1. DESIGNING OF EFFECTIVE CONTRACTS AT
ONGC
UNDER THE GUIDANCE OF- PRESENTED BY-
Dr . Abhijeet Singh Rohan kumar
Faculty of Management Studies MBA-IB 3rd SEM
BHU Roll no - 39
2. Flow of Presentation
Company Profile
Company‟s SWOT analysis
Research Methodology
Data Analysis
Findings
Suggestions
Limitations
3. 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.
4. 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).
5. 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, C
uba, Colombia, Nigeria, Nigeria Sao Tome
JDZ, Egypt, Brazil, Congo, Turkmenistan, Syria, Venez
uela and United Kingdom.
6. 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.
7. 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
8. Financial Performance of
ONGC
Net Profit (in crore)
20000
18924
18000
16702 16768
16126
16000 15643
14000
12000
10000
Net Profit (in crore)
8000
6000
4000
2000
0
FY'07 FY'08 FY'09 FY'10 FY'11
13. 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 c
ost.
•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.
14. Opportunities
•ONGC has an opportunity for growth in overseas mar
ket 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.
15. REASEARCH
METHODOLOGY
REASEARCH 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.
16. Research design
Descriptive research
Data Collection Method
The 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
17. PROCUREMENT PROCESS
Asset wise
Budget Made by Physical Material
target
ONGC Requirement
assessment
Formation of Handing of P.R Preparation of
Tender to M.M Purchase
Committee Department Requisition
Identification of
Float Tender Bidder‟s Quotation Lowest (L1)
Bidder
Dispatch of CONTRACT
Material from Purchasing FORMATION
supplier
Payment Made to Material Dispatch of
supplier received by material to
ONGC respected assets
18. 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)
19. 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
20. 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.
21. 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
22. 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.
23. 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.
24. 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.
25. 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.
OR
Company shall give 14 days‟ notice to
contractor for the termination of contract.
26. 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.
27. 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.
28. 7. Obligations of ONGC-
Overall supervision, co-ordination and
project Management at site.
Proper utilization of equipment and
services.
Monitoring of performance and progress
Each 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.
29. 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.
30. 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
31. 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.
32. 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.
33. Three major cases have been
taken for analysis:-
CASE 1- A contract with M/s HCL Comnet Ltd.
Description % cost of material supplied
Invoice-1
On receipt of 100% material at all sites Payment is done for 70%
Invoice-2
On completion of installation Payment is done for 15%
Invoice-3
On satisfactory overall system testing Balance 15% is done.
34. CASE 2- A contract with M/s SPANCO
Ltd.
Payment Procedure:
Description % cost of material supplied
Invoice-1
On receipt of 75% material at all sites Payment is done for 80%
Invoice-2 Payment is done for 10% of cost of material
On completion of installation for which 80%payment is already made in
For balance 25% of material invoice-1.
90% payment is done for remaining 25% of
material.
Invoice-3 Full payment is done (10%)
On successful commissioning of the system &
its integration.
35. CASE 3- A contract with M/s HCL
INFOSYSTEMS LTD.
Payment Procedure-
Description % cost of material
Invoice-1
On receipt of 60% material at sites Payment is done for 70%
Invoice-2
On receipt of 100% material at sites Payment is done for 70%
Invoice-3
On issuance of certificate of satisfactory system Payment is done for 20% for which 70%
testing & acceptance payment is already made.
Invoice-4
On issuance of certificate of satisfactory overall Payment is done for 5%
system testing
Invoice-5
On issuance of final certificate Balance 5% payment is made.
36. 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.
37. 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
38. 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
39. 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.
40. Limitations
Every 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.
