NIFT UG 2016 Question Paper with solutions

  The steep fall in oil prices have helped reduce the cost of developing and maintaining oilfields by at least 40% but Oil and Natural Gas Corp (ONGC) is unable to gain from this. Reason: Lack of discretion. Oil majors have deferred investments and cut costs, but ONGC, being a state firm, can’t fire people or renegotiate contracts easily. Most of its contracts are written with an intent of not allowing discretionary powers to executives to change the terms midway. This means terms are fixed for the duration of the contract and can be negotiated only at renewal. This is what is happening. The rates for rigs or other equipment and services needed for exploration and production in the oilfields have crashed across the globe as the oil glut forces companies to shelve projects and cut capital expenditure. This is already benefitting many oil producers who have renegotiated contracts with service providers, terminating or deploying them at far lower rates. But for ONGC, the gains have been slim this fiscal year as it can’t rework contracts underway and must wait for the renewal. In 2016- 17, the company hopes to save about 20-25% of its costs as more contracts are now due for renewal, a senior company executive said. By contrast, Cairn India, a private firm controlling a quarter of the country’s crude oil production, started a massive cost reduction exercise at the beginning of the last year, about six months after the crude oil prices had started tumbling from a peak of $115. It fired more than 300 people, terminated several rigs and renegotiated lower rates for many services. The absence of this flexibility to a state firm is surely a disadvantage when rates keep falling. “But we also escape its flipside when the prices are rising,” said another senior company executive. When the commodity cycle is on an upswing, ONGC can keep its rates stable for the entire term of the contract, usually three years