With the cost of production at ONGC hovering around the $38-$43 per barrel levels owing to depleting fields and higher production costs, the company is left with little room to meet its ambitious exploration plans. ONGC is facing a $20 per barrel revenue deficit to its ideal net revenue realisation level because of the subsidy payout.
An ONGC official told FE that the cost of production varies between $38 per barrel in the case of shallow water blocks and $44 per barrel for onland and marginal fields. The company does not have significant production from deep water blocks at the moment. The break-up of ONGC?s production costs comes to: operating costs of $12; depreciation, depletion and amortisation costs of $11; and tax, royalty etc. of $17.
Cairn India, which is the largest private sector oil producer, has the lowest operating cost in the country at $3 per barrel compared with $12 for ONGC. Analysts say that Cairn India?s low operating costs can be attributed to its prolific Barmer, Rajasthan, block.
ONGC chairman Sudhir Vasudeva said the company requires a gross realisation of $65 per barrel in order to sustain its exploration efforts, while the current average realisation stands at around $43 per barrel. ONGC has massive investment plans to the tune of R11 lakh crore for exploration between 2013 and 2030, but it fears that future exploration activities could be impacted by the rising subsidy burden. ?Our net realisation has been coming down and in H1 it was only $ 42.56 per barrel. We need a net crude price of $ 65 per barrel to be able to fund the R35,000 crore-plus annual capex plans,? said Vasudeva.
ONGC relies on 18 aging fields which account for around 80% of its total production. These fields require greater efforts in producing hydrocarbons and also suffer from declining production, thus, increasing their per barrel cost of production. ?The production volumes in the case of shallow water fields are higher, hence the costs per barrel are typically lower than in the case of on-land fields. In the case of marginal fields we generally develop them in clusters where small fields are inter-connected,? said the ONGC chief.
Older fields like Ankleshwar, Mehsana and Rudrasagar, which were discovered in 1960s, are undergoing improved oil recovery (IOR) and enhanced oil recovery (EOR) programmes which add to the project costs. ?We have to put in more inject wells to extract more oil from these fields. Each new phase of drilling efforts also depletes these fields,? he said.
Vasudeva, however, added that if the subsidy burden continues to rise in a similar fashion like it has in recent times, ONGC will have to use its cash reserves to the extent of R5,000 crore this year and a similar amount next year. ONGC had a cash reserve of R13,000 crore at the beginning of the fiscal, which will be exhausted in two years. ONGC officials state they might have to approach the market to borrow around R3,000-5,000 crore in the next financial year.
