepared and approved prior to a defined period of time, of the policy to be pursued during that period for the pll1pose of attaining objectives. It may include income, expenditure and employment of capitl”.  A budget is a valuable tool to help plan for upcoming year. It provides a structure to forecast and measure the activities of the organization. Once a budget is approved and implemented, it becomes a standard with which to measure the chapter’s performance on a monthly, quarterly or yearly basis. In addition, a budget can provide an early warning if adjustments in spending or revenue collection are necessary. Budget means the future plan or estimation.

Budget covers action m the whole of the organization for a definite period of time, being a sum total of all assets, Basins, Services, Institutes and Regional offices put together in case of ONGC. The earlier approach i. e. the traditional or incremental approach:- In the traditional approach, the budget was prepared on the basis of previous year’s figures. The past spending was extrapolated every year. This carried forward the inefficiencies of previous year to current year. This was functionally oriented (by division and department) and accounting oriented (Primary focus was on how-much) the justification was required only for the incremental programmers’.

Because the price rises, increment for inflation was given only on demand by the departments. This approach rarely made an attempt to reconcile or rationalize the budget to long range strategies and objectives. The burden of proof was placed on top management to decide how much should be spent for what and why. The new approach i. e. The Zero Based Budgeting (ZBB) approach:- ZBB is an operating planning and budgeting process which requires each manager to justify his entire budget request in detail from scratch (zero) and decide why he should he spent any money at all. It is a method of budgeting whereby all activities are re-evaluated each time a budget is set.

It is essentially a planning and budgeting mechanism employing cost benefit evaluation of projects and activities to enhance the allocation of resources within the organization into high priority efforts. It is a system whereby each budget item, regardless of whether it is a new or existing, must be justified in its entirety each tie a new budget is prepared. Advantages of Zero-Based Budgeting Efficient allocation of resources, as it is based on needs and benefits. Drives managers to find cost effective ways to improve operations. Detects inflated budgets. Municipal planning departments are exempt from this budgeting practice. Useful for service departments where the output is difficult to identify.

Increases staff motivation by providing greater initiative and responsibility in decision-making. Increases communication and coordination within the organization. Identifies and eliminates wasteful and obsolete operations. Identifies opportunities for outsourcing. Forces cost centres to identify their mission and their relationship to overall goals. Major processes: The development and implementation of the ZBB requires managers and others in the organization to engage in following major planning, analytic and decision making process:

• Definition of the mission and goals of the workll1g unit.
• Identification of the decision package.
• Analysis of each decision package.
• Ranking of decision packages.
• Acceptance of three decision packages for allocation of resources.
• Budget preparation.
• Monitoring and Evaluation.

BUDGET PROCESS IN ONGC

ONGC prepared the budgets are as follows: Revised budget estimate (Current year) Budget estimate (Next year) Commitment budget (Next to next year) Broad overview of budget formulation process: In the context of ONGC Ltd. , the Budget can best be defined as a statement of targets both physical and financial, intended to be achieved, in terms of exploration, drilling, production and other allied activities as also connected expenditure vis-a-vis revenue.

Considering the dynamic and complex nature of the organization, budgeting can be identified as the principal tool available to the management for Planning and control of physical operations and financial resources. A vital feature of Budget is the mutual enrichment of function between management and accounting. Projections of Physical targets intended to be achieved during the budget period and decision as to their exact shape and content is the purgative of the management after, of course, careful and in depth consideration of all relevant factors. The Accountant is like a Chief navigator. He provides the log of past recorded fact, allows for variations and gives the answers, in terms finance, about the results of taking specified course of action. He helps the management by converting the Physical Plan into financial figures i. e. the budget.

It has, however, to be noted that Budget is only an aid and not a substitute for managerial judgment. The process of budget formulation, in ONCC is a detailed, exhaustive and voluminous exercise; the exercise normally starts after completion of Annual Accounts in order to have actual utilization of budget and actual cost of various activities. It is envisaged to have the Board approval for the Budget Outlays of RE of the current period and BE for the next Financial Year by the end of September/ October of every year. The budget is prepared initially based on the resources requirements under natural heads and correspondingly financial outlays under various activities are prepared using the budget software.

Financial Outlays corresponding to the approved Physical Targets are prepared based on per unit cost of the inputs required to be used in accomplishing the activities. The budget activities consist of (i) Survey; (ii) Exploratory Drilling; (iii) Development Drilling; (iv) Capital; (v) R and (vi) JV’s. The Asset/Basin level activities are converted into financial outlays taking the unit cost as per rate of contracts or realistic unit cost of the activity. Virtual Corporate Boards (VCB) reviews and approves item-wise budget requirement prepared by respective units under natural heads (Capital, stores, spares, contractual, Manpower and other charges) for submission to CBG within the limits of approved indicative Financial Outlays.

Activity wise financial outlays submitted by Virtual Corporate Boards (VCB) are examined/ reviewed by Corporate Budget Group considering physical work program approved by concerned Director and reasonable cost of activities, availability of resources, etc. Corporate budget Cell (CBC) presents the draft budget proposal to the EC. EC moderates the company wide total financial outlay based on the total internal resources likely to be available during the budget period at global level. The moderation is done without reviewing the unit wise physical activities proposed to be taken up and completed in the budget period. Corporate Budget Cell requests an the units to moderate the budget as per the directives of EC.

ANNUAL BUDGET ESTIMATES TO HAVE MONTHLY TARGETS

To be an effective budgetary control system, we need to provide monthly targets of all the physical plans and the corresponding financial outlays. At the stage of annual budget formulation- at RE and BE, monthly targets would be fixed considering the expected scale and speed of operations, availability of resources (both owned and hired), availability of funds etc. The purpose is two folds

• efficient resource planning since monthly breakdown is available which calls for drawing up the daily resource deployment schedule including funds planning also;
• Variation analysis while comparing the budgeted activity with actual completed activity and comparison of cost.

This process will trigger the need for timely corrective action to

• complete the physical activities in time;
• initiation/speeding up of cases of procurement of material and services to complete planned activity in time;
• Re-appropriation/surrender of budget so that the earmarked resources and funds can be deployed for alterative uses;
• to reduce the cost of activity if the budgeted cost has exceeded.

Presently, as long as the actual expenditure remains within approved budget the SAP allows funds earmarking/release or creation of liability. With monthly budget utilization and review processes, an authorization process will be defined in SAP where in case the unit cost of activity increases even though the total monthly expenditure is within approved monthly budget, the approval would be required at corporate level. This is desirable to contain the cost of activities so that the budgeted physical activities are performed within the limits of budgeted/agreed unit cost of doing the activity.

The monthly utilization would be generated budget activity wise so that budget targets are compared with actual performance. For this purpose, monthly closing of financial accounts would be done at all the locations including closure of all service entry sheets and running of cost cycles. This will also facilitate updating of unit cost. The present system of generating the report of budget utilization on cash basis would be done way and to be replaced by the expenditure on accrual basis. Since the accounts would be closed on monthly basis and location wise accounts consolidated at Corporate accounts level, the budget utilization received from various locations would be reconciled by Corporate Budget from Consol file of CA.

Budget utilization for non procurement items like manpower costs and other charges has to be done with the accrual principle in SAP i. e. budget is utilized at the time of incurring expenditure and liability is provided in accounts even though actual payment may not have been made. Accordingly, budget provisions for such items are made commensurate to the expenses which are likely to be incurred in the respective FY. ? During the budget review process, the open PRs and PO would be reviewed in detail and if required the PR/PO not longer required would be closed so that the funds are available for other activities.

Cases of RE where supply orders have been placed advance purchase action has already been initiated during previous year, such cases should be covered through re-appropriation from overall budget of BE. However, re-appropriation may be made between Plan to Plan and Non-Plan to Non-Plan only. The throw forward cases, for which budget has been revalidated through re-appropriation from the budget of BE are to be shown under throw forward column of the budget software. As per process requirement in ICE, all open POs wherein delivery was falling due in current year but could not materialize will automatically be carried forward through central process in the 4th week of April of next year.

All such carry forward of POs will automatically consume the free budget of BE. However, in some of the commitment items where sufficient free budget (unassigned budget) is not available in BE, the available budget in such cases will become negative and system will stop all further processing of cases in respect of such commitment items with negative available budget. Accordingly, all work centers will be required to review such cases and make funds available through transfer from other commitment items wherever funds are available. As per system designed in ICE, budget utilization for procurement of materials and services takes place at the stage of LIV/ Down Payment.