Viable to produce gas at $5.61: DK Sarraf, ONGC

Written by Siddhartha P Saikia | New Delhi | Updated: Oct 22 2014, 17:37pm hrs
DK SarrafONGC chairman and managing director DK Sarraf
Most of our gas discoveries are viable at this range, ONGC chairman and managing director DK Sarraf told FE in an interview, referring to the new gas price of $5.61 per million British thermal units announced by the government last Saturday, with a provision for six-monthly review. He said an exploration company normally looks at potential gas prices over a 20-25 years horizon to determine whether a particular block will yield its remunerative returns, adding that the new price will stand ONGC in good stead in augmenting its natural gas output, as planned, from the current 62 million standard cubic metres per day (mmscmd) to 100 mmscmd by 2022.

Asked whether a price of $5.61 per mmBtu on a net calorific value basis is viable one even for its deepwater block in the Krishna-Godavari Basin (KG-DWN-98/2) where it is slated to start production by 2018, Sarraf said: Of course it would be viable. The PSU is learnt to have internally estimated the viable gas price for the northern area of the block at around $6/mmBtu, although this could vary depending on the externalities during the contract period.

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ONGCs KG Basin block is adjacent to Reliance Industries KG-D6 block which has seen a steep fall in output, leading to an arbitration between the government and the company.

ONGC, however, would have to go back to its drawing board to devise a strategy to monetise its Mahanadi block. It had discovered less than 1 trillion cubic feet of natural gas in the deepwater block that is economic only at a gas price of around $10.72 to $12.63/mmBtu, about three times the prevailing prices.

The revised gas price would be viable for most of the projects other than the Mahanadi block. The discoveries in the Mahanadi block may require a higher price, Sarraf said.

Still, since the new price would apply to all nomination blocks, ONGC and Oil India are the biggest beneficiaries. For ONGC, every dollar increase in gas price, would boost revenues by Rs 4,000 crore and profit after tax (PAT) by some Rs 2,300 crore, Sarraf said.

In FY14, ONGC bore the highest ever oil subsidy bill of Rs 56,384 crore, forcing the company to dip into its cash reserves. With the diesel price deregulation and the planned roll-out of the direct benefit transfer scheme for LPG, Sarraf is now optimistic that the firm's subsidy bill would come down substantially, leaving more funds for its capex programme. Of course, how the government would revise the subsidy sharing mechanism between itself and upstream oil companies ONGC and Oil India would be significant too. The government has deregulated diesel, which is a good step. The overall subsidy (under-recovery) would come down in this year to about Rs 85,000-86,000 crore against Rs 140,000 crore last year. At this moment, I would not be able to tell (what would be) the exact subsidy burden for ONGC, as the government is yet to tell us about our share of subsidy, the CMD added.