Jan 28, 2013, 02.23 PM | Source: CNBC-TV18

See FY13 subsidy share rising by Rs 10,000cr: ONGC

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.

We haven't heard anythiofficially from the ng ministry

Sudhir Vasudeva



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.

Also read: Uniform gas price policy to be brought soon: Moily

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.

ONGC stock price

On December 01, 2015, Oil and Natural Gas Corporation closed at Rs 235.40, up Rs 1.10, or 0.47 percent. The 52-week high of the share was Rs 380.05 and the 52-week low was Rs 208.00.

The company's trailing 12-month (TTM) EPS was at Rs 20.81 per share as per the quarter ended September 2015. The stock's price-to-earnings (P/E) ratio was 11.31. The latest book value of the company is Rs 169.02 per share. At current value, the price-to-book value of the company is 1.39.

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