InvestorQ : What is the agreement that ONGC has signed with Exxon for exploring oil in the high seas?
Mitali Bhutta made post

What is the agreement that ONGC has signed with Exxon for exploring oil in the high seas?

2 months ago

India’s largest state owned oil extractor and prospector, ONGC, has signed a deal with ExxonMobil of the US for deep-water drilling. Now, deep-water drilling is a very complex process and requires a high level of technological sophistication and that is where the tie up with Exxon will come in handy for ONGC. They will be looking at prospecting oil on the East coast of India and also in the West Coast of India. ExxonMobil is not only the largest oil company in the US, but for long it has also been one of the most valuable companies.

ONGC and ExxonMobil confirmed that they had signed a mutual “Heads of Agreement”. Let us spend a moment to understand what is this heads of agreement all about. The heads of agreement is typically a document summarizing the terms of a proposed agreement like a property sale, partnerships or a joint venture like the one between ONGC and Exxon. The heads of agreement is a very preliminary kind of understanding, so it is non-binding. That means that neither party is obligated to eventually agree to the terms of the document.

However, this is serious business and has the backing of the government of India which is evident from the fact that the agreement was signed between ONGC and ExxonMobil in the presence of Pankaj Jain, Secretary, Ministry of Petroleum & Natural Gas. Both of them would jointly focus on deep-water exploration on the east coast with special focus in the Krishna Godavari (KG) basin and the Cauvery basin. Similarly, on the west coast of India, the deep-water drilling will explore oil and gas in the Kutch-Mumbai region, off Cambay.

There is a lot of synergies that can be seen between the two players in the area. On the one hand, ONGC will bring the local area expertise and the terrain specific domain skills to the table due to its long experience in this region. On the other hand, ExxonMobil will bring in the most updated technologies, global best practices in drilling and exploration, advanced mapping techniques, incorporate developments in E&P etc. Since both are leaders in their respective regions, it gives a lot of strategic fit to the deal.

One of the big challenges to the Indian oil story has been adequate and profitable monetization of the massive investments that deep-water exploration requires. That has made a lot of big players about India. ExxonMobil has already a quarter of its brain power to evaluate and delineate the prospects of Indian deep-water drilling story. For Exxon it also gives the much needed diversification of its current assets which are largely concentrated only in non-Asia region. Also, this helps Exxon diversify out of Russia.

For India it is also a macro story. India relies on imported crude for 85% of its daily crude oil needs. In last one year oil prices surged by 60% and the trade deficit doubled while the CAD could get perilously close to the 5% mark. India is facing the problem of ageing wells and so output is falling sharply. India is only able to meet 10-15% of daily crude oil needs through local crude. For instance, India's crude oil output in June 2022, fell 1.6% to about 600,000 barrels per day. The big challenge is getting the right ecosystem to get Exxon on board.