Subsidising refiners not helping us

Updated: Aug 16 2012, 06:02am hrs
After the huge outcry by state-owned refiners against subsidising petroleum products, it was the turn of producer Oil and Natural Gas Corporation (ONGC) to warn against the subsidy mechanism that is weakening its profitability. Declaring the companys financial results for the first quarter, chairman and managing director Sudhir Vasudeva said that although the firm made a net profit of R6,078 crore 49% higher than what it was a year ago it was largely helped by a weak rupee. The company realised only $46.62 a barrel on the crude it sold during the June quarter aided by forex gains while its production cost was hovering around $38. Seven years of subsidising crude to refiners has hit ONGCs profitability by over R97,000 crore, Vasudeva said. Edited excerpts:

To what extent has subsidising downstream firms impacted your revenues

The government is right in taking subsidies from us. Its only that it should be a little more transparent and we should be remunerated. Last year, our cost of production was $38 a barrel before the cess was increased to $44 a barrel. It has been increasing at 8%. The cost of production by the end of this fiscal would be $47. If we realised $46 on every barrel of crude, it is because the dollar has appreciated and we have gained nearly R400 a tonne from R2,100 to R2,500. Had it not been so, we would have been in losses. In the first quarter of last year, the subsidy outgo was close to R12,000 crore, while in the second quarter, it was R5,000 crore. So it keeps changing. We cannot predict how much the companys profitability will be. Exchange rates will impact even the revenues from joint ventures too.

How much has ONGC gained from forex variations in the first quarter

Of the close to R4,000 crore increase in revenues, as much as R2,900 crore is from price increase due to a weak rupee. The rest is through quantity variants. The weak rupee also helped pushing down cost of production, and this year it has been less than $38 a barrel.

When do you think the subsidy mechanism will ease

I am an eternal optimist. For the last eight years, we have paid more than R1.16 crore (to subsidise oil refiners) and our profit has been impacted to the tune of R97,064 crore so far. If the subsidy mechanism was not there, this money would have gone into acquisitions. We could have merrily doubled the contribution of our overseas arm, ONGC Videsh Ltd (OVL) .

ONGC has discovered a new pool of reserves in D1 field off Mumbai, which you claim to be the third largest field in the region. How much is the recoverable oil from this

Normally, the recoverable oil is 30%, so it would come to 300 million barrels out of a total of an initial oil-in-place of one billion barrels. The FPSO (floating production, storage and offloading) unit that is coming for this has a processing capacity of 60,000 barrels. So, we can drill this immediately. It will have a production of 60,000 barrels a day, for seven to eight years. The peak production will ramp up from 30,000 to 60,000 barrels.

How is production at OVL faring, considering there were geopolitical issues you had to cope with in some parts

Last time, we produced 8.75 million tonnes (mt) and previously 9.45 oil and oil equivalent. The production remained static due to issues in Syria and Sudan. In Syria, the problems are still continuing and we have no access to production there, but things should improve in South Sudan. North Sudan is limping to normalcy, and almost 50,000 barrels are produced from there. This year, 8.5 mt is our target from OVL, and that excludes Syria and Sudan.

Do you have plans to list OVL anytime soon

This has been discussed in the board of ONGC as well. We are exploring all other possibilities. The board has said that we need to study this in more detail, and whether this is the right time to go to the market. If we have to raise debt, we can raise debt from ONGC also.

Have you relinquished your Vietnamese block in South China Sea, where it has been reported that China has raised objections

If it makes sense for us to remain there and do some work, we will do it. We wanted to relinquish since it was no commercially viable. We had relinquished Block 127 earlier, and wanted to relinquish 128 also but this has nothing to do with the South China Sea dispute. If it still makes commercial sense for us to invest, we will.

What are the issues dogging the KG-DWN-98/2 block in the Krishna Godavari basin

In some blocks, Navy and DRDO (Defence Research and Development Organisation) clearances are required. Not just ONGC, other operators too are facing similar problems.