Given the newfound stress on its books due to two mega expenditures incurred during the last financial year, state-run ONGC is looking at all possible ways to boost its coffers, including seeking an upward revision of the post-wellhead cost to reduce its royalty outgo on crude oil produced from nomination blocks.
In 2007, the ministry of petroleum and natural gas through a gazette notification said that the wellhead price —on which royalty payment to the government will be calculated — of crude oil for nominated blocks of ONGC and Oil India shall be ascertained by deducting Rs 1,250 per tonne of oil for onshore blocks and Rs 947 for offshore blocks as operational expenditure. “The amounts specified…shall be the post-wellhead cost which shall be valid for a period of three years with effect from 1st April, 2007 or such period till the revised rates are notified,” said the notification. These operational expenditures haven’t been revised since. In contrast, however, for all blocks offered after the nomination era, actual cost of production is allowed to be set off before calculating royalty payment to the government.
ONGC has sought a revision with effect from April 1, 2010. Fields nominated to ONGC and Oil India account for 70% of domestic oil output. But production from these fields have stagnated around 25 million tonne per annum for years. ONGC produces almost 87% of its crude oil production from nominated blocks.
An ONGC source told FE that royalty should be calculated after deducting the actual operational cost as the firm is at present paying royalty on even the cost. “The operational expenditure are around four times the amount fixed,” said the source, adding that the ministry is still to respond on the issue. ONGC did not respond to an email seeking comments on the issue till the time of going to press.
As reported by FE earlier, ONGC has also sought reimbursement for royalty and cess paid by it on behalf of its exploration partners for the pre-New Hydrocarbon Licensing Policy, soon after the Union Cabinet in July decided that these taxes will now be paid by all contractors as per their participating interests in blocks signed before 1999.
In the 1990s, the government awarded some discovered oil and gas fields to private companies in order to attract investments in the hydrocarbon sector. As an incentive, however, the liability of payment of royalty and cess was put on state-run explorers (ONGC and Oil India) and they were made the licensees of the blocks. While ONGC and Oil India had the option to take PIs of 30-40% in the blocks or just remain the licensees without any stake, they were required to pay 100% of the statutory levies.
An official from the ministry of petroleum and natural gas, confirming the development, said that though the government is still to deliberate on the issue, the company should limit its production costs as it reduces the government’s share. For oil explorers, production costs include pre-wellhead and post-wellhead expenses such as applicable operating costs of support equipment and facilities, apart from depreciation.
A zero-debt firm till late last year, ONGC had to borrow `25,000 crore to pay for the government’s 51.1% share in HPCL. It had also bought stake in GSPC’s KG basin block for `7,738 crore.