McKinsey blasts ONGC performance

McKinsey blasts ONGC performance
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NEW DELHI, MARCH 26: The Government may be forced to take “draconian” measures, including establishing joint ventures at key oil fields, unless Oil and Natural Gas Corporation quickly changes over to asset-based structure, warns McKinsey.

“ONGC’s current performance is clearly unacceptable. It needs to rapidly reorganise. Failing this, the government is likely to be forced to take alternate draconian measures, including possibly establishing joint ventures at key fields,” the American consultancy firm said in a report commissioned by the Government.

Faced with decline in production and escalating cost, ONGC needs to shift to an asset-based structure by clearly demarcating exploratory and producing assets with significant decentralisation of authority and accountability, it said. Production of crude oil by ONGC has declined from about 30 million tonnes five years ago to just over 24 million tonnes in 1999-2000. It is expected to remain mostly unchanged during the current fiscal.

The role of corporate centre should change from being a large, centralised administrative support function to a small group focused on core value-adding activities, McKinsey said, adding portfolios of directors need to be reallocated and performance management system needs to be implemented.

The restructuring can improve ONGC’s recovery factor by 10-20 per cent or an addition of 2.5 million tonnes of oil per year and foreign exchange savings of 360-670 million dollars annually, it added. “ONGC’s restructuring is long overdue. The process of change should have been complete by now, with the organisation focused on the task of performance improvement. Instead, as full deregulation of the sector (by April 2002) approaches, ONGC faces the real prospect of running into financial losses,” McKinsey said. Parallel to the roll-out of the asset-based structure, the fine-tuning in structure as well as revision in key processes such as human resource and material management needs to take place, McKinsey said.

While ONGC has been able to successfully implement the asset-based model at Neelam oil and gas field where production decline rate of 35% in 1995-96 has slowed down to 10 per cent in 1998-99, results at Neelam have taken longer than anticipated due to inordinate delays in decision making. “The transformation exercise is clearly behind schedule and if ONGC wants to show tangible results before 2002, it is important to implement the asset-based structure in rest of ONGC swiftly,” McKinsey said.