Positive impact of $5-6/bbl if cess on crude is removed: ONGC

ONGC will see positive impact of nearly Rs 5000-6000 crore on sales if the cess on crude is removed — from fixed quantum to ad valorem duty, says the company's director - finance AK Srinivasan. He says this translates to USD 5-6 per barrel.

The cess rate may be cut as a sharp drop in crude has impacted E&P companies. The government is reportedly considering ad valorem duty of 10 percent on crude oil.

The government is also looking to re-impose custom duty of 5 percent on imported crude oil. Srinivasan says this too will be positive and the company will see a positive impact of Rs 2,000 crore on EBITDA.Below is the verbatim transcript of AK Srinivasan's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: What are your expectations from the Budget, some of the ONGC fans are hoping that there will be duties imposed on crude imports, is that a legitimate expectation at all?A: If custom duty is imposed then there is an impact on the product prices but as far as ONGC is concerned, we get about 50 percent of the custom duty rollback on our offshore duty crude. So it is a gain for us but as far as the product prices are concerned, there has been impact on this.Sonia: The other big positive that could come through for a company like yours is the possible reduction in the cess on crude oil from the fixed quantum to an ad valorem duty. I just wanted to understand from you, currently what is the cess that is levied on an absolute basis and how much do you pay both quarterly and annually and if it gets reduced then what could the positive be for a company like yours?A: Presently the cess, which is levied on a product is Rs 4,500 per metric tonne. That translates to around USD 9 per barrel on my entire production volumes. If this cess is reduced in ad valorem basis in the Budget proposal then there is going to be an impact about USD 5-6 on our topline. USD 1 gives us about Rs 1,000 crore impact on my volumes of nomination block and nomination production.Latha: Likewise if you can tell us what will be the impact if the customs duty of 5 percent was imposed, what will be the impact on your earnings before interest, taxes, depreciation and amortisation (EBITDA)?A: On my EBITDA, it should be giving about Rs 2,000 crore. Exact numbers I don’t have as of now but definitely 2.5 percent will be getting added up to volumes on my offshore crude that gives me a gain on that.Sonia: You did say that currently the cess levied on absolute basis is Rs 4,500 per metric tonne and there could be a positive impact of USD 5-6 per barrel and one dollar is equivalent to Rs 1,000 crore. So is it safe to say that about Rs 6,000 crore could be the positive impact for a company like yours?A: Because in the current crude prices which are hovering in the range of USD 30 per barrel, definitely that gets added back to our revenues and it helps us to do a business. Otherwise in a current crude price level and if the taxes are at USD 9 then nothing is left for the companies to do the exploration and production (E&P) activities.Latha: Is there any reasonable chance of the cess going to ad valorem?A: We are hoping on that. It should come through in our Budget proposal and apart from ONGC, other players are also seeking a relief on this because when the cess was levied, when the crude prices were in USD 100 per barrel range and now the crude prices are in the range of USD 30 per barrel, definitely at the same level, USD 30 per barrel will not be a justified proposition.Sonia: Could you give us what the impact could be on your earnings per share (EPS) because there are some analysts who have forecasted that there could be about Rs 3.5-4 positive impact on your earnings per share if there is this reduction in the cess, is that a fair assumption?A: Obviously, as I told you about USD 5-6 per barrel is the revenue and that adds up to my topline and the bottomline also goes up. Automatically, the EPS is bound to go up from the existing levels. Different analysts have their own calculation, definitely it will go up.Latha: In April, you should be probably in for a gas price revision as well. If it is calculated with today's average, what might be the gas price?A: Definitely it is going to be -- if the current level prices are going -- about 15-20 percent down from the existing level. So for the next half, there will be a negative impact of the gas price.Latha: Is it made up by volumes at all? Is there incremental gas consumption by, for instance, fertiliser companies?A: Presently, the gas volumes are in the range of about 23 billion cubic meters (bcm) production levels and sale volumes are around 19 bcm and going in the next year, 2016-2017, we expect the gas volumes to go up to 25 bcm and thereby the sell is likely to increase by 1 bcm. So, that gets little bit offset due to the higher volumes.Sonia: What could the topline impact be net-net if the value goes from 23 to 25 bcm, for ONGC what could the topline impact be?A: As of now, I don’t have the exact numbers to tell you but it will be positive by 1 bcm going up.Latha: Sometime during your Q3 results, you said that the domestic gas price is not remunerative because your cost itself is USD 3-3.2 per mmbtu?A: If you see the cost of gas with a return on my capital employed, it is about 5.29 and remove the growth portion on that then it is about 4.02 production and we are getting about 4.24, so it is only a marginal incremental thing there on the gas.Latha: You took an impairment charge on your east India assets, is there any further impairment on ONGC Videsh or something that you will be taking in the current quarter?A: Normally we calculate our impairment as per the accounting standards of AS-28 at the end of March 31 and looking at long-term crude prices and based on the entire calculations are carried out and can be formed only when the final numbers are drawn on March 31.