In an interview to CNBC-TV18, Alok Banerjee, Director Finance, ONGC spoke about gas prices and the fertiliser subsidy
Recent revision of natural gas price has not appeased many. For upstream companies, doubling of price to USD 8.4/million metric British Thermal Units is a welcome move but fertiliser and power sectors may not appreciate the decision, as their cost would escalate.
There is a talk in the corridors of the finance ministry that price hike should be capped. The ministry has asked the oil ministry to scrutinise and take appropriate action on the suggestion for putting a cap within which rates can be raised.
In an interview to CNBC-TV18, Aloke Banerjee, Director Finance, ONGC said that one cannot predict the ceiling for gas price hike.
The Cabeinet Committee on Economic Affairs (CCEA) approved the new pricing formula but did not suggest any ceiling on prices which were to be based on a mix of imported LNG and international hub rates. The ministry now believes that gas producers should not reap all the benefits, especially when there is an upswing in global prices.
Below is the edited transcript of his interview with CNBC-TV18:
Q: Are you in the loop on this suggestion we are getting from the wires that possibly if and when the gas prices rise, you may also be called upon to share a bit of the fertiliser subsidy?
A: Not yet. We have not been informed anything about this.
Q: According to you, at the moment what is the calculation, how will your world view and your profit and loss (P&L) look like in April 2014, what are you factoring in by way of the price of gas as of next year?
A: We have not yet been informed officially anything about what the gas price would be from April 1.
Q: There is no doubt about the source of that information, the finance minister and the members of the cabinet said it in a press conference that they are raising the gas price and that the new formula has now been accepted?
A: I cannot comment on what will be the price at that point of time because today in the newspaper we have seen that at 6.8 and then again you are saying that there are some reports that on April 1, it will be 8.4. So we are not very sure and we have not yet made any calculations as such. So the moment it comes, we will do that.
I have personally informed earlier to the channel that if the price is increased by USD 1 per mmbtu then we will have an impact on a profit after tax (PAT) to the extent of more than Rs 2,000 crore. That is what we have given earlier provided other things remain the same.
Q: There has been no unofficial intimation that even if you increase your profit by USD 1 by Rs 2,000 crore at least part will be diverted to fund the other subsidies like perhaps power or fertiliser because we understand that it has been indicated by not just the finance minister but perhaps even by Moily that upstream companies will have to bear the power as well as fertiliser subsidy. Have they at least if not told you the exact quantum, that this is the way it is going to be, this is the likelihood?
A: Not yet. As a government company, we have to respond to the government’s call.
Q: The actual finance minister’s statement when he announced the gas price hike was that the finance ministry will keep a hawk eye for any windfall profits that oil companies might make and he also said that the input prices for power and fertiliser will not necessarily be the output price for gas. Any calculation on your own front on what would be windfall profits according to you, at what point do costs get met at a gas price of USD 6.8 per mmbtu?
A: I do not know whether there is windfall profit or not. The issue is that, present year our cost of production is coming to about 3.7. We are likely to go in more frontier areas, deepwater areas and there definitely this price of USD 4.2 per mmbtu may not be sufficient. So definitely, if we get a higher price, it will help us to monetize our gas reserves. That way it will be a boost for us.
Q: At a price of USD 6.8 per mmbtu, how much more reserves do you think you will be able to monetize and by when?
A: I cannot comment on the exact contribution but definitely it will help us to monetize particularly our east coast, some of the fields are there. There we will be taking up the product developments. So this will be a boost for us.
Q: Any idea how you might upgrade your production on account of higher gas prices?
A: This production will be coming from some of the fields in the east coast and this production is likely to start in 17 onwards because there is a development which will take some time. By 17 onwards we are expecting substantial flow of cash from those fields.
Q: You said your current cost of production is 3.7 or 3.37?
A: This is 3.7. The audit is going on so roughly it is about 3.7.
Q: At 3.7 then for the current reserves and for the current cost of production at USD 6.8 per mmbtu, it is a decent 80-90 percent profit?
A: As you know because of rupee depreciation -- some of the services we are hiring -- as a result the cost is increasing. There is a constant increase – upward push on the cost also. So definitely this cost is likely to increase. The price is fixed for a certain period of time, during that period of time, every year it increases. As a result it gets somehow stabilised somewhere in between.
Q: What we also understand from finance ministry sources and this has been a CNBC-TV18 exclusive that they have been calling for a ceiling price in the new gas price formula, anything that you have heard on that or what perhaps they will consider in forming a ceiling?
A: No, nothing has been conveyed officially to us.
Q: Unofficially anything has been conveyed?
Q: If there has to be a ceiling, what perhaps will they consider in deciding what the cap should be according to you in your understanding of the industry?
A: Difficult to predict at this point of time. This is anybody's guess. When you allow the market forces to work, it is the best situation but at the same time, you have to take care of the market players. Market players as in producers, the suppliers, even consumers. So at this point of time Indian market is not as matured. So, they may not be in a position to take the entire forces in their stride. There comes the role of the state or the government and that is in the form of subsidy or whatever. As I told earlier, that as a government company we have to respond to that also.