New gas price for undeveloped discoveries to be $7/MMBtu: ONGC

DK Sarraf, CMD, ONGC says, new gas price for undeveloped discoveries will be around USD 7 per million British Thermal units (MMBtu). The gas price for existing production remains unchanged at USD 3.8 per MMBtu, he adds.

Sarraf expects the Ratna and R Series fields to add 0.7 million tonnes per annum to output. These oil fields, lying 130 kilometres off the Mumbai coast, were recently returned to ONGC after the government’s contract with Essar Oil could not be concluded even after 20 years.

He says the implementation of Greenfield projects might take couple of years to implement and production is likely to start within 3-3.5 years. While the budgeted capital expenditure for FY17 is at Rs 30000 crore, revenue is likely to be USD 7 per MMBtu, he adds.

Sarraf expects to speed up investment decision on KGWN 98/2 oil and gas field, discovered in September 2015.Below is the transcript of DK Sarraf’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Sonia: If you could just start by telling us what could be the estimated new gas prices for undeveloped discoveries based on the new formula?A: It is a complex formula. They have given three different fuels and the imported price of those three different fuel or fuel baskets the minimum of the same would be the expected gas price. So, we are working on that, but we suspect that based on formula it would be around USD seven per million British Thermal Units (MMBtu) on gross calorific value (GCV) basis. Latha: Actually some brokerages are toying with a much lower number between USD 4-5 per MMBtu. You do not think that is correct?A: What I told you, USD seven per MMBtu is based on the 2015 average prices of those fuels. And as per the formula which has been announced, it seems that the price applicable from April 1, 2016 will be based on 2015 calendar year fuel oil prices average.Latha: Then in that case, would you go ahead and develop these fields with some alacrity to take advantage of this higher price?A: Yes, sure, certainly because one of our major discoveries which is eastern offshore, namely Kg Dwn 98/2, we feel that at the current prices, it would viable. And we have done a lot of technical work in terms of preparation of the field development plan of the same and we have already submitted that to Directorate General of Hydrocarbons (DGH), but we were requesting the government to review the gas pricing formula which has been done yesterday and we feel that we would be able to take investment decision very soon.Sonia: So, you said that for the undeveloped discoveries, the new gas price will be USD seven per MMBtu, but what could be the estimated gas price for the existing oil fields?A: I think that the gas price for the existing production is not changed as per this formula. It is only the future investments that will get benefit out of it.Sonia: So, if it has not changed, how much would it be currently? Will it be below USD three per MMBtu?A: No, it is much above USD three per MMBtu. It is about USD 3.8 or so.Latha: How much more gas will you be able to produce? FY17, what is the excess volume and multiply it by USD seven and give us an idea of revenues that you are forecasting.A: We would start our investment implementation now an it would take a couple of years to implement those projects, because these are all Greenfield projects. And the production which we anticipate from this investment would be around 17 million cubic meters per day of gas and about 77,000 barrels of oil per day.Sonia: Another thing that we wanted to discuss with you is the government returning the Ratna and R-series blocks to ONGC to develop and produce. Can you tell us what impact will that have on your output going ahead?A: We have not estimated that very accurately as of now, because we had this field more than 20 years back winners and after that, a lot of developments have taken place in terms of exploration near that particular field. So what will be the impact if consolidate everything into this discovery and then develop, so that has not been estimated, but it would be around 0.7 million tonnes per annum which is about 15,000 barrels per day.Latha: From what you are speaking about your Kg Dwn field, your new gas at USD seven is going to available only probably in 2018 or 2019. Now, what we understand from gas experts, commodity experts is that by 2018, a lot more LNG is going to available from Australia – almost 100 million tonnes and the demand in the eastern hemisphere is not so good. They were forecasting LNG prices of USD five landed in India. So, are we counting our chickens before they hatch?A: I do not think so, but in any case, when you make these investments, this type of risk is always there. But, I do not think that this is a major risk so far as our investment is concerned for India.Sonia: But just to understand in terms of a timeline, is it safe to say that by the end of the next four or five years, we can see some benefits on account of the Kg Dwn 98/2 projects and this is a more longer-term impact, not a near-term positive impact for a company like yours?A: We would be a little faster than what you said. We may start our production between three to three and a half years from now.Latha: But, the government will keep 10 percent of the profit share, that is a higher profit share.A: No, that is a different formulation which they have given. This does not apply to this particular production sharing contracts.Sonia: So, you have said that production will start 3-3.5 years from now, but you have also said that pricing freedom will help monetise some of the discoveries. Can you elaborate which are these discoveries? How much do you expect to monetise and are there any buyers in the current environment?A: Yes, the pricing freedom which has been given is for the investments to be made now which is quite helpful for us. So, the prices which we just discussed, these are the ceiling prices. So, we will have the pricing freedom subject to the ceiling prices. And also, we would have the marketing freedom as well.Latha: What is your capital expansion amount, your capital expenditure (Capex) plan for FY17?A: For FY17, our Capex would be, it was planned earlier, it was about Rs 30,000 crore. But, we have seen a lot of reduction in the cost of services as well as increase in efficiency of these services. So, because of that, the Capex may be slightly below that, but our original plan of Capex was Rs 30,000 crore.Latha: So, the immediate beneficiaries would be people like Aban and all, who would be helping you drill out?A: The reduction in Capex would be from lower rig rates and lower prices of the new platforms and so on, as well as the efficiencies of these assets have also increased which means that we can carry out the same amount of work with less amount of assets. So, because of that also, we would be able to contain our Capex to some extent.