UNDER THE GUIDANCE OF-Dr . Abhijeet SinghFaculty of Management StudiesBHU

PRESENTED BY-Rohan kumarMBA-IB 3rd SEMRoll no - 39

DESIGNING OF EFFECTIVE CONTRACTS AT ONGC

Flow of Presentation

Company Profile

Company’s SWOT analysis

Research Methodology

Data Analysis

Suggestions

Findings

Limitations

COMPANY PROFILE

Oil and Natural Gas Corporation Limited (ONGC) (incorporated on June 23, 1993) is an Indian public sector petroleum company. It is a Fortune Global 500 company ranked 335th, and contributes 77% of India's crude oil production and 81% of India's natural gas production. It is the highest profit making corporation in India. It was set up as a commission on August 14, 1956. Indian government holds 74.14% equity stake in this company.ONGC is engaged in exploration and production activities. It is involved in exploring for crude oil and exploiting hydrocarbons in 26 sedimentary basins of India. It produces about 30% of India's crude oil requirement. It owns and operates more than 11,000 kilometers of pipelines in India.

ONGC is the only fully–integrated petroleum company in India, operating along the entire hydrocarbon value chain:

Holds largest share of hydrocarbon acreages in India.

Contributes over 80 per cent of Indian’s oil and gas production.

About one tenth of Indian refining capacity.ONGC has single-handedly scripted India’s

hydrocarbon saga by:Establishing 6.61 billion tonnes of In-place

hydrocarbon reserves with more than 300 discoveries of oil and gas; in fact, 6 out of the 7 producing basins have been discovered by ONGC: out of these In-place hydrocarbons in domestic acreages, Ultimate Reserves are 2.36 Billion Metric tonnes (BMT) of Oil plus Oil Equivalent Gas (O+OEG).

Cumulatively producing 788.273 Million Metric Tonnes (MMT) of crude and 463 Billion Cubic Meters (BCM) of Natural Gas, from 111 fields.

ONGC has bagged 85 of the 162 Blocks (more than 50%) awarded in the 6 rounds of bidding, under the New Exploration Licensing Policy (NELP) of the Indian Government.

ONGC’s wholly-owned subsidiary ONGC Videsh Ltd. (OVL) is the biggest Indian multinational, with 44 Oil & Gas projects (7 of them producing) in 18 countries, i.e. Vietnam, Sudan, Russia, Iraq, Iran, Myanmar, Libya, Cuba, Colombia, Nigeria, Nigeria Sao Tome JDZ, Egypt, Brazil, Congo, Turkmenistan, Syria, Venezuela and United Kingdom.

Major Products Manufactured by ONGC

Crude Oil – Crude oil is a surprisingly abundant commodity. The world has produced some 650 billion barrels of oil, but another trillion barrels of proved reserves have yet to be produced.

Natural Gas-Natural gas is a naturally occurring hydrocarbon gas mixture consisting primarily of methane, with up to 20 % of other hydrocarbons as well as impurities in varying amounts such as carbon dioxide.

LPG-Liquefied petroleum gas, also called LPG, GPL, LP Gas, liquid petroleum gas or simply propane, is a flammable mixture of hydrocarbon gases used as a fuel in heating appliances and vehicles.

NGL-Naphtha is a group of various volatile flammable liquid hydrocarbon mixtures used primarily as feedstock in refineries for the reforming process and in the petrochemical industry for the production of olefins in the steam crackers. It is also used in solvent applications in the chemical industry.

Ethane is a chemical component with chemical formula C2H6. It is the only two-carbon alkane, that is, an aliphatic hydrocarbon. At standard temperature and pressure, ethane is a colourless, odourless gas.

Propane is a three-carbon alkane, normally a gas, but compressible to a liquid with inexpensive containers. It is derived from other petroleum products during oil or natural gas processing. It is commonly used as a heat source for engines, barbecues, and homes

Financial Performance of ONGC

FY'07 FY'08 FY'09 FY'10 FY'110

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

15643

1670216126

16768

18924

Net Profit (in crore)

Net Profit (in crore)

FY'07 FY'08 FY'09 FY'10 FY'116200

6400

6600

6800

7000

7200

7400

7600

6631

6844 6844

7058

7486

Dividends (in crore)

Dividends (in crore)

FY'07 FY'08 FY'09 FY'10 FY'110

20000

40000

60000

80000

100000

120000

61410

69943

78085

86441

96708

Net Worth (in crore)

Net Worth (in crore)

Financial Highlights (FY’11)

Gross revenue- Rs.695,322 million

Profit after Tax- Rs.189,240 million

Return on capital employed- 51.6%

Debt Equity Ratio- 0.00

SWOT ANALYSIS

Strengths•The company is highly cost competitive and has established network in India.•The company has gained expertise in the field of onshore and offshore oil exploration.•ONGC contributes 77% of Indian crude oil production.•The organization possesses highly skilled manpower at a low cost.•ONGC is one of the few companies in the world, which operates a large number of oil field services such as drilling, production testing, geophysical and logistic service.

Weakness•O.N.G.C is facing difficulties to produce oil from aging reservoirs.

Opportunities•ONGC has an opportunity for growth in overseas market through subsidiary ONGC Videsh Ltd. (OVL).•The company has entered into strategic alliance with IOC to form a national oil entity for domestic and global operations.

Threats•Security of personnel & property especially crude oil continues to be a cause of concern in certain area.•Some exploration Campaign Company involves high technology, high investment and high risks.

REASEARCH METHODOLOGYREASEARCH OBJECTIVES:-

1.Impact on pricing when contract condition changes.

2.Designing the contracts in such a manner so that work becomes more cost efficient for ONGC.

3.To analyse the contracts from financial point of view.

4.Comparison of different contracts with respect to ONGC.

Research design

Descriptive research

Data Collection MethodThe methodology used for the accomplishment of this project is subjective Analysis of Secondary data. Secondary data has been collected from Contract manuals, company records, Websites, ONGC Intranet, Books, Magazines & Annual Reports. Also we meet with different people of different department connected with formation of contracts to understand their work and get thorough knowledge of the subject

PROCUREMENT PROCESSBudget Made

by ONGC

Asset wise target

assessment

Handing of P.R to M.M

Department

Formation of Tender

Committee

Physical Material

Requirement

Identification of Lowest (L1)

Bidder

Preparation of Purchase

Requisition

CONTRACT FORMATION

Bidder’s Quotation

Float Tender

Purchasing

Dispatch of Material from

supplier

Material received by

ONGC

Dispatch of material to

respected assets

Payment Made to supplier

CONTRACTS- A contract is a mutually binding

agreement that obligates the seller to provide the specified products or services – obligating the buyer to pay for them.

Types of Contracts-LSTK Contracts (Lum Sum Turnkey) With this kind of contract the contractor

agrees to do the a described and specified project for a fixed price. Also named “Fixed Fee Contract”.

AMC (Annual Maintenance Contracts)

IMPORTANT CLAUSES FROM FINANCIAL POINT OF VIEW

1. Scope of work.-The scope of work of a contract would determine the areas of construction activities that the contractor would be responsible for.

2. Duration of a contract- For an AMC contract, duration is 1 year but for a materials contract duration depends upon the project

3. Payment-

3.1 Contract Price-

Shall mean the sum accepted or the sum calculated in accordance with the rates accepted by ONGC and amendments thereof, and shall include all fees, registration and other charges paid to statutory authorities without any liability on ONGC

3.2 Payment Procedure-

For Materials contract:Invoice-1 70% of ‘cost of material’ supplied shall be paid after receipt of MRR

(Material Report Receipt) for all locations. For this 70% of cost of material 90% payment will be made.

The following documents are required for making payment by ONGC against each invoice:

Invoice in Triplicate in the name of Chief Manager (F&A),ONGC, Delhi Site wise Material Receipt Report (MRR) issued by GM (E&T). Copy of FAT clearance certificate, issued by the TPI (Third Party

Inspection). Copy of warranty certificate from the contractor supported with back

guarantee from OEM for the material supplied & invoiced. Documentary proof of insurance.

Invoice -2 15% of ‘cost of material’ shall be paid on installation &

commissioning. For this balance 10% payment will be made. Invoice-3 Balance 15% of cost of material & installation shall be paid on

overall system testing, acceptance & handling the entire works as per scope of work.

The following documents are required for making payment by ONGC:

Certificate Tax Invoice-Original & copy(for availing set off VAT,CENVAT & Service Tax) in the name of Manager(F&A),ONGC, Delhi indicating following:

Service Tax and VAT registration no. Certification as per VAT Act. Service classification Rate of Service Tax/VAT Amount of basic and Tax shown separately. Certificate of satisfactory Overall system testing to be issued by

the Head or authorized representative. Certificate-Material has passed test and inspection as per

contract

For AMC contracts:Invoices @ 25% of total annual

charges with original supporting documents duly countersigned by CORPORATION’s representative wherever applicable be submitted quarterly by the CONTRACTOR to CORPORATION and payment shall be made within 15 days from the date of receipt of invoice.

 3.3 Performance Guarantee-

A performance BG (also called performance bond) states that in the event of failure to perform an agreed task the beneficiary can raise a claim on the bank. Example: Party A wins a tender to supply party B with equipment for US$ 1 billion. Party A submits a performance bond. Thereafter party A backs out because it feels it cannot deliver on the agreed price and will incur a loss. The beneficiary (party B) will claim against the performance bond for failure to perform the contract.

Performance Bank Guarantee ensures the buyer the payment of the guarantee amount by the issuing bank. Generally the performance guarantee is 10 percent of the total assignment or project value.

3.4 Duties & Taxes-The Contractor shall be responsible for the

payment of all charges and taxes in respect of income including value added tax, all in accordance with and subject to the provisions of the income tax laws and regulations in force and all amendments thereto. It is the Contractor's responsibility to make all the necessary inquiries in this respect and he shall be deemed to have satisfied himself regarding the application of all relevant tax laws.

Variation- For a Material Contract, contractor considers Custom duty, Excise Duty, VAT, Sales Tax and for a service contract only Service Tax is considered.

4. Liquidated Damages-

If the contractor fails to compensate the entire works or any part thereof before the scheduled completion Date or the extended date or if contractor repudiates the contract before completion of the works, the company may:

Recover from the contractor as ascertained and agreed amount. 1/2% of Contract Price for each week of delay or part thereof Max 10% of CP.

ORCompany shall give 14 days’ notice to

contractor for the termination of contract.

5. Insurance-

Contractor at his own expense arrange appropriate insurance to cover all risks associated in respect of equipments, tools etc. However all insurance is included in the contract price. If any loss not covered under the contract then it will be beard by the contractor.

6. Change in Law-

•In the event of introduction of new legislation or any change or amendment or enforcement of any Act or law, rules or regulations which becomes effective after the date of submission of price bid or revised price bid, if any, for the contract and which results in increased liability of taxes, duties, fees the contractor shall be Compensate for any such increased cost by the company subject to the production of documentary proof to the satisfaction of the company.•In case, change in law results in reduced liability of taxes, duties, fees. The contractor shall pass on the benefits of such reduced taxes, duties or fees to the company.

•Any increase in the duties, taxes and fees after the Scheduled Completion Date will be to the contractor’s account.

7. Obligations of ONGC-Overall supervision, co-ordination and

project Management at site.Proper utilization of equipment and

services.Monitoring of performance and progressEach and every document emerging from

site in support of any claim by the contractor has to have the countersignature/comments of ONGC’s representative/engineer without which no claim will be entertained by ONGC.

8. Obligations of contractor-

The contractor’s representative shall have all the powers requisite for the performance of the works.

He shall liaise with ONGC’s representative for the proper co-ordination and timely completion of the works and on any matter pertaining to the works.

He will extend full co-operation to ONGC’s representative/inspector in the manner required by them for supervision/inspection/observation of equipment, material, procedures, and records pertaining to works.

To have complete charge of contractor’s personnel engaged in the performance of the work and to ensure compliance of rules and regulations.

9. Termination

Termination on expiry of the contract: The agreement shall be deemed to have been

automatically terminated on the expiry of the contract period.

Termination on account of force majeure:Either party shall have the right to terminate the contract on account of force majeure. It is a common clause in contracts that essentially frees both parties from liability when an extraordinary event or circumstance beyond the control of the parties such as war, strike, flooding, earthquakes etc prevent one or both parties from fulfilling their obligation under the contract

Termination on account of insolvency: In the event the contractor or its collaborator at any

time during the term of the contract becomes insolvent, then ONGC shall, by a notice in writing have the rights to terminate the contract.

  Termination for unsatisfactory performance: If ONGC considers that the performance of the

contractor is unsatisfactory or not upto the expected standard, then ONGC have the option to terminate the agreement by giving 30 days notice in writing to the contractor.

  Termination for delay in mobilization: If the contractor fails to mobilize the complete

equipment on time, then the contract shall automatically stand terminated unless corporation has extended the mobilization period with levy of liquidated damages.

10. Arbitration Arbitration, a form of alternative

dispute resolution (ADR), is a legal technique for the resolution of disputes outside the courts, where the parties to a dispute refer it to one or more persons, by whose decision they agree to be bound.

Three major cases have been taken for analysis:-

CASE 1- A contract with M/s HCL Comnet Ltd.

Description % cost of material supplied

Invoice-1On receipt of 100% material at all sites Payment is done for 70%

Invoice-2On completion of installation Payment is done for 15%

Invoice-3On satisfactory overall system testing Balance 15% is done.

CASE 2- A contract with M/s SPANCO Ltd.

Payment Procedure:Description % cost of material supplied

Invoice-1On receipt of 75% material at all sites Payment is done for 80%

Invoice-2On completion of installationFor balance 25% of material

Payment is done for 10% of cost of material for which 80%payment is already made in invoice-1.90% payment is done for remaining 25% of material.

Invoice-3On successful commissioning of the system & its integration.

Full payment is done (10%)

CASE 3- A contract with M/s HCL INFOSYSTEMS LTD.

Payment Procedure-Description % cost of material

Invoice-1On receipt of 60% material at sites Payment is done for 70%

Invoice-2On receipt of 100% material at sites Payment is done for 70%

Invoice-3On issuance of certificate of satisfactory system testing & acceptance

Payment is done for 20% for which 70% payment is already made.

Invoice-4On issuance of certificate of satisfactory overall system testing

Payment is done for 5%

Invoice-5On issuance of final certificate Balance 5% payment is made.

FINDINGS There is always a pressure to extract greater value from contracted

relationships to avoid unnecessary costs and risks or to deliver customer projects profitably, has placed Contract Management at the centre of business strategy for the world's leading companies.

The above financial analysis shows the impact on contract with the change in taxes, duties and certain other conditions. The cost/price of the contract will change based on certain conditions of the contract clause. This has a very significant effect on decision making, finalizing for awarding the contract to the contractor. Lump sum Turnkey contracts which are more than 12 months generally get impacted due the dynamic changes in the external environment.

Hence, while drafting the standard conditions for a particular contract, the utmost importance need to be given to the pricing related clauses of the contract.

 Contract management continues throughout the lifecycle of a contract and enables both parties to the contract to meet their obligations. It also involves building a good working relationship between both parties.

DEEMED EXPORT BENEFITS

Deemed export means that transaction in which the goods supplied do not leave the country and the supplier in India receives the payments for the goods. It means the goods supplied need not to go out of India to treat them as “Deemed Exports”.

In order to survive in the global competitive world, government provides export benefit to the exporters in which the exporters has to pay less taxes, provides the material to the contractor at reduced prices which ultimately benefits the organisation

PEL/ML and Non PEL/ML Areas:

 PEL/ML Areas:  PEL STANDS FOR PETROLEUM EXPLORATION LICENCE

AND ML STANDS FOR MINING LEASE.  As per the Central Excise exemption notification under

various export promotion schemes the custom duty is not charged in PEL/ML areas. Not.No-22/03-CE.

Moreover Exercise Duty is also not charged in these areas. CENTRAL SALES TAX or VALUE ADDED TAX whichever

applicable is charged  Non PEL/ML Areas:  CUSTOM DUTIES are charged. EXICE DUTIES are charged. CENTRAL SALES TAX or VALUE ADDED TAX whichever

applicable is charged

Suggestions Impact of deletion of Clause Deemed Export Benefit: Manufacturer need to pay excise duty on goods

which passed on to the company.

Designated area is PEL/ML:

So if the area where the supply is being made is designated as PEL/ML area then the contractor will not need to pay the customs duty then the benefit will automatically will pass on to the company (according to clause 7.6.4) so ultimately the cost of company will go down as it will end up paying less taxes (custom duty) under section 3.4.1.3.

LimitationsEvery work has its own limitation. Similarly

in our case also we have certain limitations, these are as follows:

Some issues related to contracts are highly confidential to which we have no access. Thus it hinders us to understand some concepts.

Managing of contracts deals with different department of the organization, but we have access to only one department that is finance. This also limits our understanding of certain concepts.