INTERNSHIP PROJECT ON BUDGETING PROCESS IN ONGC

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF THE DEGREE OF BACHELOR OF BUSINESS ADMINISTRATION

SUBMITTED BY: SHUBHAM NAGALIA PR No. 11021021070

SYMBOSIS INTERNATIONAL UNIVERSITY NOIDA

INDEX
PAGES

Chapter 1 Introduction ONGC Budget Chapter 2 Research Methodology Chapter 3 Data Analysis & Interpretation Chapter 4 Recommendations Chapter 5 Conclusion Bibliography 1-14 15-54 55-56 57-67 68-69 70

INTRODUCTION COMPANY PROFILE

Prelude to ONGC
Oil & Natural Gas Corporation Limited (ONGC) is an India Public Sector Petroleum Company.

ONGC: Historical Profile 1955 Oil and Gas Directorate, GoI

After independence, the National Government realized the importance of oil and gas for rapid industrial development and its strategic role in defense. Consequently, while framing the Industrial Policy Statement of 1948, the development of petroleum industry in the country was considered to be of utmost necessity. In 1955 a Petroleum Division was formed within the Geological Survey of India to take up oil exploration ourselves. This resulted in formation of the Oil and Natural Gas Directorate by end of 1955 at Dehradun. This Directorate later became Oil & Natural Gas Commission (ONGC).

1956 Oil and Natural Gas Commission

Keshava Deva Malaviya, Minister of Natural Resource and Scientific Research (NR&SR) realized the importance of an indigenous petroleum industry in India and laid the foundation of ONGC in August 1956. The scientists and engineers of Oil Gas Commission, fuelled by his pioneering spirit, have made ONGC the Numero Uno Exploration & Production Company of Asia.

1959 Autonomous Statutory Body

Raised from mere Directorate status to Commission, it had enhanced powers. In 1959, these powers were further enhanced by converting the commission into a statutory body by an act of Indian Parliament.

1994 Public Limited Company

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

1999 Strategic Alliance

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.

2003 Entering New Horizon

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.

2005 ONGC Golden Jubilee

On August 14, 2005 ONGC stepped into its 50th year. During these 50 years ONGC witnessed a rapid rise to become the most valuable NAVARATNA company of independent India. Since its inception, ONGC has transformed the countrys upstream sector. Its activities are spread throughout India and significantly in overseas territories, the hallmark of ONGC is its self-reliance and development of core competence in Exploration, Drilling & Production 4activities at globally competitive level. ONGC is the only fullyintegrated petroleum company in India, operating along the entire hydrocarbon value chain.

ONGC: Activities Undertaken

ONGC has undertaken several physical activities in the petroleum sector. The activities can be divided into Upstream and Downstream Activities. Upstream Activities Exploration Production Survey (Seismic Survey), Drilling (Exploratory Drilling & Development Drilling) Development Downstream Activities Refineries SEZ Services Power

ONGC: Financials
ONGC posted a net profit of Rs. 167.016 billion (2007-08), the Highest ever by any Indian Company Net worth Rs. 699 billion Practically Zero Debt Corporate Contributed over Rs. 300 billion to the exchequer

ONGC Group of Companies

ONGC has entered into different activities through its subsidairy companies. Following chart shows the group companies of ONGC.

Chart :ONGC Group Companies

Mission & Vision

To be a world-class Oil and Gas Company integrated in energy business with dominant Indian leadership and global presence.

World Class
Dedicated to excellence by leveraging competitive advantages in R&D and technology with involved people Imbibe high standards of business ethics and organizational values Abiding commitment to safety, health and environment to enrich quality of community life Foster a culture of trust, openness and mutual concern to make working a stimulating and challenging experience for our people Strive for customer delight through quality products and services

Integrated In Energy Business

Focus on domestic and international oil and gas exploration and production business opportunities Provide value linkages in other sectors of energy business Create growth opportunities and maximize shareholder value

Dominant Indian Leadership

Retain dominant position in Indian petroleum sector and enhance Indias energy availability

Future Plans
ONGC looks forward to become an integrated energy provider, with: New Discoveries and fast track development Equity Oil from Abroad Downstream Value Additions & Forward Integration Leveraging state-of-the art technology and global best practices New Sources of Energy Production from small and marginal fiel

ACHEIVEMENTS

Ranked as the most respected Public Enterprise in India in 2007 Business World Survey, with 19th position in the league of the most-respected Indian Corporate(s). Rated Excellent in MOU Performance Rating for 2008-09 by the Department of Public Enterprises, Ministry of Heavy Industries in Public Enterprises, GOI.

Oil Industry Safety Directorate (OISD) has selected Ahmedabad Asset and MRPL for the year 2008-09 (as number one in Group-4 category (Oil & Gas Assets) and Second in Group-1 Refinery category respectively).

Topped the visibility metrics in Indian Oil and Gas Sector and the only PSU in the top 10 list of Indian Corporate newsmakers.

Golden Peacock Global Award 2007 for Excellence in Corporate Governance 2007, for the 3rd consecutive time, conferred by World Council for Corporate Governance.

Bagged the coveted winners trophy of the maiden Earth Care Award for excellence in climate change mitigation and adoption under the category of GHG mitigation in the small/medium and large enterprises.

Conferred with Infraline Energy Excellence Award for its services to the Nation in Oil & Gas Exploration and Production category.

Bestowed with Amity Award for Excellence in Cost Management.

COMPETETIVE STRENGHTH

Strong intellectual property base, information, knowledge, skills and experience Maximum number of Exploration Licenses, including competitive NELP rounds. 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 owns and operates more than 15000 kilometers of pipelines in India, including nearly 3800 kilometers of sub-sea pipelines. No other company in India, operates even 50 per cent of this route length.

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Financial Position
The fiscal 2007-08 was yet another year of growth and success for the company, which along with other group companies excelled in its endeavors. ONGC has come out with laudable improved performance, despite various odds against it in the year 2007-08. It has achieved the highest ever Sales Revenue of Rs. 601,370 million and Net Profit of Rs 167,016 million during 2007-08. That reflects an increase of 5.7% and 6.8% respectively. The total Net Worth of the company has increased with healthy 14%.

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FRONTIER BASINS
India is bestowed with 26 sedimentary basins; spread over 1.78 million square kilometres offshore areas, with a prognosticated hydrocarbon resource base of 21 billion tonnes that has been established as proven reserves. Seven basins are presently producing, rest being exploration, awaiting listing on the hydrocarbon map of India. Of the nineteen onland, seventeen are categorized under Frontier Basins, which either have indication of non shows or have perceived prospectivity by analogy with other similar petroliferous basin and these basins are least explored and in the knowledge building stage of exploration. These frontier areas hold the potential to contain vast hydrocarbon accumulations and discoveries that could make the difference between self-sufficiency in energy sector area. The frontier basins of yesteryears are the producing basins of today and the frontier basins to be converted as producing basins of the future. The history of frontier basins, erstwhile NRBC, dates back to the inception of ONGC entrusted with the stupendous task of carrying out exploration for both hydrocarbons and the hereto non-producing onland sedimentary basins of India a spectrum that reveals in the geographical disposition (from the northern state of Jammu and Kashmir to the southern) or geomorphology (from the high mountainous areas of Spiti to the plains of Ganges extensional basins like Gondwanas to compressive regimes like Himalayan Foothills as young as the Karewa Basin to as old as the Proterozoic Vindhyan Basin) or logistics(the populated areas of the Zanskars to the densely populated and well connected areas of civilization in northern India). It is such diversity of challenges that the frontier basins thrives in its pursuit of hydrocarbons difference between Indias self-sufficient in energy sector and economic bankruptcy

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INTRODUCTION
Management is declared efficient if it accomplishes its objectives with minimum efforts and costs. The various activities within a company should be coordinated by the preparation of plans of actions for future periods. So, planning has become the primary function of management these days. Most of the planning relates to individual situations and individual proposals. However, this has to be supplemented by continuous comparisons of the actual performance with the planned performance. These detailed plans are usually referred to as budgets. Budget is one of the essential tools available to the Management for Planning and Control of organizations operational and financial activities and helps in regulation of expenditure in consonance with organizational goals/ objectives. In an organisation like ONGC, where operations are enormous, nature of the business complex & expenditure involved are huge; the Budget assumes a very special significance. It sets forth both Physical and financial targets, intended to be achieved considering the organisational objectives in a given time frame with respect to various activities viz.: Exploration, Drilling, Production, R&D, JV operations etc., spread over different Assets, Basins, Plants, Institutes, JV Groups. It is with respect to the significance of budgetary control in the management of a business enterprise that the project, Budgeting system in Frontier Basin of ONGC was undertaken. The project focuses on various aspects that are involved in the budgetary control system. This project report intends to give a brief overview of the budgeting system being practiced in Oil and Natural Gas Corporation Ltd. The report also gives an insight of the performance of ONGC for the past five years. An analysis of the performance has been made by finding out the variances (actual vs. target). This analysis will help the company to know the areas where major variations have been detected. It will provide a basis for future budgeting programme. Finally, based on the findings from the study, certain conclusions have been drawn and recommendations for the performance improvement are given.

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OBJECTIVES

The project on budgeting systems has been undertaken while keeping the following objectives in consideration. 1. To learn and understand the budget forecast, activity planning, preparation of budget, monitoring and controlling of budget. 2. To analyze variance of actual performance with the target set. 3. To highlight the key areas where action needs to be taken. 4. To analyze the past budgets.

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LIMITATION
1. Time Limitation 2. Exposure limitation in production area 3. Unable to visit store location physically due to far off location 4. No physically job at evaluating is in software form

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BUDGETING

Definition
A Budget is a financial and/or 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. The process of preparation of budgets is called Budgeting. A Budget is a comprehensive and coordinated plan expressed in financial terms for the operations and resources of an enterprise for some specified period in the future. Simply put a budget is a formal statement made based on past experiences to analyze and monitor the future expenditure and revenues from specific activities. It helps to coordinate the activities of the organization. A good budget is characterised by the following:
a) b) c) d) e)

Participation: involve as many people as possible in drawing up a budget. Comprehensiveness: embrace the whole organisation. Standards: base it on established standards of performance. Flexibility: consider changing circumstances. Feedback: constantly monitor performance. Analysis of costs and revenues: this can be done on the basis of product lines, sections

or cost centres

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BUDGETARY CONTROL PROCESS OVERVIEW Budgetary controls definition

Budgetary control is a technique whereby actual utilization is compared with budgets to make the budget an effective financial control tool. Any differences/ variances are the responsibility of key individuals who can either exercise control action or revise the original budgets after providing necessary justifications to the top management. Budgetary control is defined by the Institute of Cost and Management Accountants 1 (CIMA) as: The establishment of budgets relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual results with budgeted results, either to secure by individual action the objective of that policy, or to provide a basis for its revision. Budget is a formal statement of the financial resources set aside for executing specific activities in a given period of time. It helps to coordinate the activities of the organization. A good budget is characterised by the following: Participation: involve as many people as possible in drawing up a budget. Comprehensiveness: embrace the whole organisation. Standards: base it on established standards of performance. Flexibility: consider changing circumstances. Feedback: constantly monitor performance. Analysis of costs and revenues: this can be done on the basis of product lines, sections or cost centres.

CIMA - The Chartered Institute of Management Accountants is a leading membership body in UK that offers an internationally

recognised professional qualification in management accountancy.

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Importance of budgetary controls

The budgetary process is a significant tool of financial control vested with the management of a commercial entity. This control mechanism becomes more prominent for a flagship Navratna Public Sector Undertaking (PSU) like ONGC. The budget exercise incorporates the entire gamut of plan and non-plan activities during the budget year. Since the Company is a Government of India (GOI) undertaking, plan budget of the Company forms part of the plan budget of GOI through its administrative ministry i.e. Ministry of Petroleum and Natural Gas (MoP&NG) The importance of budgetary controls has increased in the present context when most of the producing fields in the Company have entered the maturity phase. As a result, while the production levels are under pressure, the intensified secondary method of production tends to be accompanied by rising recovery costs. This poses a bigger challenge with regard to establishing effective cost control mechanism in the entire spectrum of activities. Another area of major concern is increase in rates of all oil field services and equipments with increase in Exploration and Production (E & P) activities by all E & P operators across the globe due to prevailing high prices of crude oil.

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Advantages of budgetary controls

Key advantages of budgetary controls are given below:
a)

Compels management to think about the future and forces management to draft detailed plans for achieving the targets of each section and operation;

b) c)

Promotes coordination and communication within the organization; Clearly defines areas of responsibility and ensures that in-charges/ managers of work centers are responsible for the achievement of budget targets for the operations under their control;

d)

Provides a basis for assessing the performance of the organization at various levels through a variance analysis. Budget is a yardstick against which actual performance is measured and assessed;

e)

Deviations from budget can be investigated thereby enabling remedial action to be taken on an ongoing basis based on the variances observed;

f) g)

Motivates employees by participating in the setting of budgets; and Improves the allocation of scarce resources.

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Objective
The objective of this manual is to:
a)

Facilitate the company in the preparation of its revised budgets, budget estimates and commitment budgets;

b) c)

Facilitate the company in monitoring actual performance against the planned budget; Adhering to statutory requirements with regard to declaring the Companys plans to be included in the GOIs five year plans;

d)

Define the roles and responsibilities of each location, region and Corporate Budget Cell (CBC) vis--vis budget preparation and monitoring.

Scope
The procedures and guidelines provided in this manual are applicable to all the locations within the Company. The following topics have been covered in this chapter:
a) b) c) d)

Budget formulation; Execution and operation of approved budget; Budget monitoring; and Budget for interest bearing personnel advances.

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BUDGET TERMINOLOGY AT ONGC

a)

Plan expenditure (Capex): Plan expenditure includes capital expenditure and

new schemes in a Financial Year (FY). Plan expenditure adds to the existing capacities and includes the following:

Schemes/ Lump Sum Turn Key (LSTK) projects; Fixed assets to be acquired (other than intangible assets); Survey expenditure; Exploratory drilling expenditure; Developmental drilling expenditure; Activities related to Joint Venture (JV), capital expenditure; and Research & Development (R & D) expenditure.

b)

Non-plan expenditure (Opex): Non-plan expenditure is operating expenditure

arising out of schemes/ projects implemented and fixed assets acquired in the previous years so as to maintain the existing capacities. Non- plan expenditure includes the following:

Staff expenditure; Manpower cost; Consumption of stores, spares and consumables; Insurance; Power & fuel; Repairs & maintenance; Contractual payments including hire charges; Workover operations; Water injection desalting and demulsification;

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Pollution control; Transport expenses; Other production expenditure; Transportation and freight; Idle rigs; Project overheads; Regional overheads; Headquarters overheads; and Other expenditure.

c)

Natural head-wise budget: This budget includes the total plan and non-plan

expenditure for all assets, basins, institutes, JVs and corporate functions together, each divided into natural heads, viz, capital, stores & spares, contractual payments, manpower and other charges. Capital expenditure in case of non-plan expenditure includes only replacement capital items charged off to revenue. d)

Activity budget: This budget represents the total plan and non-plan expenditure for

all assets, basins, institutes, JVs and corporate functions together. The plan expenditure is further divided activity-wise, viz, survey, exploratory drilling, developmental drilling, capital, R & D expenditure, JVs plan expenditure, etc. The non-plan expenditure is divided into operating expenses (for the Company and JVs) and purchases of condensate, gas and other products. e) Commitment budget: This budget represents provision for long lead procurements and contracts including long term supply orders where delivery of material/ utilisation of services are expected after two years from the end of the current financial year (FY). For example: commitment budget for FY 09-10 prepared in FY 07-08 will include anticipated deliveries/ utilisation of services during FY 09-10 and beyond. f) Operations budget: This budget represents operating expenditure for the current FY, next FY and the FY subsequent to the next FY.

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g) Fund Centre (FC): FC is a structure in the Funds Management (FM) module in SAP that shows the responsibility for managing the application of funds associated with it. It is also used to budget and perform budget availability checking. Under the CRC structure each CRC entity has been identified as a FC in SAP. h) Commitment Item: Budgets are stored in Commitment Items (CI) in SAP. The commitment items in FM module have been mapped with the relevant general ledger codes in the FI module to facilitate checking of fund availability at the time of budgeting. Equipment is an example of a CI. i) Foreign exchange budget: Estimated expenditure in foreign currency is converted in INR at rates given by the Corporate Budget cell and included in the RE, BE and CBE.

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ONGC
ASSETS BASINS PLANT JV SERVICES

PLANNED

NON PLANNED

SURVEY

EXPLORATORY DRILLING

DEVELOPMENT DRILLING

RESEARCH & DEVELOPMENT

OTHERS

CAPITAL

Activities

STORES

SPARES

MANPOWER

Natural Heads

CONTRACTUAL

Figure 1

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STATUTORY PROVISIONS WITH RESPECT TO PREPARATION OF BUDGETS

a) b) c)

Budgets to align with the targets set in the Memorandum of Understanding (MoU) signed with the GOI. Budgets to align with targets forwarded to MoP&NG for the purpose of five year planning: Annual budget to be forwarded to MoP&NG

The budgetary process provides flexibility to the managers in their operations and at the same time makes them accountable for cost of operations. At the corporate level, budget allocations to the assets, basins, services, institutes and corporate functions are made on the basis of physical work programme and overall resource generations. The assets/basins, institutes and service chiefs have operational flexibility to provide for the budget items and re-appropriation within the budget items. In line with the internationally accepted accounting methods followed by the Company, expenditure is booked to various activities viz. survey, exploratory drilling and development drilling and budget is presented in terms of these activities, besides capital expenditure. The process of activity cost build up is done at each asset / basin by accepting the allocation cost from various services within the work centre and transfer of cost from one work centre to another to depict the activities in the geographical location where the physical activities are accounted as per requirement.

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Figure 2. Depicts the flow of information and the functions/ personnel involved in the exercise of budgetary control.

Figure 2

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The budget exercise is initiated with the preparation of physical targets which is the responsibility of asset, basins and plants in consultation with the service heads. Physical targets once approved by the respective directors are then forwarded to the CBC for review, consolidation and inclusion in the budget agenda to be presented to the Board of Directors (BoD). The next step is compilation of the financial budget, the information for which flows from assets/ basins/ plants at location level, gets compiled at the regional level and finally gets consolidated by the CBC. To begin with, financial data with regard to service cost comes from section heads of each service type to the Location Budget Coordinators (LBC) of services, duly approved by the Head of Services. The LBC of Services compiles the budgets prepared by each section head and allocates the service cost to the respective asset/ basin/ plant based on inputs/ allocation criteria (such as number of hours/ rig days) received from section heads of each service type. These allocations are then forwarded to the respective functional heads of assets/ basins/ plants. The functional heads of assets/ basins/ plants assess the financial budget for each activity corresponding to the physical targets. On completion of assessment, they forward the budgets to their LBCs. The respective LBCs review these budgets for consistency, accuracy and prudence and forward them to the Regional Budget Coordinator (RBC) for compilation at regional level. The RBCs compile the budgets received from assets, basins and plants and assess the accuracy and correctness of data received. The RBC may seek clarifications from the functional heads on a case to case basis. After approval of RBCs, the budgets are forwarded to CBC. The CBC reviews the financial budget during which it may seek clarifications from functional heads. On finalization of budget, CBC prepares a budget agenda and forwards it to the Project Appraisal Committee (PAC) and Executive Committee (EC) for approval. These committees review the budget and make recommendations to the BoD. The BoD after considering the recommendations approves the budget. The approved budget is then forwarded to each location for uploading to SAP. The item wise budget, duly adjusted to the overall approved budget, is loaded to SAP by each LBC. Monitoring the budgets is then the primary responsibility of the function head. The secondary responsibility of budget monitoring lies with the LBCs, RBCs and the CBC.

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Budget timelines
The preparation of budgets is completed as per the CRC structure i.e. separately for assets, basins, services, institutes, regional offices and subsequently for the company as a whole. Budget comprises of three different components:

Revised Estimates (RE) for the current year; Budget Estimates (BE) for the subsequent year; Commitment Budget Estimates (CBE) for the year following the subsequent year.

The preparation of RE, BE and CBE is in three stages and is required to be completed within the timelines given below Time schedule 15th June of each financial year Stage 2 Formulation of activity-wise indicative financial outlays corresponding to approved physical targets Examination of activity outlays by CBC, and communication of indicative financial outlays to virtual corporates Stage 3 Determination of financial outlays based on approved indicative financial outlays Presentation of draft budget proposals by CBC to the EC Determination of financial outlays based on approved indicative financial outlays Formulation of activity-wise indicative financial outlays 15th June of each financial year 30th June of each financial year 20th July of each financial year 14th August of each financial
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Stage Stage 1

Activity Determination of physical targets

Description of activity Determination of physical targets

Stage

Activity

Description of activity

Time schedule year

Submission of budget proposals by virtual corporate based on ECs approval

31st August of each financial year

Submission of budget agenda by CBC for consideration of PAC and BoD

15th September of each financial year

BUDGET FORMULATION

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PROCESS NARRATIVES & FLOWCHARTS

CBC has been the nodal agency for coordinating and finalizing the budget for work centers. Each year a detailed circular is issued by the CBC which provides guidelines for preparation of budget. The circular is distributed to the asset managers, basin managers, plant managers, chief of services, chief of corporate functions, heads of PSCs, JVs, Head BD JV, heads of regional offices, heads of Institutes, and heads of finance of assets/ basins/ regional offices/ institutes/ plants/services/JVs/BD. CBC representatives visit work centers to discuss and finalize the item-wise budget for the work centers as all the information and justifications are available at the work centers only. The budget process has been aligned with the CRC structure, wherein the virtual corporate (i.e. assets/ basins/ plants/ institutes/JVs) are given flexibility to determine line item-wise budget requirement, in their own areas of responsibility, within the overall allocations given by the CBC. CBC finalizes overall allocations to work centers on the basis of their level of activities, cost per unit of activities and escalations for increase in input costs. Increased powers for expenditure sanction and re-appropriation of funds is delegated to key executives at the work centers. To facilitate the budget process, budget software was developed internally in the year 2002 for determining activity wise outlays from the line item-wise natural-head budget data. After approval by the BoD, the budget is submitted to the GOI and Planning Commission as part of the annual plan. Detailed process on budget formulation has been covered in subsequent paras in this chapter.

Detailed guidelines for preparation of financial outlays

1) Budget to be kept at consuming work centres

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Budgets are prepared at the work centres where budget is utilized/ consumed rather than at work centres where payments are made, as budgets are prepared and monitored in terms of cost of activities and profitability of the virtual corporate. In case of centralized procurement cases, budget provision is kept at the consuming work centres. The consuming work centres forward indents along with the sanction orders to the central procurement agency for procurement. With the implementation of CRC structure, budget is prepared and monitored in terms of cost of activities and profitability of the virtual corporate. Unless the budget provision is kept at the consuming centres, true profitability and cost of activities for the virtual corporate does not emerge. For detailed guidelines on SAP facility to upload budget at one work centre while actual utilization/ Logistics Invoice Verification (LIV) being done at other work centres against funds of the budget holder

2) Concurrence and administrative approval at pre-budget stage

Concurrence needs to be obtained prior to including significant scheme capital and capital expenditure in the proposed budgets. With the implementation of the system of financial concurrence and fund allocation in SAP through system of PR release, PRs for all scheme capital and major capital procurements of significant value are created in the system in time and be concurred/ released by finance after due examination/ justification before incorporating the same in budget proposals. While according concurrence, cost benefit analysis is executed. Necessary action to obtain the financial concurrence may be 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) Provision created for cases at conceptual stage

Provision for certain cases at conceptual stage can be created only for a partial value to the extent it is expected to be executed, so that these do not remain unbudgeted. This aids in prevention of over budgeting as some of these cases may not be executed. This is applicable mainly to schemes and major capital acquisitions/ up gradations/ refurbishments.

4) Consumption based budget

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To plan activity wise financial outlays accurately, consumption of stores and spares is considered rather than procurement of the same, as procurement budget is derived from planned consumption for the targeted level of activities. Accordingly, the work centres updated the details of opening stock, planned consumption and the planned closing stock (considering buffer stock, maxima-minima level, etc as per policy) in the budget software. Based on this input, the procurement budget is prepared automatically by the system using the following formula:

5) Planned Closing Stock Stock

Plus Planned Consumption Minus Opening

The consumption figures are used for determining activity wise outlays and budgeted costs. The difference between procurement and consumption is reflected as inventory variation, which is shown as working capital change. It is ensured that inventory levels are not very high. In case of contractual payments anticipated utilisation of services in the respective budget periods are updated in the consumption column. The requirement of contractual services is planned precisely after considering the realistic requirement so that it does not impact cost of the activity.

6) Procurement budget
Budget is utilized in the year when material is received/ services are utilised and not at the stage of creation of PO or opening of letter of credit. Funds are assigned/ committed at the stage of issue of supply order/contract from the budget of the respective FYs in which delivery of the material/utilisation of services is due as per contract terms. Actual utilization takes place at the stage of LIV which happens at the stage of receipt of material/ utilisation of services. In the event that substantial amount of funds are provided in the RE towards items which are at conceptual stage or expenditure which is yet to be sanctioned, and such items remain unutilised at the end of the year, then not only such items have to be carried forward to the next year but also result into adverse comments from the GOI. Therefore, it is essential that while keeping budget provision, lead time in creation of PR, its release at various stages including financial concurrence and expenditure sanction,
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time taken in tendering process, issue of supply order and delivery schedule are taken into account and budget be kept in the respective budget years during which material is expected to be received/ services are to be utilised. Also, it is ensured that delivery date in the PR is kept realistic after taking into account the time involved for completing various stages of processing (specially for the PRs which are likely to mature at the fag end of the FY), so that under utilisation of budget and throw forward of open commitments is avoided. The planning of procurement process targets deliveries to take place latest by third quarter of the budget year. If the deliveries are likely to spill into the fourth quarter, then the procurement process targets deliveries in the first quarter of the next FY. Thus, the chances of under utilisation due to uncertainties of the procurement process is reduced and shortage of funds in BE period due to carry forward of immature supply orders of previous years shall be avoided. Procurement cases can be initiated against the budget provided in BE / CBE after the approval of budget by the BoD. Note: In case of import procurements, currency rates as specified in the annual budget circular issued by the CBC are considered.

7) Budgeting for non-procurement cases

Budget utilisation for non procurement items like manpower costs and other charges is mapped with the accrual principle in SAP i.e. budget is utilised at the time of incurring expenditure and liability is provided in accounts even though actual payment may not have been made. Accordingly, budget provisions for such items are made commensurate to the expenses which are likely to be incurred in the respective FY.

8) Schematisation of the budget

Capital budget summarises expenditure on plan capital items by classifying the same into following schemes:

BoD approved schemes; Other schemes relating to oil & gas production and processing;
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Major acquisition programmes; Major refurbishment/ up-gradation of equipments; Infocom initiatives; R&D schemes and equipments; Major buildings & civil works; and JVs To facilitate preparation of the capital budget, specific scheme codes are created in the

budget software so that the scheme details can be aggregated from the root level. Scheme code master along with section cost centre master is created centrally at the respective location by the LBC.

9) Replacement capital
Replacement capital forms part of non-plan capital and is included in the operational budget as per corporate policy. These are items in the nature of revamp of production installations/ facilities, pipeline replacement projects, etc which are chargeable to profit & loss account as per accounting policy.

10) Commitment budget estimates

Provision for long lead procurements and contracts including long term supply orders where delivery of materials or utilization of services is expected in the year next to the subsequent year and beyond is included in commitment budget estimates. LSTK projects which are likely to be executed in the commitment budget year are also included in commitment budget. As the commitment budget involves fund requirement for the commitment budget year and beyond, year wise break up of commitment budget is prepared in the specified format.

11) Budget for carry forward items

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In cases where POs have been placed and material has not been received, reappropriation of budget is done in the budgetary estimates for the current year. However, reappropriation of budget is done only between plan to plan and non-plan to non-plan only. The carry forward cases are shown separately in the budget software. Cases where POs remain open till the end of the FY, and deliveries are not received; the POs get carry forwarded automatically to the next FY through a central process in the fourth week of April each year. In all such cases, the POs consume the free budget from the budget estimate of the current year. However, in some of the commitment items where sufficient free budget (unassigned budget) is not available, the available budget becomes negative and the system stops further processing of purchase orders in respect for such commitment items with negative available budget. Accordingly, all work centres review such cases and make funds available through re-appropriation of funds from other commitment items where funds are available. Cases wherever LIV has been done even though actual payment has not been made or wherever down payment against procurement cases has been created in the system, the budget is considered as utilized. In these cases, budget is not carried forward in revised estimates for the current year. Cases where LIV could not be completed in the previous FY or where down payments against specific commitment items of the purchase orders were not created are reflected in revised estimates for the current year as carry forward budget.

12) Changes in rates of custom duties, excise duties and service tax
GOI announces certain changes in customs duties/excise duties/service tax through the yearly Finance Bill. Accordingly, while determining budget requirements for procurement & services, revised rates of custom duty/excise/service tax are considered for fund requirement

13) Reduction in non-plan expenditure

Non-plan expenditure is directly charged off to profit & loss account and thus affects the profitability of the company. Hence, increase in non plan expenditure takes place only if

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supported by an increase in physical activity for work over operations, maintenance, revamping and replacements.

14) Budget drivers

Guiding factors for allocation of budget resources are:

Budgeted cost of activities; Inventory; and Profitability.

15) Budgeted cost of activities

Budgeted per unit cost of activities is the main budget driver for allocation of budget resources. Accordingly, virtual corporates compare the budgeted cost of activities vis--vis actual cost of activities during last two years and in case budgeted cost of activities is increasing with reference to last years actual utilization, the reasons of the same is analysed in detail and budget provisions should be moderated to bring down the budgeted cost of activities within the reasonable limits with reference to previous years actual utilization. After each round of moderations, the stage 1 to 6 of the cost allocation cycles in the budget software are re-run to arrive at the revised budgeted cost of activities. To facilitate the workings of budgeted cost of activities the budget software has an additional module for deriving the budgeted cost of activities. Detailed guidelines for working out the budgeted cost of activities are given in Para 2.1.6 below.

16) Inventory
Inventory management is essential to optimise level of inventory holding and carrying cost. While preparing/ approving item-wise budgets for stores and spares, the available items in stock is considered To meet this objective, the budget software provides additional fields for updating planned consumption of stores and spares items. Opening and closing inventory as per buffer stock requirements/ corporation policy is to be updated in respective fields and the system automatically determines the procurement budget for each line item. Budget head-wise summary report variation projected in the budget. The guiding

36

principle is to optimise the investment in inventory and also attempts should be made to reduce the level of non-moving/ slow moving inventory. All work centres ensure that there is no addition to slow moving/ non moving inventory.

17) Profitability
While framing the budget estimates it is considered that not only the physical targets set in the MoU are to be achieved but the financial parameters of gross margin, net profit / capital employed and net profit/ net worth indicated therein are also to be achieved. Profitability of the asset/basin assumes greater importance, rather than the cash outflow. The assets/basins are therefore expected to prepare Budgeted Profit Margin and Contribution and emphasise achievement of overall efficiency/productivity and cost effectiveness in all its operations.

37

BUDGETING PROCESS IN DETAIL

Determination of physical targets

The physical targets are framed by the assets and basins in consultation with the respective heads of Services in line with the overall corporate objective, MoU targets and five year plan projections. The physical targets form the basis for budget, annual plan and are submitted to the Planning Commission.

Process flowchart

38

Process flowchart

39

40

Budget for interest bearing personnel advances

Interest bearing personnel advances refers to advances given by the company to eligible employees to facilitate them to incur personal expenditure. These can be given for purposes such as house building, purchase of four-wheelers or two-wheelers. However, advances given for purchase of desktop computers and laptops is non-interest bearing.

The RBC is responsible for assessing requirement for such advances on a quarterly basis for the respective region, on the basis of information obtained from PCS and HR section. This requirement is intimated to the CBC, which reviews the requirement and approves/ allocates funds to each region.

41

Process flowchart

42

EXECUTION/ OPERATION OF APPROVED BUDGET

The execution/ operation of approved budgets are through the interface of Funds Management (FM) module and Investment Management (IM) module in SAP. These modules contain monetary balances and budgets for fund centres (in FM module) and projects (in IM module) respectively. The fund centre contains budgets at the CI level while the projects have budgets at work break down structure (WBS) level. Projects/ schemes uploaded and rolled up in IM module is also uploaded in FM module under one fund centre for the purpose of fund management. Thus, every time a PO is released fund availability is automatically checked by the system in FM as well as in IM.

Budget structure in SAP

The budget structure in FM module is aligned to the CRC structure as defined in the Finance (FI) module in SAP. The FM module interfaces with the FI module and checks for fund availability in the respective commitment through the mapping of CIs with the GL codes.

Procedure for creating new fund centre and new commitment item:
For creating a new fund centre and new commitment item, a request is forwarded to the CBC with relevant justification by the user/ LBC. On review and approval by the CBC, the request is forwarded to the designated officer in ICE team for creating the fund centre/ commitment item in SAP. Once created, the same is intimated to the user/ LBC and the CBC. Once the approved overall budget is obtained from CBC, the LBC of each location is responsible for uploading the commitment item-wise budget within the overall approved limit in SAP. Loading of approved budget is done to facilitate year-wise capturing of committed POs.

Budget for schemes in Investment Management module

The IM module is a module used for management of LSTK projects which include projects/ schemes such as erection of platforms, development of fields, installation of large facilities, development of plant, etc. These projects are long term projects in the range of one
43

to three years or more. LSTK projects need not necessarily be large projects monetarily but may be of high strategic importance. Approval of these projects is either obtained from the respective asset head or the BoD and subsequently from the GOI, depending on the nature and value of the project. The IM module facilitates review of associated actual costs vis--vis budgeted costs at WBS level, status and progress of the projects. Fund centres are created according to the existing CRC structure (use T -code IM23 for obtaining the structure/ IM hierarchy from SAP). For instance, there are separate fund centres for surface teams at Assets that are involved in activities such as enhancement of facilities, constructions etc and separate fund centres for sub-surface teams that are involved in well services, reservoir activities etc. The budget for all projects/ schemes is rolled up at the IM Position ID level i.e. at respective work centre/ asset level. The assets give details of cost calculations of the related activities pertaining to the respective projects/ schemes, after which approvals are obtained from competent authority. The approved plan is then converted to budget at various IM position ID level. Further, the budget is distributed to various projects within an IM position ID level after which the budgets are available for utilisation. Budgets in IM get utilised when a service entry sheet (SES) is made in SAP. For detailed process on creation of service entry

Uploading of token budget

Commitment item wise budget prepared within overall budget duly approved by the BoD is termed as the token budget. The budget values are uploaded to the relevant fund centre in FM module by the LBC. Next, an appropriation request (AR) is created by the Project Coordinator (PC)/ Project Engineer (PE) to capture the token budget. At this stage a new variant is created to capture these values. This variant is not required to be assigned to any plan version since it is used mainly for information purposes only. The budget values entered here are the same as in FM.

Release of PRs in finance and fund availability checking mechanism in SAP

Designated officers in F & A review the PR at the time of PR release and check for fund availability using SAP report ZFIFMREP7. In case of exigencies, PR can be approved by the designated officers in F & A even if budget is not available. However, in such cases,
44

the indenter arranges for the budget before PO release. (For detailed process of reappropriation, refer Para 2.2.4.10 mentioned below). Non-availability of budget in the system can not be a constraint for creating PR in the system. Out of the various critical elements in a PR, there are four elements which impact fund management and therefore require close scrutiny by the LBC at the PR release stage. These are detailed below:
a)

Plant: Plants pertaining to the respective business area are allowed. Multiple line items
can be indicated for fund utilization from fund centers of different business area / company code.

b)

Fund centre: Relevant fund centre is indicated. Multiple line items can be indicated for
different fund centre within the same business area.

c)

Account assignment category: With regard to account assignment category the following is ensured:

Field should be blank for procurement of material / capital items except for purchase of medicine / stationary.

Assign K for contractual payment and procurement of medicine and stationery with relevant GL / commitment items.

Assign A and ensure the asset number for installation and commissioning of assets is indicated (accounted as contractual payments).

Assign P for projects and ensure WBS elements for the contractual payments only if the item of contractual payment is in nature of Capital Work In Progress (CWIP).

Based on material code, capital census code relevant commitment items / GL is derived. Procurement budget control for all stores / spares / capital items is at the inventory level only. Material consumption accounts do not have any budgetary control. Only for contractual services procurement budget control exists at consumption accounts. CI: CIs not relevant for budgeting, like MCON_STORE, MCON_SPARE,

OUTSIDE_FM etc. are being allowed. Fund centre together with GL account determines the commitment item from which budget is consumed.

45

Delivery date in PR important for fixing the budget period

Delivery date needs to be considered by the designated officer in F & A section at the time of PR release, as the fund allocation happens on the basis of delivery dates. PRs is created in the relevant fiscal year only, since PR gets reflected in the FM module for the year in which the PR delivery date falls. For example in case the PR is made before 31st March and the PR delivery date is after 31st March the budget of next year will get used. Thus, in case of LSTK contracts or rate contracts or any other contracts which are expected to be executed in a span of more than one year, the concerned work centre breaks the PO year wise and the load necessary budget in the relevant future years on the basis of PR.

Importance of using correct commitment item for proper booking of expenditure

The booking of expenses is made for the particular commitment item only. For example, if cars have been hired for transportation, then expenses is booked under the respective commitment item only.

Funds commitment process for non - procurement cases

With respect to the funds commitment process for non-procurement cases, sufficient earmarked funds are required to be created. Earmarked funds can be created by the respective LBCs on need basis. There is a provision in the system whereby budget can be loaded at one work centre and actual utilization of the budget can happen at other work centers against the funds of the budget holder. Examples of such cases are centralized offshore survey contracts of Mumbai, central procurement cases of Head quarters, expenses incurred by one location on behalf of another location, etc. In such cases though the PO is raised centrally the budget provision and actual utilization/ LIV happens at the location where material is received/ services are utilized. System facilitates fund management in such cases through generation of inter unit transactions (IUT).

46

Budget utilization at LIV/ down payment stage

Budget utilization for procurement of materials and services takes place at the LIV/ down payment stage. Unless LIV is done or down payment against the supply order is created in the system, budget is not utilized and is considered as carry forward budget which consumes funds from subsequent years budget. Hence, during closing of accounts, it is ensured that wherever materials have been received/ services have been utilized before the end of the FY, LIV is completed.

Budget supplement
Budget supplements are used to add funding to existing budgets. This can be done only once during the year align the previously budgeted amount (BE) with the RE. The supplement is for the additive amount only, when posted, the cumulative fund totals (original budget plus supplements) are reflected in the system. The LBC can add supplement to the respective fund centre and commitment item by executing the Tcode FR21. Supplement can also be done via batch mode using the Tcode ZFISR. Before executing these T-codes the LBC ensures that the following information is available: Fund; FC; Commitment item; and Budget supplement amount.

Budget transfer
Budget transfer can take place when funds are transferred from one asset/ basin/ service to another asset/ basin/ service. The LBC of the transferor asset/ basin/ service executes the Tcode FR 50 for transferring funds only after obtaining the authorized document for transfer of funds. On executing the T-code the fund totals in the transferor asset/ basin/ service get reduced and are then reflected in the fund totals of the transferee asset/ basin/ service. Before executing the T-code the LBC ensures the availability of the following information:

47

Budget subtype; Fiscal year; Fund centre; Commitment item; and Amount for each item.

Budget return
Budget return procedure is used to return or reduce a previously budgeted amount. This can be done only once during the year align the previously budgeted amount (BE) with the RE. The LBC executes Tcode FR29 for return of funds. Before executing the T-code the LBC ensures the availability of the following information: Budget subtype; Fiscal year; Fund centre; Commitment item; and

Amount of budget return.

Re-appropriation of funds
Re-appropriation of funds can take place at the time of PR release stage the concurring officer approves the PR subject to availability of funds. At that stage, it is the indenters responsibility to make funds available before the PO release for which a requisition is made to the LBC. The requisition duly authorised by the Head of the indenting section clearly specifies the following:

Amount of fund requirement; Commitment item against which funds are required; and Commitment items (giving three to four options) from which funds can be reappropriated. Based on the above information the LBC re-appropriates funds, considering that re-

appropriation can take place within commitment items under plan budget and within
48

commitment items under non-plan budget. However, re-appropriation of funds from one commitment item in plan budget to another commitment item in non-plan budget and vice versa is not allowed.

Process for negative release of funds

Once funds start getting utilised against approved budgets in the system on LIV/ down payment, at times the available budget becomes negative due to insufficiency of funds. The system stops further processing of POs in respect for such commitment items with negative available budget. For centralised PO cases which can not be created because of insufficient budget the negative (over) posting of utilization is done through earmarked funds. This can be authorised only by the attached Finance officer in Corporate MM and can be posted using T-code FMW1. Once the negative utilisation of budget is posted the available budget increases and the PO can then be further processed. Monthly report of negative (over) earmarked fund is generated by designated officer in Finance of Head MM and is circulated to respective work centres. Respective projects initiate action to ensure that necessary budget re appropriations are posted. The negative earmarking of funds are monitored and removed from the system by designated officer in Finance, Corporate MM using T-code FMW2. Removal of negative earmarking of funds can be done only after necessary re-appropriations have been made.
Year end processes in SAP in Funds Management and Investment Management modules A-Year end processes in SAP for Funds Management module

Closing of all earmarked funds

All earmarked funds are closed centrally in the FM module using the T-code FMRE_SERLK immediately after FY close. If there is a request for revalidating the earmarked funds, LBC issue new earmarked funds. This activity is done immediately after closing of the current fiscal year.

49

Provisions for new earmarked funds

New earmarked funds are furnished in the current year. This is done by the respective LBC on a need basis.

Uploading of approved budget

Follow up with MM section and/or indenters for old POs/ PRs. In cases of open POs and PRs, PR/PO wise details of all ongoing cases are down loaded from the system and reviewed with reference to status of case, lag in delivery schedules, if any. All LBCs follow-up with MM section and/or indenters for old POs i.e. POs that are due for more than six months at the end of each fiscal year. The T-code ME2M is used to open the list of old POs. The report can be generated for a range of work centres and commitment items. The list can be generated in such a way that POs are ordered as per specific delivery dates. This exercise also includes cases where only a small quantity of the PO has not been received. In such cases the MM officer or indenter can cancel such POs on a case to case basis. Similarly, existing PRs, which have not matured into supply orders, are required to be reviewed. If required, action is taken by the indenter for closure/ amendment in delivery dates to release the funds blocked. The follow up activity is done at FY close as well as throughout the year by the respective LBCs.

Follow up with Pre-Audit section /MM section to ensure that LIVs are processed LBCs follow up with Pre-Audit/ MM section to ensure that LIV is done to the maximum extent possible against all down payments made against respective POs before end of current fiscal year Deletion of all parked FI documents consuming budget Carry forward of commitments on account of all open Pos Reconstruction of distributed and assigned values The T codes FM9P and FMBV are executed for both the current fiscal year as well as the subsequent fiscal year. This exercise is done centrally immediately after the carry-forward exercise is completed.

50

Removal of budget deficits from the system The report S_ALR_87012621 is generated to view the budget deficits. LBCs remove budget deficits from fund centres by making the required budget transfer postings using the T code FR14. This exercise is done by the respective LBCs immediately after FY close.

Year end processes in SAP for Investment Management module

The IM program structure is copied from the current fiscal year to the subsequent fiscal year by the LBC Carry forward of commitment items i.e. outstanding PRs or POs is executed. The current IM program structure is subsequently locked by the LBC.The assignments are locked to the current IM structure by the project coordinator (PC), LBC and the CBC

51

BUDGET MONITORING

Utilization of the budget as per plan is monitored by the BoD and the GOI on a periodic basis through submission of the quarterly reports, namely, statement of actual expenditure against central plan outlay and statement of plan expenditure, on a monthly basis. Monitoring of the budget is done with the aim of having 100% planned budget utilization. Variations between both physical and financial parameters in the budget and actual utilization are reviewed and required corrective actions are taken after obtaining required clarifications from the virtual corporate. Virtual corporate review variations between budgeted targets and actual utilization, and progress of ongoing projects on a quarterly basis on budget utilization is prepared on a quarterly basis recommending corrective actions to be taken and detailing the reasons for variations as per format specified by the CBC. A monthly expenditure report, monthly sales expenditure report and monthly sales receipts report is prepared by each LBC and forwarded to the RBC for consolidation at regional level.

52

RESEARCH METHODOLOGY
Following in order to complete project report on budget on O.N.G.C. Ltd., methodology has been adopted. The very first step I have taken is that I have collected all the accounts which are required for analysis after that I have extracted the things out of accounts, which are needed for Budget analysis. (e.g. Current assets etc.) There are two main types of data collection i.e. Primary data Secondary data

PRIMARY DATA It means collection of information for the first time. In order to collect such type of information questioner, ie.e. to be constructed and information is collected from the respondent. In my project report budget analysis in ONGC Ltd., the primary data collection is not used since it is based on secondary date already available.

SECONDARY DATA Secondary data are information, which has already been collected by others. In order to carry out my project successful I have relied on the secondary data already available. Source of secondary data Annual report of ONGC Ltd. Monthly publication of ONGC i.e. corporation finance. ONGC Ltd website : www.ongcindia.com Library of ONGC at KDMIPE

1. Research Design

: Exploratory Research

53

2. Data Collection Method

: Secondary Data Collection Method

3. Operational Area of Study : Frontier Basin, ONGC 4. Data Processing Method : By calculating the utilization ratios of capital and revenue (actual target)*100%

54

BUDGET DATA ANALYSIS

Oil & Natural Gas Corporation Ltd is a Government of India undertaking as previously stated and hence the preparation of budget is synchronized with the 5 year plans prepared by the government and further budget targets decided with the approval from the ministry of Petroleum and Gas. Presently the annual budgets are prepared in accordance with the 11th five year plan from 2007-2012. ONGC has set 3% higher budget in this plan than the previous one.

The budget is prepared as explained in the process for planned or capital expenditure (Capex) and non-planned or operating expenditure (Opex) at every level. The Capex and Opex budget outlays for past few years are tabled on next page

55

PLAN OUTLAYS (CAPEX)

Figure in Crore

Description

Actual 07-08

Actual 08-09 1992 2325

BE 09-10 2516 3114

RE 10-11 2387 2951

BE 11-12 2593 3715

SURVEY EXPL. DRILLING DEV. DRILLING R&D CAPITAL JVS PLAN-ONGC INTEGRATION PROJECTS TOTAL

1498 2390

1875 108 4003 820 10694 727

1898 86 5496 1263 13060 245

3102 148 6399 1506 16785 1102

3111 186 7238 1406 17279 1067

3837 194 6824 1212 18374 964

11421

13305

17887

18346

19338

TOTAL PLAN OUTLAY(CAPEX) Rs. In Crore

25000 20000 15000 10000 5000 0
200607

18346 13305 11421

200708 200809 200910 201011 201112

17887

19338 TOTAL PLAN OUTLAY(CAPEX) Rs. In Crore

07-08 in comparison to 07-08 & 08-09. This goes on to show a consistent increase in the activity. However if we look at the actual utilization of 07-08 then its lesser than RE.It

Ac tu al

It can be seen from the graph that there is a jump In the actual utilization of budget in

Ac tu al (0 607 ) BE (0 708 )

RE (0 708 ) BE (0 809 )

(0 506 )

56

produces a case in point of lock up of funds due to certain expected expenditures. There is a cushion of Rs 695 crores, but looking at the size of the company, a headroom of this extent is unavoidable.

NON-PLAN OUTLAYS (OPEX)

Figure in Crore

Description

Actual 07-08

Actual 08-09 8501 425 12256 22 8027 7643 37 6692

BE 09-10 8984 380 11768 13 7467 6585 43 266

RE 10-11 9256 450 12453 11 6967 7313 36 -2322

BE 11-12 9060 470 12755 10 6937 7526 16 1306

OPEX JVs OPEX STAT. LEVIES INTEREST PYT. CORPORATE TAX DIVIDEND LOAN REPAYMENT

7232 328 9979 47 7406 7317 897

WORKING CAPITAL 481 CHANGES ADV. SUBSIDIARIES TOTAL NON PLAN 37945 TO 4259

-2418

4004

4000

4000

41185

39510

38163

42080

57

TOTAL NON PLAN OUTLAY(OPEX)Rs.In Crore

43000 42000 41000 40000 39000 38000 37000 36000 35000
2006-07

41185 39510 37945 38163

42080 TOTAL NON PLAN OUTLAY(OPEX)Rs .In Crore

(0 506 AC ) TU AL (0 607 ) BE (0 708 )

per the requirement of the corresponding planned outlays. Therefore we can draw a conclusion that the plan budget and the non planned budget need to be made in proper harmony with each other and there needs to be a better coordination between the two.

Trend in Planned and Non Planned Budget Utilisation Trend PLAN EXPENDITURE
Figure in crore

Particulars BE RE ACTUAL ACTUAL BE (%) ACTUAL RE (%)

AC TU A

The graph clearly depicts that the non plan activity is not consistent and is varying as

2006-07 7408 7142 6063 OVER82%

2007-08 10308 10625 6852 66%

RE (0 708 ) BE (0 809 )

2007-08

2008-09

2009-10

2010-11

2011-12

2008-09 10000 10850 10681 107%

2009-10 10487 12736 11421 109%

2010-11 14354 16522 13305 93%

2011-12 17887 18346 17651 98%

OVER85%

64%

98%

90%

81%

96%

58

PLAN BE 20000 15000 10000 5000 0 2002-03 2006-07 2003-4 2007-08 2004-05 2005-06 2008-09 2009-10 2006-07 2010-11 2007-08 2011-12 7408 10308 10000 10487 14354 PLAN BE

17887

PLAN ACTUAL 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0

17651 13305 10681 6063 6852 11421 PLAN ACTUAL

2006-07 2002-03 2007-08 2003-4

2008-09 2004-05

2009-10 2010-11 2011-12 2005-06 2006-07 2007-08

PLAN ACTUAL OVER BE (% ) 120% 100% 80% 60% 40% 20% 0%

20062002-03 07 20072003-4 08 200820092004-05 2005-06 09 10 201020112006-07 2007-08 11 12

107% 82% 66%

109% 93%

98%

PLAN ACTUAL OVER BE (% )

The graphs above show that the plan BE and plan actual have been rising with more or less a consistent rate signifying a growth in the activities of the company.However it being a plan expenditure, it could have been more precise.

59

RE 20000 15000 10000 5000 0

2006-07 2002-03 2007-08 2003-4 2008-09 2004-05 2009-10 2005-06 2010-11 2006-07 2011-12 2007-08

16522 10625 7142 10850 12736

18346 RE

PLAN ACTUAL 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0

17651 13305 10681 11421 6063 6852 PLAN ACTUAL

200 200 201 2007201 200 2005200 200620022003200467018903 4 05 06 07 08 07 08 11 12 09 10

PLAN ACTUAL OVER RE (%) 120% 100% 80% 60% 40% 20% 0%
200 200 201 200 200 20022003-4 200420052006- 201 200767018903 05 06 07 08 1107 1208 09 10

98% 85% 64%

90%

96% 81% PLAN ACTUAL OVER RE (%)

If we compare the percentage utilisation of BE and RE, then the actual utilisation seem consistent in both the cases except that in the year 2004-05.Thus here the vision of the budget makers can be deemed fine and in consonance with the overall objectives of the firm.This so ,because the utilisation ratios in most of the cases are quite high i.e more than

60

90%, signifying proper allocation and near to optimum utilization of funds.Thus it can be said that the budget makers and controlers have been successful in striking a proper balance between an efficient control mechanism and smooth functioning.

NON-PLAN EXPENDITURE
Figure in Crore

Particulars

2006-07

2007-08

2008-09

2009-10

201011

201112 8984 9256 9863 110% 106%

BE RE ACTUAL

6564 5840 7115

5738 6312 5880 102% 93%

6696 6428 7136 107% 111%

6875 7653 7668 112% 100%

8323 8619 9260 111% 107%

ACTUAL OVER 108% BE (%) ACTUAL OVER 122% RE (%)

61

NON PLAN BE 10000 8000 6000 4000 2000 0 200 200 200 200 200 200 2-03 3-4 4-05 5-06 6-07 7-08
200 200 200 200 200 200 200 200 201 201 201 201 6- 67- 78- 89- 9- 0- 0- 1- 107 07 08 08 09 09 10 10 11 11 12 12

8323 6564 5738 6696 6875

8984

NON PLAN BE

NON PLAN RE 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0

7653 6428 5840 6312

8619

9256

NON PLAN RE

200 200 2-03 3-4

200 200 200 200 4-05 5-06 6-07 7-08

62

NON PLAN ACTUAL OVER BE (%) 114% 112% 110% 108% 106% 104% 102% 100% 98% 96%
200 200 200 200 201 678- 2005-92002200320042006- 0200707 08 11 09 10 03 4 05 06 07 08 201 112

112%

111%

110%

108%

107%

NON PLAN ACTUAL OVER BE (%)

102%

NON PLAN ACTUAL OVER RE (%) 140% 120% 100% 80% 60% 40% 20% 0%
200 200 2002- 200 2003- 20046803 74 05 07 08 09 201 2007201 200 2006200501906 07 08 11 12 10

122% 93%

111%

100%

107% 106% NON PLAN ACTUAL OVER RE (%)

The corroboration of the aforesaid points regarding the under sanctioning of opex outlays can be seen here.It can be suggested that it would be more appropriate if a portion of the planned expenditure is diverted towards the non planned expenditure to maintain a optimum balance of liquidity in both the areas.

FRONTIER BASIN WHOLE BUDGET

CAPITAL PROCUREMENT (TARGET) YEAR 200620072008200920102011-

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07 BUDGETED ESTIMATE (BE) (Rs) REVISED ESTIMATE (RE) (Rs) 24.88 7.5

08 13.27 5.07

09 17.22 9.32

10 37.2 3.56

11 12.94 22.68

12 12.12 31.1

the budget is revised.This could have been because of major shift in plans in the region or due to underachievement in the previous year or optimism in the coming year. REVENUE EXPENDITURE (TARGET) YEAR 2006-07 2007-08 200809 BE (Rs) RE (Rs) 90.63 85.6 91.77 68.9 62.76 61.67 200910 44.58 71.78 201011 81.9 86.16 116.44 78.2 2011-12

140 120 100 80 60 40 20 0

2006-07

2 0 0 2 -0 3 2 0 0 3 -0 4 2 0 0 4 -0 5 2 0 0 5 -0 6 2 0 0 6 -0 7 2 0 0 7 -0 8

37.2 40 31.1 35 30 24.88 22.68 25 13.27 17.22 20 12.94 12.12 15 9.32 10 7.5 5.07 3.56 5 0
200607 200708 200809 200910 201011 201112

BUDGETED ESTIMATE (BE) (Rs) REVISED ESTIMATE (RE) (Rs)

It can be learned from the graph above that there is quite a large shift in outlays when

116.44 90.63 85.6 91.77 68.9 62.76 71.78 81.9 86.16 78.2 BE (Rs) RE (Rs)
2010-11 2011-12

61.67 44.58

2002-03

2007-08

2003-04

2008-09

2004-05 2005-06

2009-10

2006-07

2007-08

The revenue targets are not subjected to much changes negatively except that in the year 2007-08.
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EXPENDITURE (ACTUAL) YEAR 2006-07 2007-08 2008-09 200910 CAPITAL (Rs) REVENUE (Rs)
70 60 50 40 30 20 41.71 37.24 35.9

2010-11

2011-12

4.66 41.71

4.16 37.24

4.96 35.9
66.27

3.18 46

8.22 41.13

28.57 66.27

46

41.13 28.57 CAPITAL (Rs) REVENUE (Rs)

8.22 4.96 4.16 3.18 10 4.66 0 2006-07 2007-08 2010-11 2011-12 2008-09 2009-10 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

The actual utilization data gives correct view of the scenario and helps in plugging lacunas and making the budgeting system more effective.If we study the above graphs and tables then it becomes clearly evident that in both the cases,whether its capital expenditure or revenue expenditure,there have been major deviations in actual figures even over the revised estimates.

FINDINGS

It is observed that the budget utilization is good only for some few cases: Capital utilisation for BE & RE for the year 2009-10 Revenue realised for BE for the year 2008-09

During my course of training in the Company, the Revised Estimate of 2009-10 and Budget Estimate of 2009-10 was under preparation and approval.

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The total financial outlay of RE (2009-10) is Rs 269.54 crore and that of BE (200809) is Rs 283.96 crore. But the RE for 2008-09 was Rs.109.3 crore. Since the subsequent year budget is high it requires close controlling and monitoring to achieve 90% of its estimation.

RECOMMENDATIONS

1) Proper review of monthly and quarterly budgets -It has been witnessed that the
actual targets achieved year on year basis ,vary widely from the budgeted estimates and revised estimates. In lieu of this anomaly ,it can be said that the month and quarter wise physical targets breakups and corresponding budget allocations need to be fixed with a clear vision and proper planning.

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2) Use of SAP-Budget is meant more for controlling than for meeting financial needs as
and when they arise. Therefore proper control mechanism needs to be installed which can minimize deviations in practicality. The budget software presently being used at ONGC just fixes the initial outlays and targets. These targets are then fed into the SAP software in order to monitor the achieved progress. This creates duplicity in the budget preparation. Hence a better option would be to channelize the whole process of budget preparation and operation through SAP only as this software provides lesser room for deviations and hence better monitoring.

3) More realistic preparation of Budgeted estimates -The Budgeted estimates

that are prepared for the next year allocations need to made on more realistic assumption through proper forecasting of the future market trends and availability of R&D and technology during the period for which the estimates are being made.

4)Accountability of the fund centre-Much of the underachievement of physical

targets in a given year are due to the late release or stacked up funds at various fund centres.thus for faster achievement of targets smooth flow of funds is required which can only be implemented when the various fund centre are held accountable.

5)Greater autonomy of the organization-the overall budget of ONGC is prepared

while bearing in mind the terms of MoU that the company has signed with the GoI.This in a way paralyses the organization while fixing the annual targets and corresponding allocations. This restricts the vision of the company to stipulated targets and further reallocation or cancellation of funds becomes more complicated and also makes it more bureaucratic. Though government monitoring performance should be given. and reporting is necessary but required freedom for

6) Proper monitoring of all services - In order to have micro monitoring in place,

proper supervision of each services can be helpful. The overall achievement ,overachievement or underachievement records of the organization help ,but if proper achievement has to be monitored then performance of each service type needs to be done.

7)Focus on OPEX expenditures Mostly the long term budgeting plans get executed
without much delays or hassles as range of time of their execution is suitable to minor

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adjustments if and when required. However variances in OPEX budget actually creates problems. Thus in order to minimize the overall variation ,OPEX should be scrutinized ,so that annual targets are achieved.

8) Better response towards market volatility -The recent spate of fluctuating crude
oil prices indicate that expecting a hundred percent accuracy in line with the estimates is harsh on the company. However if predetermined response system is in place then market volatility wont remain a deterrent and the company would be better prepared to achieve its projected aggressive guidance.

CONCLUSIONS

It can be concluded that the utilisation is poor with respect to BE and RE. It should be more than 90% in case of realistic budget. And it was realisable only for few cases.

The subsequent year budget being more optimistic, it requires a close controlling and monitoring to achieve 90% of the target.

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Hence, more focus is required for controlling of budget for maximum utilisation of plan budget in terms of financial as well as physical budgets.

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REFERENCES www.ongcindia.com ONGC ANNUAL REPORTS

RESEARCH METHODOLOGY

C. R. KOTHARI

FINANCIAL MANAGEMENT

KHAN AND JAIN

FINANCIAL MANAGEMENT PRINCIPLE & PRACTICE Dr. S. N. MAHESHWARI

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