Will diesel price deregulation drive re-rating for OMCs?

Vasudeva says cost of production is less in offshore compared to onshore.

Below is the verbatim transcript of Sudhir Vasudeva's interview with CNBC-TV18's Latha Venkatesh, Sonia Shenoy and guest editor Abhay Laijawala, MD & Head of Research, Deutsche Equities India.

Abhay: I want to primarily focus on gas because I don’t know if you have heard about a report that Deutsche Bank has put out. Our view is that India is going to move into a model that is going to be highly materials, highly energy intensive and in order to move towards that economic model India will need to safeguard its energy security as well as its foreign exchange security. So over here the issue is primarily with regards to gas. What is in your view a fair price to breakeven in the gas sector particularly given that most of the gas discoveries now are in deep offshore basins?

A: As a gas producer, I am talking from my capacity as former chairman of ONGC. We are the biggest gas producer in the country still today and the projection which ONGC also has for the future, maximum gas is going to come from deep waters etc. Even today our cost of production is about USD 4.43 a million btu. Deep water, we have been telling right since the beginning that it will not be possible to produce at this rate. So, gas price needs to be increased. Only if gas prices are increased we can produce.

ONGC has the potential to reach a level of more than 100 million cubic metres a day from deep waters and existing discoveries put together. Although requirement of gas in the country is of the order of 400 million cubic metres a day, this is not going to satiate entire requirement but this will go a long way and there are other private parties - Oil India etc - so if gas prices are increased definitely it will see an impetus in producers monetising gas reserves in difficult and hostile areas.

At the same time one has to see the impact of this on consumers, predominantly on fertilizer and power industry and how this is going to affect common people. That is why the government has now rightly formed the committee of the secretaries which are the largest consumers of this and they will decide on a price. So, pricing is the only issue. As far as the potential is concerned, I think that there is enough potential although we cannot be self sufficient in gas supplies etc but we can go a long way from where we are today.

Abhay: Moving on to what is right now of lot of topical interest is the key question that investors have for gas producers in the country is as a result of the big reduction in the overall fuel subsidy. The government is perhaps going to look at the subsidy sharing mechanism in a meaningful manner. Up until recently as we understand that the share of upstream was close to about USD 50 or so and now we are hearing that the share could move to probably a 50-50 between upstream and downstream. In your view what is likely to evolve over here and what could be the impact of 50-50 on companies like ONGC? I am referring to downstream fuel products which you all share and the realisation on the gas eventually.

A: Last year, the total under recovery was of the order of Rs 1,40,000 crore and the government paid only Rs 77000 crore and Rs 67000 crore was paid by the E&P companies and only Rs 2000 crore was burdened to OMCs.

This year because of diesel price increases, crude oil prices being low etc, the under recovery burden is projected to be about Rs 98000 crore and what I have been indicated is that it will be evenly split between the government and the E&P companies. So, Rs 49000 crore each with no burden going to OMCs. This will certainly be less than what it was last year.

ONGC last year, out of this Rs 67000 crore paid about Rs 54000 crore. At Rs 49,000 crore, if the figure is right and our burden being about 82-83 percent, we will be about Rs 40,000 crore, which will be about Rs 14,000 crore less. So, this is good for ONGC. All this money can go towards monetisation of assets and also for impetus on exploration. Same thing is true for Oil India as well.