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ONGC

Submitted For

Bachelor of Business Administration (BBA)

Submitted By

Submitted TO

Hemchandracharya North Gujarat University, PATAN

COLLEGE OF COMPUTER & MANAGEMENT STUDIES, VADU

ONGC

2008-11-12-2009

This is to certify that Mr. VIJAY KUMAR SHUKLA. has completed the Report entitled

“BUDGETING PROCESS OF ONGC , Mehsana Asset ” under my guidance for the

partial fulfillment of the course. Project Work of the Bachelor of Business Administration

(Batch: 2008-2009)

Signature of Faculty Guide:

Name of the Faculty Guide: Prof. HARSAD PATEL

Project Guide Seal Principal


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Finance in any organization is indispensable and is said to be the lifeblood & backbone of

the organization. All kinds of business enterprises, irrespective of their size and nature,

need finance to carry out the day to day operations without which it is not at all possible

to run the enterprises.

Budget is one of the principle tools available to the management for planning and control

of organization operation and financial activities and helps in regulation of expenditure in

consonance with the organizational objectives.

This project has been undertaken with the main objective of studying the budgeting

process in Mehsana asset as well as ONGC as a whole.

This report also reveals the guidelines for framing financial budgets, departmental

budgeting practices followed in all the department of Mehsana asset under the head plan

and non plan activity and how the budget of the various departments are converted from

natural heads to activity wise budget along with the recent changes in the budgeting

system of ONGC.

The report gives an insight of the utilization parameter in the asset along with my

contribution to the asset.


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ACKNOWLEDGEMENT

I would like to thank and owe my gratitude to “OIL AND NATURAL GAS COMPANY

LIMITED” for giving me an opportunity to work on project which has been titled as

“BUDGETING PROCESS OF ONGC , Mehsana Asset ”.

I would like to thank Mr. R. K. Jain, CM (F&A); who gave me an opportunity to work

in Finance department and helped me with his support and guidance to complete the

project.

I would also like to thank my project guide Mr. R. A. Pegu, Sr. F&A Officer, Budget

coordinator, MEHSANA ASSET & Mr. K.C.Ramesh (manager) F&A , who was

always there to extend me a helping hand not only as a guide but also as a friend, teacher

and mentor.

The successful completion of this project is a result of the guidance and timely inputs I

have received from various other employees of ONGC, MEHSANA ASSET.

I would also like to take this opportunity to thank our Honorable Dr. B.S. Agrawal, The

Principal for providing me an opportunity to do this project works.

I would certainly like to thank my beloved Faculty Guide Prof. HARSAD PATEL for

lending his valuable time in guiding me to complete this project.


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1) INTRODUCTIONa) PREFACE & ACKNOWLEDGEMENTb) ONGC PROFILEc) ONGC HISTORYd) ONGC MEHSANA ASSET

i. Introductionii. Key Objectives

e) PROCESS OF EXTRACTION OF OIL & GAS

2) SYNOPSISa) OBJECTIVESb) REASIONS FOR TAKING UP THE PROJECT

3) BUDGETa) INTRODUCTIONb) BUDGETINGc) WHY BUDGETINGd) BUDGET PERIODe) PRE-REQUISITES OF A GOOD BUDGETARY SYSTEM

4) TYPES OF BUDGET IN ONGCa) CASH BUDGET AND ACCRUAL BUDGETb) OPERATION BUDGET AND PRODUCTION BUDGETc) GENRAL BUDGET (REVENUE AND EXPENDITURE BUDGET)d) NATURAL HEAD BUDGET V/S ACTIVITY BUDGETe) PERFORMANCE BUDGET

5) EXPENDITURE BUDGETa) PLAN EXPENDITUREb) NON-PLAN EXPENDITUREc) NATURAL HEADS OF THE BUDGET

6) PREPARATION OF THE BUDGET

7) METHODOLOGY OF BUDGETING IN ONGC

8) ACTIVITY WISE BUDGETS


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9) DEPARTMENTAL BUDGETING IN MEHSANA

10) BUDGETARY CONTROL

11) RECENT CHANGES IN THE BUDGETING SYSTEM OF ONGC

12) OBSERVATION/ CONCLUSIONS/ SUGGESTIONS

13) MY CONTRIBUTON TO THE ASSET

14) ANNEXURE:a) LOCATION OF ONGC WORK CENTERSb) ORGANOGRAMc) MEHSANA ASSET STUCTUREd) ONGC PERFORMANCE

15) BIBLIOGRAPHY


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ONGC PROFILE

Oil and natural Gas Corporation Limited popularly know as “ONGC”, republic India’s

no. one E&P Company with significant contribution in industrial and economic growth of

the country, it is a leading national oil and gas producing company of India engaged

mainly in exploration, development and production of crude oil, natural gas and some

value added products.

1. ONGC’s core business is exploration of hydrocarbons. It has the requisite

experience to explore and produce from classic, carbonate and fractured

basement reservoirs from depth as deep as 5000 meters.

2. ONGC is India’s largest producer of crude oil, natural gas, LPG etc. It also

produces other value added products such as NGL, C2-C3, aromatic rich

naphtha and kerosene.

From a small directorate to a monolith today ONGC is circumpassing the entire gamut of

public sector organization. ONGC today is endeavoring to become a world-class oil and

gas producing company in pursuit of exploration and production business in the domestic

and international area and related opportunity specific energy business.


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The salient features of ONGC LTD. are:

1. The No.1 E&P Company in the world. Ranked 20th amongst the leading global

energy majors, as per the ‘Platt’s Top 250’ Global energy company ranking,

2006.

2. Started in 1955, when Government of India dedicated to develop the oil and

natural gas resources in the various regions of the country as part of the Public

Sector development. With this objective, an Oil and Natural Gas Directorate

was set up towards the end of 1955, as a subordinate office under the Ministry

of Natural Resources and Scientific Research.

3. The main function of the Oil and Natural Gas Commission subject to the

provision of the Act, were “to plan, promote, organize and implement programs

for the development of Petroleum Resources and sale of petroleum.

4. In the year 2002-03, after taking over MRPL from the A V Birla Group, ONGC

diversified into the downstream sector. ONGC will soon be entering into the

retailing business.

5. Cumulatively producing 685 Million Metric Tones (MMT) of crude and 375

Billion Crude Metric (BCM) of Natural Gas, from 115 fields


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ONGC HISTORY

1947 - 1960

During the pre-independence period, the Assam Oil Company in the northeastern and

Attack Oil company in northwestern part of the undivided India were the only oil

companies producing oil in the country, with minimum exploration input.

After independence, the national Government realized the importance of oil and gas for

rapid industrial development and its strategic role in defence. Consequently, while

framing the Industrial Policy Statement of 1948, the development of petroleum industry

in the country was considered to be of utmost necessity.

Until 1955, private oil companies mainly carried out exploration of hydrocarbon

resources of India. In Assam, the Assam Oil Company was producing oil at Digboi

(discovered in 1889) and the Oil India Ltd. (a 50% joint venture between Government of

India and Burma Oil Company) was engaged in developing two newly discovered large

fields Naharkatiya and Moran in Assam.

In 1955, Government of India decided to develop the oil and natural gas resources in the

various regions of the country as part of the Public Sector development.

Delegates under the leadership of Mr. K D Malviya, then the Minister of Natural

Resources, visited several European countries to study the status of oil industry in those

countries. Foreign experts from USA, West Germany, Romania and erstwhile U.S.S.R

visited India and helped the government with their expertise.


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In April 1956, the Government of India adopted the Industrial Policy Resolution, which

placed mineral oil industry among the schedule 'An' industries, the future development of

which was to be the sole and exclusive responsibility of the state.

Soon, after the formation of the Oil and Natural Gas Directorate, it became apparent that

it would not be possible for the Directorate with its limited financial and administrative

powers as subordinate office of the Government, to function efficiently. So in August,

1956, the Directorate was raised to the status of a commission with enhanced powers,

although it continued to be under the government. In October 1959, the Commission was

converted into a statutory body by an act of the Indian Parliament, which enhanced

powers of the commission further. The main functions of the Oil and Natural Gas

Commission subject to the provisions of the Act, were "to plan, promote, organize and

implement programmes for development of Petroleum Resources and the production and

sale of petroleum and petroleum products produced by it, and to perform such other

functions as the Central Government may, from time to time, assign to it ". The act

further outlined the activities and steps to be taken by ONGC in fulfilling its mandate.

1961 - 1990

ONGC not only found new resources in Assam but also established new oil province in

Cam bay basin (Gujarat), while adding new petroliferous areas in the Assam-Arakan Fold

Belt and East coast basins (both inland and offshore).

ONGC went offshore in early 70's and discovered a giant oil field in the form of Bombay

High, now known as Mumbai High. This discovery, along with subsequent discoveries of

huge oil and gas fields in Western offshore changed the oil scenario of the country.

Subsequently, over 5 billion tonnes of hydrocarbons, which were present in the country,

were discovered. The most important contribution of ONGC, however, is its self-reliance

and development of core competence in E&P activities at a globally competitive level.

After 1990


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The liberalized economic policy, adopted by the Government of India in July 1991,

sought to deregulate and de-license the core sectors (including petroleum sector) with

partial disinvestments of government equity in Public Sector Undertakings and other

measures. As a consequence thereof, ONGC was re-organized as a limited Company

under the Company's Act, 1956 in February 1994.

After the conversion of business of the erstwhile Oil & Natural Gas Commission to that

of Oil & Natural Gas Corporation Limited in 1993, the Government disinvested 2 per

cent of its shares through competitive bidding. Subsequently, ONGC expanded its equity

by another 2 per cent by offering shares to its employees.

During March 1999, ONGC, Indian Oil Corporation (IOC) - a downstream giant and Gas

Authority of India Limited (GAIL) - the only gas marketing company, agreed to have

cross holding in each other's stock. This paved the way for long-term strategic alliances

both for the domestic and overseas business opportunities in the energy value chain,

amongst themselves. Consequent to this the Government sold off 10 per cent of its share

holding in ONGC to IOC and 2.5 per cent to GAIL. With this, the Government holding in

ONGC came down to 84.11 per cent.

In the year 2002-03, after taking over MRPL from the A V Birla Group, ONGC

diversified into the downstream sector. ONGC will soon be entering into the retailing

business. ONGC has also entered the global field through its subsidiary, ONGC Videsh

Ltd. (OVL). ONGC has made major investments in Vietnam, Sakhalin and Sudan and

earned its first hydrocarbon revenue from its investment in Vietnam.


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Mehsana Asset was established in November 1967 as a small project, Mehsana has

emerged as the Highest Onshore Producing Asset in ONGC with production figures at

2.23 MMT for 2006-2007. It has consistently achieved the highest oil production figures

amongst all onshore Asset year after. Spacing an area of 6000 sq. km, Mehsana has 28

fields, which are mostly oil producing.

There are 1295 oil wells and 21 gas wells producing about 6120 tones per day. Mehsana

produces sweet oil. The average depth of a well in Mehsana is in the range of 1100m to

3000m. There are total 39 numbers Installation in the Asset

Mehsana also has the highest onshore production ration in ONGC.

The CORE ACTIVITIES are:

Oil and gas field development

Integrated reservoir management

Oil and gas production

ONGC Mehsana can proudly claim to be the pioneer of In-Situ combustion (thermal

recovery technique) implementation at sub surface depths of 1000 to 1100 meters, which

is a first of its kinds in the whole world. The asset is in the process to increase the oil

recovery from 28% to global recovery leavel of 40%.


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More oil from ageing field.

Introduction of hi technology

Renewed trust in optimization of production

Increased profit through effective cost control.

Self operation, clean & green environment

Reserve replenishment

Exploration of opportunities in frontier areas.

Process of Extraction of Oil and Gas

First of all a survey is carried out to find out the possibility of hydrocarbons in the earth

Crust. This is done by geologists in many ways. They use sound waves and electric

current for identification of existences of HC. After a well location is released, the land

has to be acquired, site is to be prepared for drilling and it has to be cleared & leveled so

that access roads may be built. Drilling consists of two components-exploration and

development. An exploratory test is done to establish the presence of hydrocarbons in the

selected areas of earth crust. In development the reservoirs are developed for extracting

the oil. Here the drilling starts with the help of an oilrig after which a mental pipe called

‘casing’ is cemented into the hole. After the completion of drilling, Rig is removed and a

pump is placed on the top of the well. Now the process of the extraction of oil starts. The

well are connected to Group Gathering Station (GGS) though the flow lines for collection

of crude oil and gas.

Segregation of crude oil, gas and water is done by mechanical, thermal and electrical

process. Lastly, the oil which is separated is also not in pure form. So, it is sent to Central

Tank Form (CTF) for further purification through flow lines. Form here it is sending to

refinery with help of trunk lines to Baroda.


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SYNOPSIS

PROJECT TITLE:

Study of the budgeting process at Mehsana Asset as well as ONGC as a whole.

OBJECTIVES:

1. To study existing process of budgeting & find out new ways of improving the

existing budgeting process with clear understanding of the pros and cons.

2. To enable productive utilization of the limited funds of the organization keeping

in view the opportunity cost and the time value of money.

REASON FOR TAKING THE PROJECT:

In an organization like ONGC, where operations are numerous, nature of business is

complex expenditure involved is huge, the budget assumes a very special significance.

The setting of the physical targets considering resource availability, converting these

physical targets into financial figures, correct estimation of expenditure and revenue

requires a great degree of skill & involves coordination between various technical and

financial personnel.

Hence, the study of the budgeting process in such a big organization like ONGC is

perceived as a very good opportunity. A proper understanding of the budgeting process

and finding out the loopholes if any can prove out to be greatly advantageous to the

company.


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INTRODUCTION

Every organization takes proper care of the future. At the same time, it cannot afford to

forget the present. It has to ideally balance long-term advantages and goals against short-

term performance pressures with the objectives of creating a business to be stronger

tomorrow. Budget is an ideal tool to meet the objective.

The word ‘budget’ has been derived from the French word ‘baguette’ which denotes a

leather pouch in which funds are appropriated for meeting anticipated expenses. Budget

is quantitative expression (numerical statement of plan, policies and goals prepared in

advance for a definite period in future). It is an estimate, which when approved by the

management become a budget. Infect, budget acts as a business barometer as it is a

complete programme of activities of the business.

WHAT IS A BUDGET?

Definition of budget has been attempted by various Organizations / Experts.

The layman definition of budget is “a plan of operations expressed in monetary terms.”

According to the Institute of Cost and management Accountants of India, “a budget is a

financial or a quantitative statement prepared prior to a given period of the policy to be

pursued, the work to be done and the expenditure to be incurred during that period for the

purpose of achieving a given objective.”


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For an organization like ONGC, “the budget can be best defined as a statement of targets

both physical and financial, intended to be achieved in term of exploration, drilling,

production and other allied activities and connected expenditures vis-à-vis revenue.”

BUDGETING:

Budgeting is the procedure which help to know the future financial requirements, the plan

when presented in written form is called budget. It includes budget plan and budgetary

control and other related techniques.

It provides a tool to the management for controlling the activities of the employees.

In the words of W. J. Valter, “Budgeting is a kinds of future accounting in which the

problems of future are met on paper before the transaction actually occur.”

WHY BUDGETING??

Preparation of the budget is essential for steering the organization in a well directed

manner and for enabling its various business group/ units to operate with maximum

efficiency through planning, coordination and control.

Major objectives, which the budget serves, may be summarized as:

1. It spell out the targets, both physical and financial, to be achieved during the

budget period.

2. It provides the detail about the resources needed for fulfilling the laid down

targets.

3. It pre-determines the capital expenditure programme in a more orderly fashion

and well in advance.

4. It helps in the planning and regulation of the expenditure.


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5. It ensures more effectives control over the level of inventory.

6. It helps in arranging for the financing of the operation so that adequate working

capital is available as and when required. At the same time, a better utilization of

liquid capital and avoidance of uninvited surpluses in certain period is made

possible.

7. It enable the control of all activities by the top management through review and

planning of each aspect at appropriate level and bringing out areas where attention

of the top management is needed.

8. It provide a yardstick to measure the actual achievement vis-à-vis laid down

targets not only for the whole organization, but also of various business group/

units.

9. It provides the basis of control by determining the variation of the actual from the

planned and reasons for such variations.

BUDGET PERIOD:As a matter of practice, budgets are prepared on financial year basis.

The budgeting practice in ONGC starts in the month of June of every year. Whereas, they

have to submit their final revised estimates of the current year and the budgeted estimates

for the next year along with commitment budget for the next to next year by the end of

the month of September.


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PRE-REQUISITES OF A GOOD BUDGETARY SYSTEM

1. Clearly defined targets.

2. Preparation of reasonably accurate budget.

3. Sound system of financial and cost accounting.

4. Systematic analysis of all expenses on consistent basis in live with provisions

made in the budget so that true and meaningful comparisons can be made.

5. A sound system of information flow from the work centre.

6. Constant comparison of actual achievements and expenditure with the pre-

determined budget figures.

7. A well define management structure so that the responsibility for deviations from

the budget can be readily established.

8. A genuine concern among all the levels of the management for the success of the

system.

9. Preparation to the management at frequent and predetermined intervals, of

information related to the areas of their interest and control.


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TYPES OF BUDGET IN ONGC LIMITED

ONGC follows Accrual method of accounting, hence, while preparing the financial

budget, principles of accrual is kept in mind, as the budget process has to be aligned with

the Accounts. However, as the cash management is also equally important activity for the

company, the cash budget also forms a sub-set of the overall budget. Therefore the

budget in ONGC can be classified mainly into the following categories:

1. Cash Budget & Accrual Budget.

2. Operational Budget & Procurement Budget.

3. General Budget (Revenue Budget & Expenditure Budget)

4. Natural Head Budget Vs. Activity Budget

5. performance budget

CASH BUDGET: - Cash budget is scheduling for the cash inflows and outflows

expected over the budget period. Apart from the revenue & expenditure it also takes into

consideration. While arriving at the cash out go component of the budget, the cash

payment made for the last years liability and the liabilities created against the

expenditure of this year for which the payments will shift to next accounting year, need


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to be factored. This is primarily the working capital change, which is forming the part of

cash budget.

Though the budget is prepared on accrual basis, cash forecast is required for fund

management. Therefore, cash budget is basically prepared to have a proper control over

the cash flow. It helps in planning the investment of surplus cash, mitigates any crisis of

cash payments and avoids idling of funds.

ACCRUAL BUDGET: - Receipt of material/ services is important for accrual budget

rather than actual cash outgo. Hence, utilization for budget purpose occurs at the stage

of creation of liability in the accounts.

The expenditure, which is likely to be incurred during the budgetary period forms part

of the accrual budget. The payment against the expenditure may be made in the

budgetary period or it may spill into the next year. To explain this aspect more clearly, if

an item has been provided in the budget and the action against the same has been

completed, the payment may not be made in the same year against that item, but the

liability has to be created, in such cases the budget is deemed to be utilized under

accrual concept for which the budget need not to be carried in the year. Likewise, the

items, which existed in the budget but no action, could be taken, needs to be considered

in the next budgetary period.

Form the costing and profitability point of view accrual budget is a healthy system of

budgeting.

PROCUREMENT BUDGET: - The procurement budget is prepared on the basis of

accrual principle. Procurement budget is planned for Capital, stores, Spares and

Contractual on the principle of accrual. While working out the procurement budget

receipt of material/ service during period is considered rather than actual consumption

of the same.


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OPERATIONAL BUDGET: - Operational budget is linked with activities. For

working out operational budget, operating expenditure for various services and

production costs are considered. It consists of consumption of Store & Spares,

contractual payment, manpower and other charges. Operational budget of various

services and departments are allocated to various activities to workout the activity wise

financial outlays, which forms part of performance budget.

Thus procurement of materials forms part of procurement budget whereas consumption

forms part of operational budget. Difference between the procurement and consumption

is inventory variation, which is considered under working capital variation in projected

balance sheet.

GENRAL BUDGET: -This the total budget both indigenous and imported, of the

corporation for the current year and next year which is submitted after being approved

by the ONGC Board, to the Ministry by 15th October every year, in compliance with

statutory requirement as per O.N.G.C. Act. After submission the budget is discussed

with the Planning Commission where the final budget is approved. This budget is made

of two parts.

REVENUE BUDGET: - ONGC’s revenue accrues from the sale of Crude oil, Natural

gas, LPG, NGL, Naphtha, C2-C3 and other value added products. The revenue budget is

prepared on the basis of Sales programme, which depends on the production targets

Finalized by the Board.


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Revenue of ONGC (in crores)

2003-04 2004-05

BE RE Actual BE RE Actual

crude 20952 23971 22213 21959 29127 32254

Natural Gas 5067 5083 5219 4806 5089 5502

Value Added 3763 4344 4708 3934 4936 5113

Others 49 386 49 40 446

Total 29782 33447 32526 30748 39192 43315

2005-06 2006-07 2007-08

BE RE Actual BE 06-07 RE 06-07 BE 07-08

crude 26401 35050 32893 34497 37814 37450

Natural Gas 5042 6306 6819 6607 7066 7537

Value Added 4665 5226 5100 5882 5810 6357

Others 40 235 3199 (126.5)* 2503 2342

Total 36148 46817 48011 46859.50 539193 53686


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NATURAL HEAD BUDGET vs. ACTVITY BUDGET: - Plan and non-plan budget

both are prepared at work centers at natural head level. Natural heads of the budget in

ONGC has been mentioned in this chapter later on. These natural budgets are further

allocated to activities to work out the activity wise plan and non-plan budget.

PERFORMANCE BUDGET: - The National institute of Bank management, Bombay

has defined the performance budgeting technique as “the process of analyzing,

simplifying and crystallizing specific performance objectives of a job to be achieved over

a period, within the framework of organizational objectives, the purposes and objectives

of the job. The technique is characterized by its specific direction towards the business

objectives of the organization”. However, in the long run, it aims at a continuous growth

of the organization so that it continues to meet the dynamic needs of its growing clientele.

It enables the organization to be sensitive and adaptive.

Traditional Budgets are being prepared for different elements of cost like manpower,

material, etc. This cannot help us to determine the efficiency of various activities. This

cannot be used as performance indication. To overcome this and make budget more

objective and purposeful, budget is being prepared for different activities. These

budgeted parameters are compared with actual performance taking into account the actual

physical achievement with planned level of activity and the financial implication in order

to evaluate the performance and productivity.


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EXPENDITURE BUDGET

ONGC’s Expenditure Budget is classified as under:

1. Plan expenditure

2. Non-Plan expenditure

3. Natural heads

Plan expenditure: - Plan budget/ Expenditure consist of all activities under survey,

exploration, development, research areas, which will enhance the capacity of the

organization to grow.

It comprises of following:

1. Survey

2. Drilling (Both Exploratory & Development)

3. Institutes and R & D

4. Working Capital

5. Capital

It incurred with the objectives of creating some assets, e.g. reserves, which will give

rise to revenue. However, the entire capital acquisition is considered as Plan expenditure

irrespective of its development for plan activity i.e., Survey or Drilling or Non-Plan

activity like production. As regards working capital, it can be added that plan working

capital means the inventory held for plan activities like Survey and Drilling. Research &

Development expenditure is considered as plan expenditure because this is incurred

primarily with the objective of enhancing the capacity to produce. It adds to the

efficiency and efficacy of the organization, the benefits of which are enjoyed over a large

period. Again, the plan expenditure for Survey and Drilling in totally is termed as

“Deferred Revenue Expenditure”, which is primarily budgeted element-wise, i.e.

Manpower, Materials, Contractual Payment and Other charges.


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After-wards, this is further grouped under Survey and Drilling expenditure. Subsequently

it is bifurcated, between Exploratory and Development Drilling Expenditure on the basis

of certain pre-determined ratio, wherever necessary.

Non-Plan expenditure: - Any expenditure, which is incurred for earning the revenue and

maintaining the same, is termed as Non-Plan expenditure. There is some resemblance of

non-plan expenditure with Revenue Expenditure. But these two are not same. For

example, survey is plan expenditure but it is charged off to Profit and Loss Account as

revenue expenditure. Similar is the treatment for Research and Development expenditure.

Expenditure not coming within the preview of Plan Expenditure is treated as non-plan

expenditure. In this way, the total expenditure is accounted for either under Plan or Non-

plan expenditure.

The major components of non-plan expenditure are:

a) Production Expenditure: Both may include Manpower, materials.

b) Selling & Distribution: Contractual payments, other charges, Publicity, etc.

c) Statutory Charges & other payments.

Royalty

Sales tax & turn over

Octroi

Excise duty, etc.

d) Interest & Repayment of loans.


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e) Working Capital (increase or decrease during the budget period).

f) Allocation from Plan – this represents the allocation from common expenditure

for plan & non-plan initially booked under plan.

Natural Heads of the Budget

Budget on ONGC is primarily prepared for the elements which are required for executing

the plan of action grouped primarily under the following heads: -

1. Capital

2. Manpower

3. Stores and Spares

4. Contractual payment

5. Other charges

1. CAPITAL

Capital items can be classified under following:

Items having a life span more than 1 year.

Land & building, furniture.

Turnkey packages such as process platforms.

Technical officers in consultation with stores and purchase officers and finance officers

estimate for the capital expenditure

.


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2. MANPOWER

Manpower item includes

Salary and wages

Perks and allowances

performance linked payments

Number of actual manpower is kept in view before forecasting manpower expenses and

the changes in the level of activity and price index changes is also considered.

3. STORES AND SPARES

Stores and Spares item include

Electric stores

Chemical

Drill pipes

Explosives

Cable and other fitting items

Electric spare

Geophysical equipment spares

Production and mechanical

Estimation of budget for stores and spares is basically related to purchase of stores and

spares.


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4. CONTRACTUAL PAYMENTS

Contractual payment includes

Work over services

Seismic surveys

Drilling

Contracts for logging

Hiring of offshore vessels.

The executives who are responsible for getting the contract work executed for the

organization evaluates the costs and gives proper justification for it.

5. OTHER CHARGES

Other charges includes

Rents

Electricity and water expenses

Telephone expenses

Traveling expenses

It is also forecasted on the basis of actual expenditure during the preceding period and

level of activities.

Budget in ONGC is initially prepared for the physical activities. Thereafter it is converted

into financial terms, which is based on natural heads of the budget. The natural head


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budget is further drilled down on cost allocation basis to derive at the activity wise

financial budget. The natural head budget of ONGC is prepared at location level and

aggregates at regional level, which is then finally compiled at ONGC level.

Natural head wise budget is shown below:

(in Crores)

Revised Estimates (RE) RE 02-03 RE 03-04 RE 04-05 RE 05-06 RE 06-07

CAPITAL 2714.55 2775.42 4872.12 7577 9567

STORES 1713.61 1750.28 1019.48 740 3315

SPARES 589.38 509.83 543.39 752 771

MANPOWRE 2225.85 2496.69 2563.70 2834 3012

CONTRACTUAL 4253.67 5293.35 6831.10 10837 14037

OTHER CHARGES 894.97 1074.85 1070.79 1216 1410

TOTAL 12392.02 13900.42 16900.58 25956.58 32112.00

Budget Estimates (BE) BE 03-04 BE 04-05 BE 05-06 BE 06-07 BE 07-08

CAPITAL 4284.30 4823.56 5587.50 11258.00 12301.00

STORES 1772.71 1657.86 1001.62 3135.00 3819.00

SPARES 553.69 547.31 575.65 808.00 809.00

MANPOWER 2296.35 2545.49 2631.21 2969.00 3131.00

CONTRACTUAL 6052.86 6251.33 6825.60 14164.00 17308.00

OTHER CHARGES 815.56 1091.00 1151.96 1221.00 1436.00

TOTAL 15775.46 16916.55 17774.5 33555.00 38804.00


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PREPARATION OF BUDGET IN ONGC: -

The budgeting process starts in Feb/ March with the preparation of plan action for

Revised Estimates of the current year, Budget Estimates of the next year and

Commitment Estimates of the next to next year.

Every year a budget circular is issued from the corporate budget section at the beginning

of the financial year to all the budget location / work centers. The budget circular

contains the following:

a) The Schedule for submission of Physical & Financial targets.

b) Guidelines for preparation of the budget and technical improvement, if any made

in the budget software.

c) The methodology to be adopt for compilation and submission of the Budget along

with the necessary formats, if any.

d) Instructions and guideline of the management to be followed in formation of the

budget.

e) The role of the Budget Co-coordinators and the Regional Budget Co-coordinators.

Budget is a reiterative process wherein top-down and bottom-up approach is followed.

Planning is carried out on bottom up basis i.e. Physical targets and resource requirements

are generated at work centers keeping in mind the corporate objectives and local level

constraints. However, after consolidation at the corporate level it is checked if the same

meets with the corporate objectives.


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METHODOLOGY OF BUDGETING IN ONGC

1. Budget of the virtual corporate is prepared at cost center level under the CRC

structure.

2. The items, which need to be included in the budget, are concurred first and then it

is included in the procurement budget. Accordingly to concurrence, cost benefit

analysis is carried out. Necessary action to obtain the financial concurrence is

initiated in advance so that there is adequate time for the finance officers to vet

the proposals and have them included in the budget.

3. Budget is prepared to the Board and the planning commission in terms of activity

wise financial outlays. The consumption figures are used for working out activity

wise outlays and activity wise budgeted costs. The difference between

procurement and consumption is reflected as inventory variations and is shown as

working capital charges.

4. Replacement capital chargeable to R&L A/C as per corporate policy also forms

part of operational budget.

5. The procurement budget is prepared as per accrual principle. It is therefore taken

care that while compiling the procurement budget, status of cases and leads-time

in tendering and delivery of the item/ service be taken into account and such

amount be kept in the respective budget years during which there is reasonable

certainty of utilization of budget.

6. The throw forward cases, for which budget has been revalidated through re-

appropriation from the budget are shown under throw forward column of the

budget software.

7. Budget is kept at the work centers were the material/ services are utilized/

consumed and not at the work centers where payments are made. If the budget

provision is not kept at the consuming centers, it does not reflect the true

profitability and cost of activities for the virtual corporate.

8. Assets/ Basins identify the capital items, which forms part of the approved

projective schemes because “other capital” is growing at higher rate than the


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projective expenditure. Proper justification is given in support of the budgetary

requirement for items of replacement and addition.

9. Accrual principal of accountancy is applicable in preparing budget. While

arriving at the cash out go component of the budget, the cash payment made for

the last year’s liability and the liabilities created against expenditure of this year

for which the payments will shift to next accounting year, need to be factored.

10. The budget utilization is reviewed on quarterly basis in quarterly performance

review meeting wherein the plans are compared with the actual.

11. Guiding factors for allocation of budget resources are:

a) Budgeted cost of activities

b) Inventory

c) Profitability

1. The unit cost of activities is to be taken as the guiding factor for working out

budgetary outlays. Budget co-coordinators play lead role in working out of the

budgeted cost of activities keeping in mind the inter-unit cost transfer.

2. The inventory management is essential to optimize level of inventory holding and

carrying cost. Inventory builds up leads to increase in non-performing assets,

which has negative impact on bottom line of the corporation.

3. The asset and basins are supposed to prepared the budgeted profit margin and

contribution and emphasize on the achievement of overall efficiency and cost

effectiveness in all its operations.

4. Budget software has been developed in ONGC recently to meet the requirements

under the CRC structure as well as assist the work centers in working out their

activity wise outlays and budget cost of activities.

5. Currency rates are adopted prepared the imported budget.


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6. Utilization of the budget is reviewed in the Board meeting on quarterly basis.

Targets are fixed realistically so that the variations at the year-end are minimal.

ACTIVITY-WISE BUDGET

ACTIVITY-WISE BUDGET

There are three main activities carried out in ONGC:

1. Exploration

2. Production

3. Development

The budget in terms of these three activities is called Activity-Wise Budget. Natural head

budget is kept by the respective budget units as per the CRC structure at cost center level.

This natural head budget is converted into capital budget and deferred revenue budget

(DRE) for each of the CRC entity. This deferred revenue budget (DRE) comprises of:

1. Consumption of stores and spares

2. Contractual payment

3. Manpower

4. Other charges

DRE budget for services are allocation final activities viz. Exploration, Development and

Production on the basis of utilization of services.

The budget for regional offices and head quarter overhead is also allocation to final

activities. After all allocations natural head budget gets converted into activity budget

under CAPEX and OPEX.

Example to make the concept more clear :


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LOGISTICS: The logistics department fulfils the vehicular requirement of the various

departments while providing the services to these departments. The final cost that is

incurred by logistics is ultimately allocated to the department head to which it belongs

turning its own cost to zero

LOGISTICS

| | | | | | | |

Surface Sub-Surface Support Drilling Well E&C Logging

Forward

Team Team Services Services Services Services These

departments add up the logistics cost to their own cost and the final cost so arrived is

distributed among the three activities.

WORKSHOP:

Similarly in the case of workshop also the total budgeting cost is divided into the various

departments in accordance with the services that will be rendered. The JOB CARD kept

separately for each department service as the basis for such allocations.

SUPPORT SERVICES:

In the case of support services (except logistics), the total cost i.e.

Cost of support service department + Cost from logistics + Cost from workshop are

directly charged to P&L A/C under the head project overload

LOGGING SERVICES:

In logging services the total cost of logging services in addition with cost of workshop

and logistics arrived is further distribution on the basis of services provided:

NEW WELLS - EXPLORATION/ DEPARTMENT

OLD WELLS - PRODUCTION

On basis of this the cost is finally apportioned to the three activities.


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In the similar way, all the departments distribute the total budgeted cost they arrive at

(after adding logistics and workshop cost) to exploration, department and production.

This activity wise budget so prepared is also presented before the board at the time of

approval of the expenditure budget.

Working of Activity Wise Outlays:

To facilitate working of the activity costs for budget purpose, the budget software has

been modified to provide for the activity wise outlays from line item wise natural head

budget fed in the budget software. To meet this objective, following changes have been

made in the budget software: -

1. CRC structure has been implemented by implementing profit center accounting

where in CRC reporting units have been created as profit centers and existing cost

centers with changes wherever required have been linked to the profit centers.

2. Budget is kept at the work centers where the material/ services are utilized and not

at the work centers where payments are to be made. Consuming work centers

send indents along with the sanction orders to the central procurement agency for

procurement.

3. To facilitate working of activity wise financial outlays, facility of linking of cost

center to the activity is mandatory. Once the activity linkage has been defined in

the cost center master, user is required to enter the activity code for individual line

items of budget for that cost center.

4. Consumption of stores and spares is considered. The work centers feed the details

of opening stock planned consumption and planned closing stock.

5. The activities have been classified under two categories:


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a) FINAL ACTIVITIES

1. Survey

2. Exploratory drilling

3. Development drilling

4. capital

5. R&D

6. JVC

7. Operating Expenditure

b) INTERMEDIATE ACTIVITIES

1. Drilling services

2. Cementing services

3. Mud services

4. Work services

5. WSS services

6. Well services

7. Logging services

8. Engineering services

9. Logistics services

10. Geophysical services

11. Project overhead

12. Regional & headquarter overhead

1) Each of the final and intermediate activity has been further classified

under sub activities to capture further details of activity wise expenditure.

2) Allocation of budgeted costs from intermediate activities to the final

activities is done. All costs get allocated to the final activities and no

amount is to be remained un-allocated under intermediate activities. The

responsibility of cost allocation cycles lies with the location budget

coordinator who is from finance department.


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3) Guidance note issued by ICAI and the relevant accounting guidelines are

to keep in mind. As per present accountancy policy, Non Plan

Replacement Capital is charged to the P&L Account.

4) The cost allocation cycles for preparation of activity wise outlays and

activity wise costs have been placed under a separate menu in the budget

as stages of cost allocation.

The various stages of cost allocation cycles are as under:-

1) Allocations are within same locations and if needed amounts can be

allocated to other locations also. Allocation of budget from one final

activity to the other final activity is resorted only in exceptional cases.

2) Allocations are not for the identified amounts but are proportionate on

the basis of activity parameters. In case direct activities parameters are

not available, allocations are carried out on the basis of weights

considering last years actual allocations in accounts, change in activity

level, technical weights etc.

3) This stage provides for incorporation of allocations received from other

locations in activity outlays of the transferee locations. Before running

this stage the location budget coordinator of the transferee location

merges the allocations received from other locations though “restore

inter until allocation” option under “utilities” menu of the budget

software.

4) The physical target is used by the system to work out the budgeted per

unit cost of activities.


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5) Virtual corporate compare the budgeted cost of activities vis-à-vis cost

of activities during last two years and in case if budgeted cost of

activities is increasing with reference to last years’ actual, the reasons

for the same are analyzed in detail and cost of activities are kept within

reasonable limits.

Final budget data is submitted to regional finance coordinators/ corporate budget section.


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(Rupees Crores)

Revised Estimates (RE) RE 02-03 RE 03-04 RE 04-05 RE 05-06 RE 06-07

Exploration:

Survey 843.83 851.51 1252.64 1732.00 2797.00

Exploratory Drilling 1800.23 2430.84 2496.42 2791.00 2906.00

Other (APEX)

Total 2644.06 3282.35 3749.06 4523.00 5703.00

Development/ Production:

Development Drilling 1561.41 1876.44 1541.22 1525.68 2109.24

Schemes 1165.00 1321.48 3444.35 3444.60 4687.20

Total 2726.44 3197.92 4985.57 4970.28 6796.44

Others

Capital 1421.18 1466.33 793.49 1028.00 1731.00

JVC 261.14 248.45 452.61 451.00 1422.00

R&D 90.04 129.66 139.16 155.00 135.00

Acquis. / Integration/ OVL 2300.00 730.00 170.00 734.00

Total others 1772.36 4144.44 2115.26 1804.44 4022.00

TOTAL PLAN 7142.86 10624.71 10849.89 11297.28 16521.44

Budget Estimates (BE) BE 03-04 BE 04-05 BE 05-06 BE 06-07 BE 07-08

Exploration:

Survey 876.23 855.30 855.39 2036.00 2516.00

Exploratory Drilling 3168.81 3134.13 2744.12 2955.00 3376.00

Other (APEX)

Total 4045.05 3989.43 3599.51 4991.00 5892.00

Development/ Production:


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Development Drilling 1721.04 1866.43 1800.02 1673.23 2350.80

Schemes 2094.66 2399.53 2767.81 3718.40 5224.00

Total 3815.70 4266.01 4567.83 5391.68 7574.80

Others

Capital 2047.81 996.07 1797.26 1758.32 2135.20

JVC 270.09 310.19 450.41 1244.00 2135.20

R&D 86.48 138.19 155.00 170.00 148.00

Acquis./ Integration/ OVL 43.13 300.00 170.00 799.00 1102.00

Total others 2447.51 1744.56 2572.67 3971.32 4891.20

TOTAL PLAN 10308.25 10000.00 10740.01 14354.00 18358.00

DEPARTMENTAL BUDGETING IN MEHSANA


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ONGC basically follows traditional and performance based budgeting.

We can say it traditional because the budget in ONGC is prepared on the basis of

previous year’s figures. By and large, as a matter of practice it has been observed that

each and every department estimates around 10% rise in allocation, for present year

under RE (revised estimates), over last year actual which is properly on account of

providing for inflation. The Corporation Budget section consolidation the figures and the

overall physical programme is correlated with the total financial impact before

submission and presentation to the board. Decision package are not made and important

activities are not ranked accordingly to their importance. This process of budgeting does

not eliminate budget for activity that is not important in present year.

Performance base budgeting is also followed in ONGC because it is the physical

programme, which is being setup initially and therefore it is converted into the financial

implication. All activities are decided in advance, which may be as follow:

1) Production of crude oil, natural gas etc.

2) Number and area of survey to be conducted.

3) Exploratory drilling (quantified in terms of meter age & number of wells).

4) Development drilling (quantified in term of meter age &number of wells).

After deciding activities to be performed each department manager prepares financial

budget from physical activity it has to perform. Financial budget is prepared under the

following heads:

1) Plan expenditure (CAPEX)

2) Non-Plan Expenditure (OPEX-Operating Exp.)

3) Exploration expenditure

4) Development expenditure

5) Revenue expenditure

6) Capital expenditure

7) R&D expenditure.


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The budget in Mehsana asset depends upon the various departments divided on the basis

of:

1) ASSET

2) SERVICE

3) FORWARD BASE

The estimation is done by the departments are:

Capital budget estimates

Three types of analysis are done by the departments for estimating their capital

requirements:

a) New capital acquisition.

b) Replacements.

c) Major overhauling.

The departments estimate what shall be their new capital equipment and

technology requirements, the areas in which the replacements can be done or

where the overhauling can serve the purpose.

Store and spares

The estimation of the stores and spares is done giving answers to the basis questions:

a) What is the present level of inventory?

b) What is the status of in process orders?

c) What is the lead time that may be taken?

d) The consumption pattern

The department clearly make it a point that the level should not be too high that may lead

to overstocking and not too less that may lead to stoppage of the work costing heavily to

the company.

Contractual

The estimation of the contractual is done under the following heads:

a) Hiring of vehicle.


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b) Repairs and maintenance services.

c) Manpower hiring

d) Hiring of equipment

The estimation is done in case of vehicles as the number of vehicles required in

the year adding up the estimation clause, for repairs and maintenance service

study of the possible areas requiring repairs in the next year, manpower hiring

usually remains fixed. The hiring of equipment estimation is also done on; the

basis of the targets being received by the particular document.

Manpower and other charges

The estimation is done by the budget officer in finance department preparing the

manpower and other charges budget using the traditional approach of incremental

adjustments.

Apart form the above, the main basis of estimation for all the departments is the physical

targets being received by the project which define the targets for the different

department and also the previous experience.

BUDGETARY CONTROL

BUDGETARY CONTROL


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The budgetary control in ONGC starts when the file containing the requirement of the

indenter reaches the stage of financial concurrence. After the budgets have already been

approved for the year, the indenter makes a case of his requirement and sends it to the

finance department for the concurrence to the budget controller. The budget controller

checks whether the requirement is a budgeted or a non-budgeted item and whether the

funds are available for it or not. If the funds are available, the concurrence officer checks

the other details for the PR and when satisfied, release the PR. In case, the funds are not

available, the re-appropriation is to be done which is in accordance with the BDP. The

study of the stages of the procurement of a material/ services makes the concept even

easier.

PROCESS OF PROCUREMENT IN ONGC:

1. The process of procurement starts with the identification of a requirement by a

section/ site or person who becomes the indenter. This indenter then prepares the

case in which he specifies:

a) What is required?

b) What is it required?

c) Where it is required?

d) How much does it costs?

e) What is the type of availability?

2. The file then moves for the administrative approval. BDP (BOOK OF

DELEGATED POWERS) defines from whom the approval is to be taken from.

The Administrative approval acts as green light for the file to move further.

3. After this, Financial Concurrence is done. The final allotments of funds are also

done. The details mentioned in PR are further checked.

4. PR (purchase requisition) is created. PR contains various details Like Material

code, quantity required in units, inventory stock, Quantity under process, the LPR

(last purchase rate) & any other necessary detail.

5. The file then moves further to the MRP controller who checks the details

mentioned in the PR. Presence of MRP controller is mandatory in each

department as he has a critical job to ensure that there is no overstocking.


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6. The file goes to Finance department, where Finance releases the funds.

7. Final clearance is given by CPA (Component Purchase Authority).

8. The fully released PR goes to the MM department from where the tenders

are raised. A tender committee may also be made in Case the value is above

5,00,000 which may include the Indenter, Representatives of Finance and MM.

The BEC (Bid Evaluation Criteria) is also formulated to evaluate and finalize

Bides received.

9. After finalizing the vendor and bids, P.O (Purchase Order) is placed.

10. The vender supplies the required materials demanded by ONGC as per the P.O.

11. The supplier sends his bills to finance. Finance department firstly ensures that the

goods are being received by MM through GRV (Goods Receipt Voucher), which

cannot be given the approval of the indenter. Indenter gives the approval only

after the required quality checks and inspections.

12. This process is complete with the payments being made to Suppliers.


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USER

IndenterISSUE VOUCHER

GRV

RECIEPT OF MATERIALS

PR

MRP CONTROLLER

RLER

AA

FC

ORDER PLACEMENT

PURCHASE FINAL CLEARANCE

FINANCE RELEASE

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RECENT CHANGES IN BUDGETING SYSTEM OF

ONGC, INDIA:

RECENT CHANGES IN BUDGETING SYSTEM OF ONGC LIMITED

With the advancement in technology and in order to keep abreast with the changing needs

of time, changes have taken place in the budgeting System of ONGC at a rapid pace. The

major changes have been discussed below:


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a) Change from Business wise to CRC based structure : Though not a proposed

changed in the Budget methodology but has implications on the corporate budget.

The organization structure that was earlier business group based i.e. five year

business groups (Exploration, Drilling Operations, Technical & Co-ordination)

has now been changed by CRC (Corporate Rejuvenation Campaign). The CRC

has restructure ONGC as Assets, Basins, Services, Institutes and regional offices

as strategic business units (SBU). In the present scenario these Sub’s become

virtual corporate within the real corporate and the key executives become the

managing directors of these virtual corporate. The CRC seeks to ensure horizontal

consistency within the organization through proper linkage of virtual Boards with

the ONGC Board.

b) Stage of Concurrence : In the earlier system ad item had to be initially provided

for in the budget merely for the sake of taking concurrence also. This led of to

inaccuracy in preparation of the budget in the real sense. Now, concurrence is a

precondition for keeping the budget of many items, which take considerable time

for procurement. This has been implemented to estimate accurately the capital

requirements.

c) Shifting from Natural head wise budget to Activity wise oriented Budget : In

the past natural head budget was the basis of control for the entire budgetary

process whereas it was converted into activity wise budget on the basis of certain

allocations. But in the present scenario, new budget software with improved

features has been developed in house to facilitate the line item wise budget at the

location and automatic conversion to activity budget based on pre-defined cost

allocations. Allocation of costs has been made in line with the accounts in order to

facilitate comparison. The Budget software is vibrant enough rework the activity

wise outlays as and when the line items are revised. The Software also permits

cost allocations modification on specific logical of the end user.


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d) Consumption based budget : Budget is presented to the Board and planning

commission in terms of activity wise financial outlays. Therefore consumption of

stores & spares needs to be considered. The Budget software has been modified

for compilation of item wise budget for stores & spares wherein the work centers

are required to feed the opening stock, consumption & planned closing stock as

per the corporate policy. The procurement budget gets automatically calculated.

e) Implementation of Integrated ERP Package : Information consolidation for

Efficiency (ICE) project has been implemented in ONGC all across under SAP,

Under the present scenario all the different modules of Material management,

Logistics, Financial management, Costing, Project System, Human Resource etc.

Has information system. This has provided a seamless integration of the FM

module

(wherein the Budgetary controls are located) with all modules of SAP.

Accordingly the availability of funds is being checked & updated in the system

on line basis as and purpose of review the detail status is available on a single

window system e.g. Purchase Requisition-Purchase order-Material Receipt-

payment details.

f) Budgeting for Centralized procurements : ONGC being a large organization

accommodates request from the decentralized work centers for bulk purchase

items. The new budgeting system provide for generation of purchase requisition

at different work centers/ funds centers, does the consolidation of purchase

requisitions at the center unit, and place the order from the centralized location

against the budget kept by the respective locations. On receipt of the material the

utilization gets reflected at the funds centers. Thus budgeting for such

procurements is also effectively managed with the help of systematized

integration.

g) Introduction of Commitment Budget : The concept of commitment budget has

been recently introduced with the object of facilitating the processing of


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procurement for long lead items. It has mitigated the problem of throw forward

and assists in ascertaining the budgetary needs more precisely.

h) Utilization Reporting System : there is a ministerial requirement for submission

of monthly expenditure report for the utilization of budget. This is being reported

on the basis of natural head compilation & cash basis. However, in the recent past

with the implementation of ICE, the emphasis is on preparation of Activity wise

budget on quarterly basis and gradually moving towards monthly basis. This has

been necessitated in order to move in random with the physical achievement and

accrual concept of accounting.

i) Budget Report : Generation of various budgetary reports has now been made

possible with the modifications and improvements incorporated under the ICE.

Reports by exception have made the task of review and monitoring more easily

and quickly.

j) Accuracy in booking of expenditure: Before the implementation of ICE for

every budget item there was an Internal Order (IO) number. In case where a

wrong internal order was punched, the utilization would have been reflected

wrongly. Now the budget is kept at purchase requisition stage from where it

automatically captures the correct item head. The pre-audit officer does not

require giving additional details with reference to the budget. Thus, changing of

the expenditure is done under the correct account head and the chances of human

error have been largely mitigate.

k) Alignment with CRC : The funds center hierarchy has been aligned with the

CRC structure to reflect the realities of the organization structure. The funds

center is therefore kept at Sub-surface, surface, support etc. The funds availability

is now checked at the Fund center + Commitment Item. The commitment item is

linked with the General Ledger (GL) heads of accounts and the budgetary control

is at CI level.


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l) Budget monitoring mechanism : No planning system is complete without proper

monitoring and control mechanism. In ONGC also budget utilization is monitored

on periodic basis. The monitoring system has been strengthened and emphasized

upon in the recent past on account of two reasons, firstly in order to have a well

informed management system and secondly because of the query arising from the

ministry of petroleum, MOU targets, instructions from the standing committee

etc. The monitoring of budget is being done at project level as well as corporate

level. Apart from it this is being reviewed on monthly basis, quarterly basis as

well as half yearly basis and at different levels of the management.

OBSERVATIONS / CONCLUTIONS /

SUGGESTIONS


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OBSERVATIONS

1. During the course of study it has been observed that the basis concept of

budgeting, as a tool for planning and financial control is not taken in the perfect

manner. Budget is prepared largely for the sake of presenting before the

management and the legislature and acts as a part of the mechanism for

allocation and approval of expenditures.

2. It has been observed that there is a tendency of over provisioning in the budget.

This is on account of lack of awareness, proper projection of time schedules (lead

time in various processes), administrative reasons etc. this has led to the serious

problem of under utilization and query from the ministry. The astonishing part

is that the utilization hovers around 70% of the planned expenditure, which is

certainly to be pondered over.

3. The operating expenditure showing a continuous up trend. The budgeting

process lacks in identifying the controllable & uncontrollable expenses and reason

out how to control them in the long run.

4. In ONGC the budgeting process starts with a bottom-up approach, which gets

consolidated gradually. But, thereafter when the fine- tuning is made at the board/

ministerial level the approve budget aggregates with reference to he last

year’s utilization, with slight modifications/ alterations factoring the major

projects during the year.

5. Lacunae is in the implementation of the administrative process for processing

the already existing proposal in the budget e.g. Administrative approval,

Expenditure sanction, concurrence, tendering, placement of work order and so on

which adds up to the difficulties in visualizing the future outcomes from the

perspective of budgeting.


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6. As per the instructions from the top management the virtual corporate are

supposed to work out the financial outlays corresponding to the approval physical

targets on the basis of per unit cost of the activities. However, there are no

specific guidelines due to the varied nature of the industry, which leads to large

variations in the budgeted and actual numbers.

7. Considerable flexibility has been given to the work centers for meeting out their

budgetary requirement.

8. The Budgeting system and approach of the management in ONGC is very

positive, in the sense that if facilitates the smooth functioning of the organization.

Budget is mainly focused on having a well-managed information system so as

to help the top management in decision-making.

9. One of the major findings during the course of interaction with the officials of

ONGC was that, the concept, essence and implication of budgeting was not

properly understood by many employees who are also involved in contributing to

the budgeting exercise. Some of them had a preconceived notion that it would be

safe & comfortable to provide for any expenditure in the budget. Adequate

thought and plan action for materializing the planned budget was not taken up that

seriously. This adds up to the difficulty with the top management in allocation of

resources in order to priorities. Some genuine demands get chopped off as against

the low priority items.

Last but not the least is the culture of working inherited as a typical government concern.

The main reason is the strict compliance in accordance with the Delegated powers &

procedural delays which at times results to loss of opportunity.


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CONCLUSIONS

Preparation of budget is a collective effort, especially for an organization of the size of

ONGC. Obviously, all the persons involved in the process of the exercise of budget

cannot be expected to have a uniform way to understanding and interpreting. It is

therefore required that the objective & guidelines from the top management should be

very and clear and the middle management should monitor properly before forwarding

the budget proposals.

The observation regarding underutilization is much attributed to the inherent problem

with the procedure of working in ONGC. The major proposals (having considerable

impact on the budget utilization) involving huge outlays are normally long term

programs, the execution of which has to undergo lots of clearances and procedures,

which cannot be predicted with certainty, hence the period over-run in utilization.

The tendency of over provisioning in budget is also because of the cyclic effect. From the

experience in the past the end user expects certain curtailment in case of normal budget

and hence keeps a cushion for it while preparing the budget.


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A final word to conclude is that “Easier said than done”. Subjectively and no paper the

work seems to be logical, but when the fact comes on to the implementation in the literal

stage, the scene is not same. The unique nature of the industry, its peculiarities &

complexities cannot be totally avoided.

However, if there is a will, there is wish. The top management has a cardinal role to play

in the implementation of budgeting procedure. Much depends upon the will to manage,

the commitment to achieve and the level of involvement. If the top management

decides to make the budgeting procedure more effective, they can do it by strengthening

the persons involved in the process and by giving it the desired importance. But like most

new management tools, success requires balancing the approach with common sense,

human relationship and creative problem solving techniques.

SUGGESTIOS

Based upon the understanding and observation of the existing system of budgeting in

ONGC it is felt that though initiatives have been taken/ are being taken, there is a lot of

scope for improvement in order to make the budgeting system more efficient and

effective. Some of the suggestions are mentioned below:

1. The focus of Budgeting procedure should be on the Budget estimates (BE)

the next year and less on revision of the estimates for the ongoing year. The

result is that the schemes of the next financial year are given less importance than

the modifications in the budget of the current year. The budget process thus loses

its significance as a planning tool – the prime objective & basis concept of

budgeting. As a result the figures of the next year are not accurate and require a

lot of modifications when they are to be reviewed next year. Thus the problem of


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inaccuracy of data is again repeated. Only the adjustments should be allowed in

RE. Hence, the importance should be shifted on budgeting of BE.

2. If budgeting has to be emphasized from the management point o view, somebody

has to be entrusted with the responsibility of ensuring the accuracy. The project

coordinators are the best suited and suitably placed persons who are in a position

to access the requirements accurately. Hence, they should be strengthened. Some

sort of incentive/ recognition scheme could be implemented for motivating the

budget coordinators.

3. The technical and financial personnel having proper exposure and knowledge

in both the fields should interact in a reiterative process before preparing a

realistic budget.

4. In order to avoid the negative remarks (and thereafter giving justifications) from

the ministry with reference to under utilization of the planned budget, the

budgeting procedure should be based on realistic basis. Proper vision of the

external factors, time consumed in obtaining government clearance, the

procedural and administrative delays in processing of the budget. Experience

from the past provides sufficient inputs for proper planning.

5. It has been observed that there are strict norms for re-appropriation of budget.

This has also led to the over provisioning in the budget. Adequate flexibility for

re-appropriating the budget would mitigate the problem. The administrative

powers in respects to this shall be diluted so as to facilitate proper utilization of

the available budget.

1) Emphasis should be provided on the project planning & project scheduling.

Some sort of periodicity study should be conducted so as to project the jobs more

accurate and precisely and avoid switchover or resorting to throw forwards.


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2) To a great extent the budget in ONGC is still input oriented, not linked with the

results/ targets/ objectives/ initiatives. Hence, the focus should be concentrated on

the schemes and major projects rather than on the line items.

3) The management should make a drive for implementation of zero base

budgeting & strengthen the process of performance budgeting. The implementation

of ZBB should percolate from top to bottom and in a phased manner.

In our opinion, the budgets of the centralized procurements should be kept with the

procurement section in head quarters which is also considered as a reason for under-

utilization at Asset level.

Using the previous year figures, an effort has been made by me to show the actual state of

affairs to the company of the increased differences between BE, RE and Actual.

Year 2005-06 (in lakhs):

BE-------------------------58,590.98

RE-------------------------63,083.88

Actual---------------------54,888.65

Now we see that,

RE – BE = 4492.9

RE – Actual = 8095.23

BE – Actual = 3602.33


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The Approval for BE is taken in advance in the preceding year for all years & RE gets the

approval in October. As we know that money always has a time value and opportunity

cost attached to it, this is an alarming signal to the company.

% utilization against BE – 93.85%

% utilization against RE – 87.17%

Therefore,

1) Attention and focus should be attached while preparing the budget be company is

able to productively utilize its limited resources.

2) In the competitive of today, the approval exercise of RE should be completed by

31st May.

This study is confined only to one of the projects of ONGC-Mehsana Asset. The overall

advantage that the company will gets as a whole is worth given a thought.

As a result, on the basis of the study conducted it can be concluded that budgeting is

a very useful tool in the hands of management and can prove to be effective,

provided, it is given due importance and necessary changes are implemented with

the changing needs of time & technology.


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MY CONTRIBUTION TO THE ASSET


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MAN POWER BUDGET:

At the time of compilation of the budgetary requirements received from the various

department of the asset, the budget officer in finance department prepares the manpower

budget.

The manpower budget is the one on which no control can be exercised and a traditional

approach of increase by a pre-determined percentage is being done.

During my study period in the asset, the budgets of the various departments were being

prepared and send to finance section. I luckily got the opportunity to prepare the

manpower budget for the year 2008-09 for Mehsana Asset. Apart from the various useful

learning’s from the organization; this practical study of manpower budget added

extensively to our knowledge.

Important learning’s from this opportunity were:

The predetermined percentage increase from the previous years actual is being done. This

percentage increase is decided with a rational approach by the budget officer (finance)

himself.

The important classifications done in the manpower budget of all the departments are:

1) Officers

2) Staff

This classification is done because there are certain allowances that differ in both the

cases. Like the allowance professional pursue is only in the case of officers and canteen

and productivity allowances is only there in case of staff. However, the rates of increment

in both the cases are also different.


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The classification under the head plan and non-plan is done on the basis of the head to

which they belong but there are certain heads that are necessarily non-plan irrespective of

the head they belong. They are:

1. Employer contribution to CPF

2. Employer contribution to CSS

3. Leave encashment

4. Bonus/ ex-gratia

5. Annual incentives

These are directly changed to P&L A/C.

There are also some heads on which the increment is not done very often.

They are:

1. CEA (Children Education Allowance)

2. Washing allowance

3. Nourishment allowance

4. Bonus

5. Merit scholarship

6. Hostel subsidy

Some important heads of the manpower budget are:

1. BASIC PAY :

Increment:

Officers - 5% Staff - 4%

4% - every year increment in basic pay of both officers and staff

1% - for staff promoted as officer

2. DEARNESS ALLOWANCE :

Increment:


3% - over and above basic pay provision


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3. HOUSE RENT ALLOWANCE :

Increment:


Nearly equal to the basic pay increment, this comes around 20% of basic pay.

4. DRILL SIDE COMPENSATORY ALLOWANCE :

Increment:


However, the maximum limit is decided which is Rs 3600 in case of office employees

and Rs 4200 in case of field workers, whichever is lower is being given.

It also depends on the basic pay.

5. REMOTE/ TRIBAL ALLOWANCE :

No increment is being given from the last year as no budget is to be kept for the

succeeding year. As this allowance is given in case of employees having transfers

from remote areas as their due payment.

6. PROFESSIONAL PURSUIT :

Increment:

Officers - 5%

It is in the case of officers only.

7. CONTRIBUTORY PROVIDENT FUNDS:

CPF = 12% OF (Basic pay +DA) - 541

8. COMPOSITE SOCIAL SECURITY SCHEME (CSSS) :

566/month

9. KITS AND LIVERIES :


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It is the uniform allowance given once in four year.

10. LFA (LEAVE FAIR ASSISTANCE/ ALLOWANCE) :

It’s a four year scheme

One time for anywhere within India, three time for home town, whether you will go

or not.

11. LEAVE AVAILMENT :

The amount will be reimbursed only when you will actually.

This allowance is non-taxable.

12. LEAVE ENCASHMENT :

If leave not availed, cash encased. This allowance is taxable.

OTHER CHARGES-

In the case of expenditure under the head OTHER CHARGES the fixed percentage of

10% increment is given over previous year’s actual expenditure for all the

expenditure heads. It is only for the inflation factor.

Some of the items included in other charges are:

1. T.A. & D.A.

2. Training expenses

3. Stationary and printing

4. Marine insurance

5. Other misc. expenses etc.

The budgeted figures of the manpower budget for the year 2007-08 of different

departments is added in the annexure.


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ANNEXURE


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LOCATION OF ONGC WORK CENTRES


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ORGANOGRAM


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MEHSANA ASSET STUCTURE

Head


DirectorOnshore

Asset Manager E DA K Gupta

Head Surface

Head Support

Head HSE

Services

MMFinance HR/ER Info-Com Logistics

Head Logging services

Head Well Services

Head Surface

Head Sub-Surface

Head Engg. Services

Head Drilling Services

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ONGC PERFORMANCE GRAPHS


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ONGC

VISION

To be a world-class Oil and Gas Company integrated in energy business with dominant

Indian leadership and global presence.

MISSIONWorld Class

1. Dedicated to excellence by leveraging competitive advantages in R&D and

technology with involved people.

2. Imbibe high standards of business ethics and organizational values.

3. Abiding commitment to safety, health and environment to enrich quality of

community life.

4. Foster a culture of trust, openness and mutual concern to make working a

stimulating and challenging experience for our people.

5. Strive for customer delight through quality products and services.

Integrated In Energy Business

1. Focus on domestic and international oil and gas exploration and production

business opportunities.

2. Provide value linkages in other sectors of energy business.

3. Create growth opportunities and maximize shareholder value.


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Dominant Indian Leadership

Retain dominant position in Indian petroleum sector and enhance India's energy

availability.


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1. http://www.ongcindia.com

2. http://www.ongcreports.com

3. Financial Management - Prasanna Chandra

4. Management Accounting - Khan and Jain

Published Reports:

1. Annual Reports of ONGC Limited

2. Budget Circulars of ONGC Limited

3. Various News Letters of ONGC Limited


http://www.ongcreports.com/

http://www.ongcindia.com/

ONGC


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