Rangarajan proposal to bring relief to ONGC

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SummaryThe Rangarajan Committee’s proposal to double the domestic natural gas price will give major relief to ONGC, which has been hit by the policy of giving upstream firms a larger share of oil subsidies meant to compensate marketing firms.

The Rangarajan Committee’s proposal to double the domestic natural gas price will give major relief to ONGC, which has been hit by the policy of giving upstream firms a larger share of oil subsidies meant to compensate marketing firms. The committee is believed to have proposed a gas price of $8 per mmBtu, compared with $4.2 that will be effective till 2014.

If the panel’s recommendation is implemented, ONGC’s gas revenues will nearly double at current levels of production. Senior analyst at Nirmal Bang Institutional Equities Ashutosh Bharadwaj said: “According to rough estimates, the current blended gas realisation per quarter at $4.5 per mmBtu is R4,000 crore. The acceptance of the panel recommendations will give an incremental gas revenues of R3,000 crore per quarter or R12,000 crore annually to ONGC.”

ONGC now gets a price of $4.2 for its nominated blocks, at par with Reliance’s KG-D6 gas (the price of APM gas produced by national oil firms was revised to $4.2 per mmBtu a couple of years ago).

The company charges $5.65 for the gas produced from the Panna Mukta and Tapti fields.

According to industry estimates, the lifting cost (cost of production) of ONGC is $5.2/boe (barrels of oil equivalent). The cost of gas production is approximately $1/mmBtu.

ONGC's subsidy bill more than doubled to R12,330 crore in the second quarter of this fiscal, from R5,713 crore in the same period last year. Its post-tax profit dropped 32% to R5,897 crore. The company has expressed concern over having to take a higher share of the oil subsidy burden and said if the situation continues, its cash reserve — which stood at R12,000 crore at the starting of the year — would drop to R4,500 crore by the fiscal end. Between 2008-09 and 2011-12, the government reduced its share of under-recoveries from 69.02% to 46.24%, while the share of upstream companies increased from 30.98% to 38%.

The acceptance of the panel recommendations may benefit the oil explorers but it will certainly put consumers' pockets under strain. A $4 per unit increase in the price of gas will add another R35,000-40,000 crore to the Centre's fertiliser

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