The Ministry of Petroleum and Natural Gas has proposed to double the price of gas to USD 8-8.5 per million metric British thermal unit (mmBtu) sometime this calendar year, as recommended by the Rangarajan committee.
Sudhir Vasudeva, chairman, ONGC confirmed to CNBC-TV18, the company has not received any communication from the government on administered price mechanism (APM) gas price hike yet. The APM gas price would make several projects viable if it goes through. If it is raised to USD 8/mmbtu then we can commercialise new discoveries, he added.
Recently, broking firm Bank of America Merrill Lynch upgraded ONGC to 'buy' from 'neutral' post oil ministry's proposal. In 2010, the government had increased administered price mechanism gas prices by more than 100 percent. However, Vasudeva pointed out that even at USD 4.2/mmbtu, the gas business is not profitable.
Meanwhile, he sees ONGC's FY 13 subsidy share rising by Rs 10,000 crore on a year-on-year basis.
Below is the edited transcript of his interview to CNBC-TV18
Q: Have you heard any kind of update from New Delhi on such a proposal being considered by the cabinet and how material would it be for Oil and Natural Gas Corporation (ONGC’s) earnings if such a price hike were to come about?
A: We haven’t heard any thing officially from the ministry. However, whatever the media is reporting is music to our ears. In case the gas prices increase both from the viewpoint that it would be applicable to our existing gas with immediate effect. This will also help us in putting our deep water discoveries on production because those projects will become more viable.
Q: There was more than 100 per cent increase in administered price mechanism (APM) gas prices in 2010. Some people point out that production cost has not gone up as much to justify this gas price increase. What is your point of view on that?
A: Earlier, when we were getting USD 1.79 a million British thermal unit (Btu) for the gas for APM gas prices, we were not even covering our cost of production. We were losing.
Today, also it is not a very profitable business at USD 4.2. Wherever we are producing more quantity of gas and the per unit cost is less, but in small areas the unit cost of production is still high. So, as a portfolio, we are making some margins.
However, if one sees individually, then it all depends upon the volume game. But USD 8 a million Btu as per the calculation definitely would be a music to our ear.
Q: What could be the impact on production if indeed prices are increased? How quantifiably higher would it be?
A: The basic point is as to what discounted price you get - the net realisation of oil prices you get. In the first half, we got only USD 46.37, although the gross billing was at a rate of about USD 109 a barrel. So, with this and knowing very well that we don’t get any extra budgetary support for our outlays. We have to generate everything through our internal resource generation. This is very difficult.
Our outlay per year is of Rs 33,000-35,000 crore of order. So, generating with this kind of prices of USD 46 or USD 47 is just not possible. First of all, 75 percent of our production is coming from mature fields. There are 15 mature fields which are contributing predominantly. Although, we are producing from 126 fields.
The cost of production from these fields is increasing with every year. With every passing year the costs are increasing and the deliverability from these fields is decreasing. So, the law of marginal diminishing utility or diminishing deliverability is very much applicable here.
Our cost of production last year was USD 38 per barrel. Once we add USD 5 per barrel of the burden which was added because of additional cess, it wil be about USD 43 or USD 44. Te Operating expenses (OPEX) every year is increasing at a rate of 7-8 percent. By the end of this year, we hope our cost of production will be about USD 47. So, USD 46.37 of net realisation and USD 47 of cost of production, means we will have to dig into our surplus and reserves. So, that was our matter of concern. Any increase in petroleum products and thereby a consequent decrease in subsidy burden on us will definitely be helpful.
Q: Diesel prices going up if indeed they continue to every month and the fact that bulk consumers will pay more will cut down the overall subsidy bill. Are you sure that upstream companies will have to bear less of it or your burden might not down materially because of the government’s worries about its own deficit?
A: Your guess is as good as mine. Infact what has been reported now with this 45 or 50 paisa per litre increase. This bulk supply increase is going to add about Rs 15,000 crore per year. However, on LPG this is Rs 10,000 crore of increase. So, the next result is only Rs 5,000 crore today. Even if they keep on increasing at 45 paisa per litre every month, this will take some time. Ultimately it will depend upon as to how much is the government able to pay from there side to maintain their fiscal deficit. Also, how much is passed onto upstream companies.
When it comes to upstream companies our worry is that we have to bear something like 80-83 percent of entire subsidy. That is because this distribution of subsidies is decided based on the profit after taxes among these three companies ONGC, Oil India and Gas Authority of India (GAIL). Our profit is way too much as compared to other two sister public sector undertakings (PSUs). Last year we ended up paying Rs 44,466 crore of subsidy out of total Rs 55,000 crore. This was paid by these three upstream companies.
Q: The gas price hike proposal is likely to be met with a lot of opposition from ministries like fertiliser and power. Do you think a compromise is more likely that the Rangarajan Panel recommendation of USD 8 plus may not be the kind of price you get, but something between USD 4.2 and USD 8.4?
A: For that matter anything can happen. Even USD 8 a million Btu is not very high. The way the formula is there now with all the gas prices in these three destinations of Henry Hub, NBP (National Balancing Point) and Japanese Crude Cocktail plus also the weighted average price of LNG this is a sort of aggregated price of the world gas.
The way now my colleagues in the industry are reporting Reliance etc. Even this USD 8 is not adequate. So, for the producers definitely, in case they have to produce from deep water etc. the costs are going to be very high. The capex which is involved in upstream deep water projects are very cost intensive. So, USD 7-8 will probably just be bare enough for making those projects viable.
Q: Any indications though of soon this is going to happen, oil ministry has already cleared it and it could be referred to the cabinet, a decision could be taken at any time. Some of your peers are going to be hitting the market to raise money and investors will want clarity on this issue. How soon do you think a final call may come through?
A: I am not really aware as to when this is going to Cabinet Committee on Economic Affairs (CCEA). Even if it goes and whether they will take it up or not, but only hope the sooner the better.
Q: You would have a fair idea given how crude has been trending over the last few months. What kind of subsidy figure we are ultimately going to end up with? What’s your sense of what the total figure could look like?
A: We haven’t got any indication for as to what is going to be the subsidy burden for this quarter. So, we are still calculating, based on the existing formula of USD 56 to be passed on for every barrel of oil production. In the first half, we have ended up getting about USD 46.37 out of USD 109 billing.
Now today, the oil is about USD 113 per barrel. In the past also it has been in this range of USD 109-110 per barrels. Higher the crude oil prices more our worries that subsidy burdens are going to increase. We only hope that in Q3 and Q4 some kind of corrections are made and we end up getting about USD 55-60 net realisation for the crude oil. Only then we will have good margins for our expansion plans etc.
Q: You are hoping that the number will not exceed the Rs 44,000 crore odd that you paid out last fiscal?
A: First half, we have paid Rs 24,676 crore. If we just do a plain arithmetic this amounts to about Rs 49,000 crore for the year, if nothing changes. Also, this time a additional burden of Rs 5,000 crore.
So, as such we are going to be burdened with about Rs 9,000-10,000 crore extra as compared to the last year. So, we only hope that when the finance ministry and others they are calculating this under recoveries and subsidy burden for the upstream these issues are addressed. So that we finally end up getting some margins and we can atleast sustain our operations. We can generate enough for our outlays.