We want clarity on subsidy-sharing mechanism

Written by Prashant Mukherjee | Sunny Verma | Updated: Jan 25 2013, 06:59am hrs
Oil India, one of country's two public sector oil exploration firms, plans to complete two foreign acquisitions by December and has given non-binding offers in 3-4 cases. Ahead of the planned disinvestment stake this fiscal, the company has asked the Centre for a net realisation of $65/bbl by clarifying on the subsidy-sharing mechanism. In an interview with FE's Prashant Mukherjee & Sunny Verma, Oil India director (finance) TK Ananth Kumar said the upstream company does not expect any growth in oil and gas production this year.


While the government is trying ways of reducing under-recoveries and lowering the subsidy burden, there is still no clarity on the sharing of upstream companies. Can you throw some light on this

Last year, the subsidy burden was revised with a net realisation of $56/bbl for us, as against the percentage basis that was practised earlier. This year also provisionally the government has told us to stick to the $56/bbl norm. We don't mind parting with some of our (potential) gains to reduce the government's share of the subsidy burden, arising from the need to compensate for the under-recoveries of oil marketing companies. But we and our investors want clarity in the subsidy-sharing mechanism. The mechanism should be more predictable so that investors know what kind of price realisation the upstream companies can get. We have taken up with the ministry of petroleum and finance that we should be allowed to retain $65/bbl net realisation, as against $56 now.

How much subsidy burden does OIL expect this year

The recent revisions in prices will give very marginal reduction in under-recoveries for the oil industry. We don't expect in this current financial year anything significant to happen for upstream companies. We expect (realisation of) $56/bbl to continue during the third and perhaps the fourth quarter also. Going by the same trend, we expect the current year subsidy burden to be around R8,000 crore.

What are your capex plans

The high subsidy burden is hitting our capex plans. However, our capex plans have increased over the years because we have grown and taken many exploration blocks. We are required to spend money on these blocks from medium to long-term. We have kept our annual capex plans of average R3,500 crore and according to the 12th plan our investment would be R19,000 crore. So to have this kind of investment we need to generate at least $25/bbl after meeting all our expenses. Therefore, we are requesting the government that $65/bbl should be our net realisation so that after paying taxes, dividend and other costs we get around $24-$25/bbl.

What is your strategy for acquiring energy assets overseas

We have been pursuing inorganic growth strategy for the last 2-3 years. We have gained a lot of knowledge about international acquisitions: which are the regions to approach, what kind of investments to make and so on. We got our investment strategy paper prepared by a foreign consultant PFC Energy, which has been approved by our board. We have engaged 15 investment bankers to support us in acquisition investments. Recently, we have given some non-binding offers in 3-4 cases and the discussions are in the advanced stages. We are hopeful of at least 2 foreign acquisitions by December-end. Due to confidentiality, we cannot divulge the names. This acquisition will give us a good top-line and bottom line growth and a strong balance sheet.

Your competitors' recent overseas acquisitions have not be very successful. Are your confident about the success of proposed acquisitions by OIL

We do thorough analysis and due diligence and ensure that all sensitivities are considered so that we should not be taken by surprise. We feel we would be paying optimum price for the asset.

Where do you see your crude and gas production this year and what is your guidance for next year

For the last 4-5 years, our production in oil and gas has shown good growth. Oil volume has grown at 7% compounded annually and gas at about 9-10% CAGR in last 4-5 years. Unfortunately, due to some external problems this year and certain environmental issues in the North East region, our production growth could not be sustained. This year we don't expect any growth in oil and gas production, it should be a flat growth or slightly lower than last year. But we are hopeful and confident to be back on track from the next year.

What do your view on the Rangarajan-panel's suggestion on gas-pricing and production linked revenue sharing

As far as pricing of natural gas is concerned, it is a kind of off-beat recommendation. We have to wait and watch whether the government accepts the recommendation. But the revised price formula for gas is made applicable to all oil manufacturers and the price goes up as per the formula, it will benefit us also.

The current dispensation of cost-plus recovery is the formula followed in many countries. Since exploration is a high-risk business, people get into it if they are suitably compensated for the exploration risks and costs they incur. There is a radical change being proposed in the report compared to existing system. They next round of bidding is due this year, so we will have to wait for the final approval. But certainly, cost plus recovery was the preferred option so far.

What is the status OIL disinvestment that was planned for mid-January

The Centre plans to sell 10% stake in open market through an offer-for-sale. If priced attractively, domestic and foreign institutions will have a lot of appetite for the offer. We expect the issue to be a big success. If investors get clarity on subsidy then the valuation of our companies can go up significantly.

What about your plans to set up an LNG terminal

We are thinking of diversification selectively in the value chain including LNG, which has got lot of potential in India as we have lot of scarcity of gas. We have engaged an international consultant Booz and Company to give us a road map on LNG and based on that final report we will take it forward. Long term gas contracts can be at low price and we can either acquire some gas assets in Canada or USA so that we can use that gas and bring it to the country. All options are opened by nothing concrete.

We haven't seen any major discovery by OIL in recent years

It is just unfortunate that we haven't been able to get any major discoveries. Of course, we have been getting small and medium sized discoveries for quite some time, which is helping us to improve the production as well as maintain the growth. Unfortunately in exploration areas outside Assam, we haven't been able to get any discoveries. But in some of our exploration blocks where work is currently going on like Krishna-Godavari basin and Mizoram areas we expect good prospectively based on the seismic results.