State-owned Oil and Natural Gas Corporation Limited (ONGC) has been up only 22 percent year-to-date whereas, oil marketing companies (OMCs) have been rerated.
With crude prices plummeting, the government now has an opportunity to do away with subsidies altogether, says Sudhir Vasudeva, Former CMD, ONGC.
However, the company is unable to recover its production cost in this subsidy regime of paying USD 56/bbl, he says adding that its situation will improve if subsidy sharing is addressed and subsidy rationalisation is revisited.
According to him, investors need clarity on gas pricing and subsidy formula, as new gas price revisions have fallen short of expectations.
Going ahead, production from the state-owned company may not increase in near-term, he adds.
Below is the verbatim transcript of the interview:
Q: This should have been the blue-sky scenario for ONGC. You have crude prices at somewhere around USD 70/barrel or so, diesel is free, petrol is free but still there is no clarity on what is going to happen to the overall subsidy burden and how much ONGC would pay. How would you react to something like this?
A: Definitely, this is a situation where probably the government has an opportunity of even abolishing subsidies. Till Q2, the subsidy formula was still the same that USD 56 per barrel of oil production was being given as subsidy. This formula was relevant when oil prices were about USD 110 per barrel or something. So, USD 55 per barrel was being given to ONGC and Oil India Ltd (OIL). But in today’s circumstances when USD 71 per barrel is oil price and if USD 63 per barrel for ONGC has taken away then ONGC doesn’t get even the cost of production by this. So even for Q2 when the subsidies were being allocated, ONGC was asked to pay about Rs 13,700 crore so in this first half ONGC has paid nearly Rs 26,700 crore but that time itself there were hopes that this formula would be addressed in the subsequent months.
Now that the subsidy burden has been projected as Rs 92,000 crore against Rs 120,000 crore in the beginning of the year, this is already a Rs 30,000 crore respite and going forward with the oil prices still going down, these subsidies may again go down. So this is the time when this subsidy formula needs to be addressed and very clear picture needs to be given.
Earlier, there was some consideration that ONGC and OIL would probably be given USD 65 per barrel of oil production. If something like that is ensured, this will give a very clear indication for ONGC management and OIL management to see how to monetize their projects as they compound.
Q: Until we get that clarity, if the upstream companies have to pay Rs 60,000 crore itself going forward then how much do you think the realisations for the ONGC could go to because even in the quarter gone by, the net realisations fell to USD 41/ barrel versus USD 47 per barrel in the previous quarter. What do you think could be the impact on realisations?
A: The cost of production itself is about USD 40-41 per barrel. So there is no way that this kind of subsidy formula can work. The oil production would be then a loss-making proposition for national oil companies (NOC). So this formula is not relevant in today’s circumstances, the formula needs to be revised.
First of all, this Rs 92,000 crore - what is being reported probably would be shared 50:50 ratio between NOCs and Government of India. In that case, about Rs 46,000 crore is going to be the burden subsidy on NOCs this year and if ONGC is to bear about 83 percent of that, it will be about USD 40,000 crore - a rough calculation. So, if ONGC has already paid Rs 27,000 crore, I hope if everything remains constant, about Rs 13,000 crore is more that is required to be paid which is just the half of what we have paid in every quarter in the past Q1 and Q2.
Q: Do you get a sense that even if the government doesn’t have the resolve right now to completely abolish subsidies but we are hearing targeted subsidies for LPG for sure and maybe some loops would be plugged for even kerosene. In that case do you think the next financial year could be good for companies like ONGC and Oil India where they get to make maybe realisations of USD 60-62 with no subsidies? Do you see something like that playing out maybe not this fiscal but maybe next fiscal?
A: I hope there will be more clarity as we go forward. In this quarter itself, we would know what is the colour of the things that are going to come in future.
Q: Under current scenario, do you think the ONGC divestment is a good idea because this is one of the most under valued stocks right now and even at Rs 370 or so the stock is struggling while we have seen quite a bit of rerating in the PSU oil marketing company stocks?
A: In the recent times, every time we have gone to the market there have been two questions by the investors. One was the gas price in the past, which is still valid today because this new gas price revision has fallen short of expectations and second thing is subsidy formula.
If both things are corrected, there is possibility of good realisation. Otherwise, the way government is thinking of doing this disinvestment in two tranches otherwise is market is good. If the Sensex is 28600 and everything is looking up, investment climate in the country is looking up from that viewpoint it is the right time. Specifically to ONGC, if these issues are addressed then things will brighten up.
Q: The other aspect has been that production for ONGC has also been weak for a while. In the quarter gone by, the domestic oil output was flat and many analysts believe that ONGC will not be able to meet its production targets for the fiscal, are you getting a sense that this could be a soft FY15 for the company in terms of production?
A: This needs to be understood that ONGC has been producing for last so many years and majority of its production is coming from old fields. In fact, 75 percent of our production is coming from 15 old fields. So increasing production from old fields is very difficult. On the other hand, the production is falling.
The production increase comes only from new projects, the production increase which has been seen off late is result of decisions taken in the last two-three years of monetizing these fields like D1 and D3 etc since all these projects have been implemented, the wells have been drilled, the production is seeing some uptrend in offshore. But in onshore, first of all the production levels are low, the productivity per well is low, the possibility or the margin for improving onshore production is slightly less.
The next trench of production increase will come only after this Mumbai High North and Mumbai High South plus this KG-D6 etc where the decisions have been taken for going for the new development and redevelopment projects. Once they fructify in the next two-three years then only the production will increase. In the interim, the production will continue at this level itself.
Q: Just to take that divestment argument forward, what is the sense you are getting, do you think we could get clarity on subsidy sharing before the ONGC divestment and if we don't get clarity then do you think the divestment will go through at all?
A: I wish I could comment on that but I have no idea.
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