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Last Updated : Aug 23, 2014 02:13 PM IST | Source: CNBC-TV18

Crude may trade near $100/bbl in medium to long-term: ONGC

Oil marketing companies have come into favour ever since the government signaled its intension to switch to market-linked soon, helped by a softening of global crude oil prices.

Aloke Kumar Banerjee, Director of Finance at ONGC believes switching to market-driven prices will be a big positive. He expects crude prices to remain around the USD 100 per barrel mark, unless there is an untoward surprise.

Oil marketing companies have come into favour ever since the government signaled its intension to switch to market-linked soon, helped by a softening of global crude oil prices.

“The decision of the government, which stands today, is reduction in diesel subsidy by 50 paise per month, which means, increase in prices by 50 paise. So, the logical conclusion is that as and when that is over, it will become market driven,” Finance secretary Arvind Mayaram said at an event organised by industry body Assocham.

The Indian government, which used to force oil companies to sell automotive fuels steeply below cost, last year gave them the freedom to price petrol at a profit while initiating a 50-paisa monthly hike for diesel till prices reached breakeven – under pressure to cut its yearly Rs 65,000 crore fuel subsidy bill.

Also Read: Crude below $100/bbl may hasten diesel price decontrol

Below is the transcript of Aloke Kumar Banerjee's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.


Sonia: The finance secretary has said that diesel will now be made market driven very soon. Do you think that is a realistic assumption and what impact do you think it would have on upstream companies if the overall subsidy burden comes down?

A: I think it has a major impact of the international price also. Today we are in a very comfortable position that crude price is coming down. This is one part.

Also, medium-term to long-term crude price is about less than USD 100 per barrel. So from that angle, I think government can continue as far as diesel is concerned unless and until there is a major oil shock, which is perhaps not very likely. But at the same time with that contingency that if there is any major oil shock then some rethinking may be required there.

Sonia: The worry during the United Progressive Alliance (UPA) regime was that any cut in under-recoveries will be used by the government to address its own fiscal deficit and upstream companies would continue to finance the burden. Has the new government given any signals of a change in that stance?

A: In fact, for quite sometime we have been requesting the government to review this subsidy mechanism because they are deducting USD 56 per barrel and because of condensate consideration, ONGC’s net subsidy is coming almost about USD 62-63 per barrel. As a result our net retention price is squeezing. At the same time, the cost of production is increasing day-by-day.

Keeping this in view, we have already represented to the government that we need a better price so that our retention is sufficient enough to take care of exploration and production (E&P) as well as overseas acquisition because we have to support our overseas acquisition through OVL.

The government has also conveyed that they would look into this aspect with all this consideration and we feel that with the reduction in the overall under-recovery drastically, we can expect reduction in our contribution to the under-recovery or discount. So definitely we are optimistic.

Sonia: What kind of realisations do you think would be fair? I know you want USD 65 per barrel but that is not possible in the current scenario, so you are currently making about USD 41 per barrel, what kind of realisations is a realistic assumption?

A: This oil operation is something very peculiar. In some of the fields, the production cost is quite high while in some of the fields, it is quite moderate. Some of our fields like - marginal small fields, the production cost is more even in existing fields. Also we are going for schemes for enhancing the production and there also the cost is increasing.

So we have already requested government in that cases, our price should be remunerative enough so that we can go for even production in some cases unless until you get a remunerative production -- our production will not be remunerative at all. So, breakeven price also we need a certain level, which is more than what we are getting today. This is one aspect.

As far as even general existing production from the existing field, there also the retention last year was abysmally low, this year till last quarter it was USD 47 per barrel. So we feel that this may not be sufficient enough for our long-term capital projects.

We are going for two major capital projects, one in east coast and other one is west coast. So for these two fields we will require quite a substantial investment. So naturally we feel that we need sufficient retention for deployment of funds for this development programmes.


Sonia: If I heard you right, you said you need more than USD 47 per barrel realisations for your long-term capex but if you are promised USD 60 per barrel, can you assure that you would ramp up production significantly, so that reliance on imports is lowered?

A: Definitely. In oil and gas, hydrocarbon production the import/output relation is also very uncertain. So what we are telling government is that if you give us the remunerative prices, some of the fields which are not in a position to be developed with existing price, those can be put in the stream of production. Although those fields are not very major fields -- these are small fields and marginal fields but in addition, we have two of our major projects - basically more of gas projects one in east coast and other in west coast. These two fields are definitely going to add substantial gas production to our domestic gas production, which will go a long way to meet our energy demand.

Although this production is expected to come from 2017-2018 onwards, they both are in offshore and particularly the west coast, the Daman filed, we are expecting it by 2017 and we are expecting a production of about 10 million metric standard cubic meters per day (MMSCMD) per day gas production while in the east coast, we are expecting gas production of the order of 20-30 MMSCMD gas per day. Plus we are having some oil production also. We have got some oil also there. So we are expecting that these two fields will add substantial amount of oil and gas to the domestic production.

Sonia: Are you disappointed with the back and forth on gas prices and where do things stand right now, have you factored in any increase in gas prices yet?

A: The gas price increase is the only government’s decision. Earlier government took a decision and decided to follow a certain formula and as far as that formula at that point of time, the price would have been about USD 8.4 per mmbtu. Today, it is quite expected that definitely the new government will look into the entire process and interest of the other stakeholders. It needs time.

So I feel that this may take some more time but at the same time, what is the most positive for us -- there is an upside because this price should definitely increase but only the time and the extent. So that will be anybody’s guess but as far as we are concerned, we have the upside and we feel that maybe this calendar year or anytime we can expect -- but at the same time, I am not in a position to comment on that that when it will come and how much it will come but definitely there is an upside for ONGC because our gas production is quite a substantial gas production by us.

Sonia: As of now what do you think will be your overall subsidiary burden for this year, will it be the same as last year or do you see a significant reduction in the subsidy burden for ONGC?

A: Whenever we calculate any profitability, we go by the most conservative basis. But if you see the background of this under-recovery, it started sometime in 2003-2004 it started because of those petrol, diesel -- that time petrol was a subsidised product and because of that under-recovery only, this subsidy issue came.

So subsidy is a product of those under-recoveries. Now over the years, subsidy increases because of the under-recovery also increases. Today under-recovery has come down and is likely to come down further, one is because of the government’s number of measures by diesel price increase and on the top of it is crude oil price reduction.

So as a result if the under-recovery is coming down, definitely subsidy is likely to come down. Only thing is that -- you were telling in your first comment that whatever direction is there government will take it for their budget deficit etc but I feel that already it was Rs 161,000 crore into financial year 2013 then 2014 it was Rs 139,000 crore and now this year in FY15 it is expected to be 1 lakh crore.

So definitely this Rs 60,000 crore reduction in the span of two years - we can expect some reduction and government has already conveyed that they are considering our proposal to renew this under-recovery burden on us. So we are definitely hopeful and I feel that the investors also would consider this aspect while investing in ONGC.

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First Published on Aug 22, 2014 11:19 am
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