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For decades, Oil and Natural Gas Corporation (ONGC) has been India's flagship upstream oil producer-a profit-generating machine that met a sizable chunk of the country's hydrocarbon needs. But the energy world is shifting rapidly, and so is ONGC's playbook. Underneath its decades-old oil and gas empire, the company is quietly building a hedge against what it sees as an inevitable future: a world awash in oil but short on profits.
Why ONGC's oil-only model is no longer safe
The writing on the wall is clear, and ONGC's management has not shied away from admitting it. In a candid interview, ONGC's Director (Strategy), Arunangshu Sarkar, acknowledged:
"It will be difficult for a company like ONGC to survive in a low oil-price regime. The new businesses provide a hedge for such a scenario."
This is not corporate posturing. It is an acceptance of a structural shift in global oil dynamics.
Structural risks to oil demand
The oil market has begun to show visible signs of long-term stress. Globally, 45 per cent of oil demand comes from road transport-diesel and petrol that power vehicles (according to Vitol, a multinational energy and commodity trading company). This demand is projected to peak as soon as 2027-2030 (according to BloombergNEF and the International Energy Agency), thanks to the rapid adoption of electric vehicles (EVs), biofuels and alternative mobility solutions. For an upstream oil company that sells crude to refiners, this is a ticking time bomb.
Rising supply, falling prices
Adding to the worry is the abundance of global oil supply. Discoveries over the past two decades and production ramp-ups, particularly in the US and the Middle East, mean that oil prices are unlikely to be sustained at the highs seen in the past. Even when prices spike temporarily due to geopolitical events, they are unlikely to hold. ONGC management has clearly said that the era of structurally high oil prices may be behind us.
Domestic headwinds
On the home turf, ONGC's problems are equally pressing. Its crude oil production has been stagnant to declining for years. Mature fields in Mumbai Offshore and elsewhere are yielding less, and maintaining output has become costlier. Despite ongoing investments in exploration and production enhancement, the trend remains flat.
ONGC's declining oil output
A continuous declining trend
| Year | Avg annual oil output (in MMT) |
|---|---|
| FY05-10 | 25.5 |
| FY11-15 | 23.2 |
| FY16-20 | 20.5 |
| FY21-24 | 19.0 |
To make matters worse, when oil prices do rise, ONGC does not fully benefit. The windfall tax regime imposed by the Indian government caps the company's earnings, keeping its profit margins in check during boom cycles.
A new playbook: Building a hedge
Faced with these structural challenges, ONGC is attempting a significant strategic shift-a move that will define its next decade. It is diversifying into three key areas:
1. Scaling up renewables
ONGC has declared an ambitious plan: to build 10 GW of renewable energy capacity by 2030. For this, it is committing an eye-popping investment of Rs 1,00,000 crore.
While the investment may seem attractive on paper, it really is not much. For instance, Adani Green , which operates at a capacity of around 10 GW, earns an EBITDA of around Rs 7,000-8,000 crore. On the other hand, ONGC generates an EBITDA of around Rs 44,000 crore from its oil business. To replace this core business, the company will have to increase its capacity by over five times (assuming the same asset turnover ratio).
Moreover, global energy majors are treading cautiously in this space. BP (a British oil and gas company), under its 'Reset Plan', has pulled back its renewable investments. Another British oil and gas company, Shell, has scaled down its offshore wind exposure. The reason is straightforward-renewable projects, particularly solar and wind, are capital-intensive, low-return businesses.
But ONGC's renewable push is not just about financial returns. It is about strategic survival. This investment is part of its Net Zero commitment by 2038-a regulatory and market necessity in a transitioning world. It is a hedge against an oil-driven future that may no longer be lucrative.
2. Growing petrochemicals: The non-fuel bet
While fuel demand faces structural headwinds, petrochemicals demand does not. Plastics, polymers, and chemical derivatives made from crude oil remain essential to modern life-from packaging to infrastructure to pharmaceuticals. No viable alternatives are on the horizon.
Recognising this, ONGC is scaling up its petrochemical business. It recently increased its stake in ONGC Petro Additions Ltd (OPaL) to over 95 per cent, committing Rs 18,365 crore. Its long-term plan is to integrate refining capacity with petrochemical production, similar to the strategy adopted by global energy majors.
Saudi Aramco plans to double its petrochemical capacity by 2030. Reliance Industries currently earns around 36 per cent of its Oil-to-Chemicals (O2C) business revenue from petrochemicals and has previously stated its goal to increase this share to 70 per cent. Indian PSUs like IOCL and BPCL are also increasing their petrochemical footprint.
Currently, petrochemicals account for less than 10 per cent of ONGC's refining output. The company intends to scale this significantly over the next few years to shield itself from the volatility of fuel markets.
3. Gas monetisation and regasification ambitions
ONGC is also eyeing India's booming city gas distribution (CGD) sector and is exploring entry into LNG regasification. While no formal projects have been announced yet, the company has indicated plans to:
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Monetise stranded and remote gas fields.
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Explore setting up small-scale LNG terminals.
- Participate in CGD value chains.
India's growing gas demand-aided by government policy to increase gas's share in the energy mix-presents a long-term opportunity for ONGC to monetise its gas reserves and diversify earnings.
Gas will also play a strategic role in ONGC's renewable push. The company is targeting 'round-the-clock' (RTC) solar power projects, which require integrating gas-based power to improve reliability. Standalone solar plants operate at only 20-25 per cent plant load factor due to limited sunlight. By blending gas capacity, ONGC aims to increase utilisation and make renewable energy dispatchable-a critical factor for large-scale adoption.
Will diversification change the game?
For long-term investors, the critical question is this: Can these diversification bets replace ONGC's massive cash flows from oil production?
The answer is nuanced.
In the short to medium term, the answer is clearly no. Renewables, petrochemicals, and regasification are capital-intensive, low-return, and crowded businesses. Unlike ONGC's oil business, where it enjoyed monopoly-like status in India and high global margins, these new sectors have intense competition and regulated returns.
This explains why the market still values ONGC at a low P/E multiple-a reflection of investor scepticism about its ability to navigate the energy transition profitably.
The long game
However, long-term investors should not ignore the strategic importance of ONGC's changing playbook.
The management's acceptance of an oil glut future and structural demand risks is rare in the state-run corporate space. Few Indian PSUs are as candid or proactive in acknowledging these risks.
Importantly, ONGC is not altogether abandoning its oil business. Its recent technical tie-ups with BP and continuous investments in new oil & gas blocks indicate a clear strategy to sustain, or even increase, its core production. However, it recognises that this business has structural limitations and is making these diversification bets to ensure survival for the next 100 years.
If ONGC executes its diversification strategy efficiently:
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It could reshape its earnings mix over the next decade.
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It may eventually transform from a pure-play upstream producer to an integrated, diversified energy company.
- It could insulate itself from the wild swings of global oil markets and government-imposed price caps.
That said, it is a long and risky transition. Execution challenges, return dilution, and policy risks will continue to weigh on the stock in the near term.
Investor takeaway
For patient, long-term investors, ONGC's diversification journey is worth watching closely. If the company succeeds in building credible, profitable businesses beyond oil and gas, it may unlock new value and command higher multiples.
But the payoff will not be immediate or even in the medium future. While the investments may be huge, they still are not enough to replace the core business or even compensate for the decline. Only when its initial phase of investments starts yielding profits can we assess whether ONGC's strategy has worked. For now, ONGC will continue to be nothing but an oil company.
Also read: HEG is all in. But will the graphite cycle cooperate?
This article was originally published on April 05, 2025.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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