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  1. As crude oil prices hover around 11-year low, ONGC pulls the plug on capex

As crude oil prices hover around 11-year low, ONGC pulls the plug on capex

ONGC has decided not to invest in new projects until the scenario improves and the realisation from the sale of crude oil suffices to maintain its earlier capex plans.

By: | New Delhi | Updated: December 24, 2015 11:33 AM
ONGC’s net realisation from crude oil sales stood at .92 per barrel in the first quarter of this fiscal and .83 per barrel in the second quarter.

ONGC’s net realisation from crude oil sales stood at .92 per barrel in the first quarter of this fiscal and .83 per barrel in the second quarter.

With the price of Brent crude oil hovering around an 11-year low, state-run ONGC has decided not to invest in new projects until the scenario improves and the realisation from the sale of crude oil suffices to maintain its earlier capex plans. The decision follows an investment review meeting called by petroleum minister Dharmendra Pradhan on Monday and a meeting of the company’s board the following day.

Analysts said it would be crucial to watch if the state-run explorer could go ahead with the development of the much-touted deepwater block KG-DWN-98/2 in the Krishna-Godavari Basin, which entails an investment of $6-7 billion to pump out oil and gas by 2018. However, sources said, ONGC won’t halt its ongoing exploration and development works, as it is getting the advantage of a fall in oil field services cost.

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The PSU explorer’s capex between FY11 and FY15 was a massive R1.5 lakh crore, but analysts believe it couldn’t show a commensurate rise in production partly because a large part — about 60% — of these investments was used for maintaining the existing production infrastructure and explorations that haven’t produced immediate results. According to sources, ONGC has made capital expenditure of R19,000 crore till November 30 this fiscal.

The explorer had estimated capex of R36,249 crore in FY16 and R34,000-35,000 crore in FY17. These plans could be put in abeyance until global crude prices look up.

While Brent crude sank to $36.05 a barrel on Monday, the lowest since July 2004, it recovered mildly to the current $36.50.

Analysts think that with US, Russian and Iranian crude to hit the markets, prices could continue to soften for a while.

For ONGC, which has long complained of being forced to cut its capex plans due to the oil subsidy burden on it (the upstream player was asked to sell oil at a discount to PSU oil marketers), the fall in crude prices has come as another blow. Meanwhile, thanks to the decline in its oil subsidy burden, the government may allow ONGC to sell crude sans discounts in the current and the next quarter.

So far, ONGC has not announced any cut in capex. However, analysts say that actual expenditure would be “much less” than the budget.

A top official at ONGC told FE that the impact of the fall in prices would not be much in the third quarter as it has dipped to an 11-year low only in the last fortnight. However, if crude oil prices continue to remain below $40 a barrel in the coming months, it could have a cascading impact on its revenues in the last quarter of the fiscal. In the second quarter of FY16, Brent has averaged $51.30 per barrel, while it is hovering 12% lower at around $45.30 a barrel till date in the third quarter.

ONGC’s net realisation from crude oil sales stood at $58.92 per barrel in the first quarter of this fiscal and $48.83 per barrel in the second quarter. It maintains realisations below $40 could jeopardise its operations. The discounts it offered to oil marketing companies in the first half was Rs 1,729 crore. The PSU reported a profit after tax of Rs 4,842 crore in July-September, down 11% from the year-ago period.

“The global crude prices have come to the level of $36-37 per barrel. This is a matter of concern and would impact ONGC’s bottom line. The scenario is being discussed and we need to bring in more operational efficiency and cut down cost,” the official said. With every dollar fall in global crude prices, ONGC’s top line gets hit by Rs 900 crore on an annualised basis, while it is negatively impacted by Rs 750 crore for depreciation of the local currency against the dollar by one rupee.

Talking about the KG Basin deepwater project, another director on the ONGC board said the team is working towards optimising the cost. “In the current environment, it is a tough decision. If the commercial returns are not high, it is difficult to go ahead on a new project. Other exploration activities would continue to go, as it is the right time because costs are low,” he said.

ONGC is optimistic, as the explorer has successfully able to continue with the exploration and development work of the projects already taken up. “This is an advantageous situation for development of projects as cost of drilling rigs have come down. For example, hiring a deepwater rig costs 50% less at $250,000 per day compared with $450,000 per day, while rents for shallow-water rigs have dropped by at least 40%,” the ONGC official explained.

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