KG basin to drive ONGC’s production growth in 2023, say analysts

The brokerage mentioned that while delay in project execution has hurt ONGC production, the floor price of domestic gas has come to its rescue

State-run Oil and Natural Gas Corporation (ONGC) is expected to see an uptick in production in 2023 with the commencement of projects including the Krishna-Godavari (KG) basin and Sagar Samrat.

The oil giant recently announced that its offshore drilling rig ‘Sagar Samrat’ was commissioned as a Mobile Offshore Production Unit (MOPU) on 23 December 2022.

Analysts are upbeat about the performance of ONGC this year and expect the company’s production to rise. “Sagar Samrat is expected to add ~6,000 barrels of oil per day (bopd) from WO-16, which is ~1-2 percent of ONGC’s existing oil production from domestic blocks. Much more important would be the developments in the KG basin, expected to add 10 percent of existing oil and 20 percent of existing gas production for ONGC,” Swarnendu Bhushan, Oil & Gas Analyst, Institutional Equities, Motilal Oswal Financial Services Ltd, told Moneycontrol.

The Sagar Samrat MOPU will handle up to 20,000 barrels per day of crude oil, with a maximum export gas capacity of 2.36 million cubic meters per day, ONGC said in a press release. The MOPU is also expected to add 6,000 bbls/day (barrels per day) of oil to ONGC’s production in the coming days, the company added.

Sagar Samrat, a jack-up rig, was converted into an MOPU and installed close to the WO-16 wellhead platform on 16 April 2022 for production, processing and transportation of oil and gas from the WO-16 Cluster. WO-16 is a cluster of four marginal fields in the Arabian Sea at a water depth of 75-80 m and 130 km from Mumbai which is about 40 km from Mumbai High.

KG basin to drive growth

With expectations of commencement of operations from ONGC’s much-delayed project in KG basin in Bay of Bengal, production growth of the oil giant is anticipated to rise in 2023.

“The decline in oil and gas production came in the backdrop of delays, especially in KG-DWN-98/2. However, with its completion standing at 76 percent as of October ’22, the visibility of first oil from KG-DWN98/2 and rise in gas production appear much stronger,” said brokerage firm Motilal Oswal in a report.

ONGC was initially expected to begin gas production from the Cluster-II fields of KG-DWN-98/2 or KG-D5 project in June 2019, while oil production was anticipated to begin from March 2020. However, the company missed the deadlines. It blamed the coronavirus restrictions, engineering changes and project execution challenges.

“ONGC’s MoU targets (standalone, excluding JV share) of 21mt (+8 percent YoY) of oil and 24.3 bcm (billion cubic meters) of gas (+18 percent YoY) are ambitious and predicated on the commencement of KG 98/2 asset after two years+ of delays. With an estimated ~12 mmscmd (million metric standard cubic meters per day) of gas and ~40,000 b/d (barrels per day) of oil production expected by FY25E, the KG asset will account for ~2 mtoe (million tonnes of oil equivalent) of oil and most of ~5 bcm/y gas output boost expected by FY25E,” said ICICI Securities in a note.

India’s crude oil production had fallen 2.67 percent in the fiscal year 2022 as ONGC missed production targets. In FY22, ONGC produced 19.45 million tonnes of crude oil, 13.82 percent lower than the target.

ONGC expects oil production to rise to 22.823 million tonnes and gas production to 22.099 bcm in the current fiscal year, the company’s management told investors in a call, reported PTI.

Analysts also expect the trend to be reversed in 2023 on account of production boost from KG basin.

“The much-awaited KG-DWN-98/2 is forecasted to reverse this trend from May ’23 by adding peak oil production of 40-45,000 bopd and peak gas production of ~10-12 mmscmd (both by FY25). At the peak, this field would add ~10 percent to ONGC’s domestic oil production and ~20 percent to its current domestic gas production,” said Motilal Oswal in a report.

Relief from Kirit Parikh recommendations

The recommendations of the Kirit Parikh Committee on natural gas pricing is expected to bring big relief to ONGC as it would incentivise the cost of production, the brokerage report said.

“The Kirit Parikh Committee recommendations of a price floor of $4/mmbtu and a cap of $6.5/mmbtu for APM gas, retaining premium for difficult fields and proposing a gradual movement to free pricing in three years (annual escalation of $0.5/mmbtu till then) is a material positive. ONGC has a production and development cost of only $3.5/mmbtu for most of its legacy fields and has seen an average blended realisation of only $3.7/mmbtu over FY15-22,” said ICICI Securities.

The Kirit Parikh Committee, which was set up by the government to review the pricing formula for gas produced in the country as global energy prices soared, has recommended complete liberalisation of natural gas prices by January 1, 2027.

The government-appointed panel also recommended a floor of $4 per mmbtu and a cap of $6.50/mmBtu for legacy and old fields operated by ONGC and Oil India Ltd.

Motilal Oswal retained its 'Buy' call on ONGC and picked the oil giant as the “top idea” for the current year in the sector.

“We recommend ONGC as the top idea for 2023 in the sector. Valuing the standalone business at 6x December ’24E EPS of Rs 28.2 and adding the value of investments of Rs 27, we arrive at our TP (target price) of Rs 198, implying 35 percent potential upside,” said Motilal Oswal.