Fix subsidy formula at $65 for project completion: Ex-ONGC

A: Earnings of ONGC will be severely dented if the crude oil prices are USD 50 per barrel. This year till first half of the year the crude oil prices were alright so the first half earnings were not very bad. However, next two quarters would depend upon what is the subsidy burden going to be if the oil prices remain at USD 50 per barrel.

Latha: At the moment if there is an offer for sale (OFS) of ONGC shares this is what an investor is going to look at that for the moment it is USD 50 per barrel. The best case that the government can tell you is no subsidy burden under USD 60 per barrel and progressive burden at crude above USD 60 per barrel. Will an investor bite at all?

A: In the beginning of the year the subsidy burden was estimated to be around Rs 1, 20,000 crore. In the first half the under-recoveries were of the order of about Rs 55, 000 crore. Now, what is being projected is that the subsidy burden would be about Rs 77, 000 crore. So, if the subsidy burden is coming down by Rs 50,000 crore there is no reason for the government to be taking this subsidy from ONGC, Oil India and Gas Authority of India (GAIL) for this purpose. So, if relief is given to ONGC and Oil India then the share prices will lookup. However, it has to be added up with so many other things and when the market is right then only ONGC shares should be divested.

Sonia: If this new subsidy sharing formula is used then how much do you think ONGC’s net realisations could go up to?

A: I am not aware, what I have heard ONGC and Oil India had jointly proposed a formula that up to USD 65 per barrel there should not be any subsidy and beyond USD 65 per barrel up to USD 100 per barrel 85 percent of the incremental revenue should be taken as subsidy and beyond USD 100 per barrel 90 percent because oil fuel services cost also goes up in tandem with the crude oil prices so take care of that another 5 percent. I have no idea in terms of absolute numbers as to how this will help but presently when the crude oil prices are less than USD 56 per barrel there is no point, there is no rationale of having a formula which says that ONGC and Oil India have to pay USD 56 per barrel towards production of crude oil.

Sonia: Is there a risk that any kind of adhocism may return at some point in this year itself if crude surges again?

A: I would not be able to comment on that but this is what has been worrying everyone, the producers as well as the market, analysts, investors that the formula has never been consistent. Right from, from the time the subsidy was introduced in 2003-2004 it has seen many avtars and the latest one was this USD 56 per barrel. We wanted a consistency first of all; both ONGC and Oil India were producing predominantly from Old Fields and since the cost of production was going up time and again, also the new projects were not becoming viable at less than USD 65 per barrel, this is what was suggested by these two oil producing companies that if we have given USD 65 per barrel at least there will be some consistency in our outlook as to what the realisations is going to be and how our funds will flow and how many projects can be cleared, etc.

Latha: USD 50 per barrel is quite clearly the nadir of the crude cycle, the global economies are not going to be in deflation forever and over production of shale gas is not going to be a reality forever; it is going to be a global growth story in calendar 2016 or 2017. How should an investor look at, if he is given a reasonable promise that ONGC will not have to bear a subsidy burden under USD 60 per barrel and over USD 60 per barrel it will be progressive you think he will not bite, he will be in the money after 2016 or 2017? As well do you think he will be much better off if that cut-off number was not USD 60 per barrel but say USD 65 per barrel?

A: Everybody, the investors, etc they look for certainty and if this kind of uncertainty is removed or the adhoc-ism is removed they will look at ONGC with renewed interest. Unfortunately, when any investor is looking into this kind of company or share they also see the history. Right from 2003-2004 this formula has been just continuing on adhocism basis and that is what has been worrying. Every time we have gone to the market for disinvestment, etc two things have bothered investors very much – one was the gas price which was later on revised and second thing was this uncertainty on subsidies. The government of the day has to address this and fortunately today because the crude oil prices are less, they are in a better position to address this issue more resolutely.

Latha: Let me give you a blank check kind of question, obviously the government is not going to not touch ONGC’s money if crude were at USD 75-80 per barrel or thereabouts so as an ONGC well wisher what would you like to hear?

A: Just to balance both the sides I would plead for at least give USD 65 per barrel to ONGC so that the projects can be taken forward. There are many projects which would be put on hold both marginal fields as well improved oil recovery (IOR) and enhanced oil recovery (EOR) projects which are not viable at less than USD 65 per barrel. These will add lot of value because the marginal fields if I remember correctly we had indicated that about 13 million tonnes crude oil could be produced from these marginal field projects which are still under consideration. They will save about Rs 40,000 crore for the government at then prevailing prices of USD 100 per barrel when we had written to ONGC way back in 2013.

Similarly, this IOR and EOR projects if they are not implemented ONGC would tend to lose about 70 million tonne of crude oil in next 10 years and this amounted to about Rs 2, 25, 000 crore of savings for the country. If this much of crude oil need not be imported and was produced by ONGC if at all ONGC was given USD 65 per barrel – that was the economics we gave in. That is why the government was very actively considering this – giving ONGC and Oil India USD 65 per barrel and same thing is being reconsidered again.