field notes. HOEC aims to strike gold with oil

Between now and the beginning of a phase that will see a tripling of hydrocarbon production at Hindustan Oil Exploration Company (HOEC) stands just one barrier — the monsoons.

Once the weather clears, the company will move the ‘single point mooring’ (SPM), currently dry-docked in Mumbai, to ‘B-80’, a 56 sq km block that lies in the Arabian Sea, some 110 km off Mumbai’s coastline. The SPM is the final piece of infrastructure required to produce oil from the block.

The other three major elements are in place — the oil gathering and processing platform, the floating storage unit (FSU) that can hold 900,000 barrels of oil, and the hook-up pipelines to evacuate the oil.

When HOEC begins production from B-80 in December, in which it has a 60 per cent participating interest, it will increase the company’s hydrocarbon production from 2,300 barrels of oil equivalent per day, to 7,000 boepd.

Alongside, another development took place in June 2021 in its other major asset — the Dirok gas field in Assam, in which HOEC has a 27 per cent stake. Moving away from a (government) fixed price contract with its buyer, Oil India Ltd, HOEC e-auctioned its gas directly to customers. This got the company a premium of $1.3 per MMBtu (metric million British Thermal Unit) of gas, over and above the fixed price, which currently stands at $1.78.

HOEC currently produces a million cubic metres of gas a day from Dirok. The plan is to raise production to 1.5 million cubic metres a day.

These developments have the potential to take the company’s top-line past the ₹500-crore mark, from ₹224 crore in 2019-20 (₹125 crore for the pandemic-hit year of 2020-21).

In 2019-20, HOEC made a net profit of ₹137.56 crore, 61 per cent of turnover. Going forward, its finance costs will increase — the company’s long-term borrowings increased to ₹160 crore in 2020-21, from nothing in 2018-19, as it borrowed for the $100 m (₹ 750 crore) investment in the development of B-80. However, since oil prices are firm and are expected to remain so, profits could be expected to grow in tandem with the top-line.

The stock market seems to have taken due note of all this. On the NSE, the HOEC share price has risen from the lows of around ₹37 in April 2020 to ₹ 169.45 now.

It’s come a long way

HOEC has come a long way since 2015, when its principal shareholder, ENI of Italy, which held a 47 per cent stake, decided to quit. Around that time, oil prices were plummeting and HOEC was producing nothing meaningful, mainly due to operational challenges at its principal asset, the PY-1 gas field in the Bay of Bengal; in 2015-16, the company’s turnover was ₹28.3 crore and net profit ₹8.2 crore.

ENI approached Pandarinathan Elango, the then CEO of Cairn Energy, asking him if he would take over the management of HOEC. Elango, who was looking to return to his home state of Tamil Nadu, from Delhi, agreed, but on the condition that ENI would waive its ₹1,000-crore loans to HOEC.

Keen to quit India, ENI agreed. Elango roped in his friend, Ramaswamy Jeevanandam, who was then looking after finance at Hardy Oil, a UK company that operated the PY-3 oil field in the Bay of Bengal. The two friends entered HOEC in February 2015, picking up a 3 and 2 per cent stake respectively.

Unburdened of loans, HOEC then had cash of ₹36 crore on its books and participating interests in the PY-1 gas field and PY-3 oil field in the Bay of Bengal, neither of which was producing much. However, the company had a 27 per cent interest in the Dirok field, a promising asset that had cash-rich, public-sector giants, IOC and OIL for partners, but which was yet to be put into production. The asset was brought to production in a record time of 27 months, says Elango, the Managing Director of HOEC.

It also helped that HOEC had a winnable case at the Income Tax Appellate Tribunal, involving ₹100 crore. “The issue was over tax-deductibility of exploration expenses,” recalls Elango. The money won and the ₹36 crore reserves with the company, paid for bringing Dirok to production, without a bank loan.

In March 2016, Ashok Goel of Essel Propack and Rohit Dhoot of Dhoot Industrial Finance together picked up 14 and 10 per cent stake respectively from ENI, at a price of ₹18.5 a share, which formed a major part of ENI’s exit. Thereafter, Elango and Jeevanandam picked up a further 4 per cent each, at the same price as Goel and Dhoot.

With Dirok producing gas (sold to OIL), HOEC’s cash flows improved. “That (Dirok gas) changed the narrative of Assam,” says Elango, pointing out that Assam had 40 per cent of India’s onshore gas but contributed only 12 per cent to national gas production.

The next big break came in 2017, when HOEC successfully bid for B-80 when the government auctioned ‘discovered small fields’.

“But for the pandemic, B-80 would have been producing oil now,” says Elango. When it does go on stream, it will produce 5,000 barrels of oil a day, 60 per cent of which belongs to HOEC. Once B-80 becomes operational, HOEC intends to train its sights on the other assets it has — Kherem and Kharsang in Arunachal Pradesh, a couple of small fields in the Gulf of Cambay, and the high-potential but operationally challenging PY-1.

Another round of auctions for ‘discovered small fields’ is in the offing and HOEC is licking its chops. The company prefers offshore fields, where, according to Elango, “the rewards are high and competition thin.”