Mumbai High plan at stake on subsidy burden

Written by Pranav Nambiar | New Delhi | Updated: Nov 18 2013, 11:07am hrs
Mumbai HighThe break-even price for the Rs 16,000-crore third phase is estimated at $66 per barrel for the Mumbai High North field
The oil subsidy regime which is taking a heavy toll on the finances of Oil and Natural Gas Corporation (ONGC) could hit the development of Mumbai High (Bombay High), which continues to be its most prolific producing asset although discovered half a century ago.

Company officials who have prepared the third-phase redevelopment plan for the field say that the net realisations on sale of crude oil from the phase will fall significantly short of the break-even price for crude oil.

The break-even price for the Rs 16,000-crore third phase is estimated at $66 per barrel for the Mumbai High North field and $77 per barrel for the Mumbai High South field. As against this, the current realisations after bearing the subsidy burden is just around $45-46 per barrel.

The break-even price includes operating costs, taxes, royalties and return on equity.

The company will soon approach the board with a proposal for the third redevelopment phase, which is expected to bring in an additional 20 million tonnes of oil starting two to three years from now. We are worried that subsequent phases of redevelopment will become unviable as costs have gone up and subsidy burden remains high, said a senior ONGC official.

ONGC subsidises PSU oil retailers to the extent of $63 per barrel for selling diesel and cooking fuel at discounted prices.

ONGC has made good accretion to reserves over the years (the reserve replacement ratio stood at a healthy 1.84 in FY13), but since most of the additions are of deep-water blocks, where it suffers technologically, the production has more or less stagnated. Mumbai High, although an offshore oilfield, is in shallow waters (about 75 m).

The Mumbai High fields, which have been producing for four decades now, require regular redevelopment programmes through improved oil recovery (IOR)/enhanced oil recovery (EOR) schemes to sustain production. According to senior ONGC officials, future redevelopment efforts could become unaffordable if the subsidy burden remains at current levels and the company could make losses on oil production.

Mumbai High is strategically important for the company as it accounts for about 50% of the company's production and the company has not made many oil discoveries in recent times.

ONGC undertook two other phases of redevelopment in 2000 and 2010 which resulted in an incremental production of 57 million tonnes (mt) and 36 mt of oil, respectively. In the two phases of redevelopment of Mumbai High, the company has already achieved around 47 mt (up to March 31) of production.

In a recent interview with FE, ONGC chairman Sudhir Vasudeva said, Our production from Mumbai High is definitely falling and we have taken a lot of efforts in putting improved IOR and EOR schemes. The IOR/EOR schemes in the first phase cost us about $7 per barrel, while for the current schemes our costing is about $12 per barrel. In future this would cost us even more, he said.

ONGC officials said that the redevelopment efforts that the company is undertaking will help extend the life of Mumbai High till 2040 and improve the recovery factor to 35% from the current 28%. Production at Mumbai High started in 1976.

ONGC officials add that the current subsidy levels also threatens the company's future ambitious exploration plans, as there is very little returns on crude oil sales. Around 75% of ONGC's production comes from just 15 fields including Ankleshwar and Rudrasagar, which were discovered decades ago but are still on production.

These fields require greater efforts in producing hydrocarbons and also suffer from declining production thus increasing their per barrel cost of production.

ONGC officials say that the cost of production (excluding return on equity) varies between $38 per barrel in the case of shallow water blocks and $44 per barrel for on-land and marginal fields. The realisations for the previous quarter stood at around $46 per barrel. The company does not have significant production from deep-water blocks at the moment where the costs are higher. ONGCs production costs includes operating costs of $12, depreciation, depletion and amortisation costs of $11 and tax, royalty, etc, costs of $17 per barrel.

Cairn India, which is the largest private sector oil producer, has the lowest operating cost in the country at $3 per barrel, compared to $12 per barrel in the case of ONGC. Analysts say that Cairn India's low operating costs can be attributed to its prolific Barmer, Rajasthan block.

Chairman Vasudeva believes that if the subsidy burden continues to rise in a similar fashion like it has in recent times, ONGC will have to dip into its cash reserves to the extent of Rs 5,000 crore this year and a similar amount next year. ONGC had a cash reserve of Rs 13,000 crore at the beginning of the fiscal which will be exhausted in two years. ONGC officials state that they might have to approach the markets to borrow around Rs 3,000-5,000 crore as early as in the next financial year.