Reported By:
| Edited By: Promit Mukherjee |Source: DNA |Updated: Mar 18, 2018, 05:18 AM IST
The doubling of the cess on oil producers and a massive subsidy burden may turn India’s biggest oil explorer ONGC’s marginal fields commercially unviable once again.
That would mean turning a substantial capital expenditure of close to Rs26,000 crore into a loss-making exercise as subsidy hurts.
Marginal fields are oil and gas-bearing assets where production has been discontinued due to depleted reserves. Bringing the oil up becomes a very expensive affair.
Around 2004, ONGC embarked on an ambitious programme to develop marginal fields as crude oil prices rose and it got access to better technology.
With no major discovery, the quest was to maintain stable production volumes and not let them fall incrementally.
Currently, the company is investing up to Rs26,000 crore to develop 11 such fields with a cluster of blocks under them. These are the C-Series, B-22 cluster, B-193 cluster, B-46 cluster, North Tapti gas field, Cluster-7, BHE & BH-35, WO-16 cluster, G-1 & GS-15 and SB-14.
“We are investing a huge amount of money to develop these fields and we have taken into consideration all possible factors. There is a base price of $50 and around that the fields are viable for us,” said Sudhir Vasudeva, chairman of ONGC.
He said the company expects to produce close to 3.5 million tonne of oil and oil-equivalent from these fields by next fiscal.
However, an increase in cess on oil producers announced in the Union Budget on March 16 means even a few dollars of fall in crude oil prices will make the marginal fields unviable because of their higher cost of production.
“Higher cess implies a hit of $5.6 per barrel, which implies downside risks of around 10% to earnings,” said Vinay Jaising, Rakesh Sethia and Anirban Roy of Morgan Stanley in a March 19 note.
They assume a net realisation of $60 per barrel in the fiscal just ended.
According to ONGC’s annual report for 2010-11, upstream companies had to share a subsidy burden of 38.8%, instead of the past practice of 33.3%, of which ONGC had to share 82%.
The company’s outgo towards this stood at Rs24,892 crore, resulting in a net crude oil price realisation at $53.77 per barrel in that fiscal against $55.94 per barrel during the previous year.
This year, due to the increase in cess, net realisation could be even less.
ONGC produced 62.05 million tonne of oil and oil equivalent gas in 2010-11.
“With an increased burden of cess, ONGC’s total production cost will now stand at close to $45 a barrel or higher from the marginal fields due to the complexity of the operation involved. But its realisation per barrel is virtually capped at $55 per barrel. Hence, it becomes difficult to maintain profitability from these fields in the long run,” said another analyst with a leading international brokerage.
Besides this, the field takes three to four years to become operational again and that further adds to the cost, said the analyst.
By a rough estimate, to bring every marginal field under production, ONGC spends close to $20 per barrel in operational cost, and up to $10 per barrel in capital expenditure, while taxes take up another $15 per barrel, taking the cost of production to $45 a barrel.
Now, due to the subsidy burden, the government virtually ends up capping realisation per barrel at approximately $55. To boot, there’s another Rs2,000 per tonne of cess.
ONGC’s current production from marginal fields is close to just 5% of its total output.
“But going forward, in the absence of any major discovery and incremental production happening, these marginal fields are expected to prevent ONGC’s production volumes from falling,” said the analyst.
