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In Order to break out of the lower output phase, the country's largest explorer, ONGC, has embarked on an aggressive investment programme of INR 36,475 crore to monetise 15 projects, which are expected to add 5 million tonnes of oil equivalent annually. All projects are expected to be commissioned by FY17. It is to be seen if the explorer can meet the field development targets and boost its output.

The biggest hiccup is the exponentially higher subsidy bill, which leaves ONGC high and dry with less funds to invest for exploration and development. This also forced ONGC to dip into its cash reserves that dropped to INR 10,600 crore as on 30.03.2014, from more than INR 14,000 crore a year earlier.

“The government’s decision to pass on a larger share of the fuel subsidy burden to upstream oil and gas producers is credit negative for ONGC because it will further reduce the company’s profitability”, said Moody’s Investors Service. At ONGC’s current production levels, we project that a permanent increase of the discount to $65.75 a barrel may set the company back by around $420 million in revenue annually, it said.

It is important to see what steps are being taken by the new government to curb fuel subsidy. Dharmendra Pradhan, minister of state (independent charge) for petroleum and natural gas, has already stated that the government will have a pro-poor bias. “This will be my ministry's guiding principle. My government is committed to working for betterment of the poor,” Pradhan had said on his first day at the ministry.

Cutting down on fuel subsidies, or in other way providing subsidy to the needy and stopping leakages, would help the government consolidate its fiscal position where expenditure is heading northwards with no substantial increase in revenue generation. Upstream players such as ONGC, Oil India and GAIL would also benefit from such a measure.

Moody's expects the newly elected Narendra Modi government to continue, if not speed up, efforts to deregulate fuel prices in India and reduce fuel subsidies. It, however, remains uncertain whether the government will reduce the fuel subsidy burden of upstream companies following a reduction in fuel subsidies. A high share of fuel subsidies will be credit negative for upstream companies.

“Any upside from the gas price increase from $4.20/mBtu to $8.0/mBtu will be tempered by the impact of rupee appreciation and our expectation that the government may not reduce the company's share of the fuel subsidy burden,” said Moody’s.

In FY14, ONGC suffered the highest ever oil subsidy bill at INR 56,384 crore, which impacted its profit before tax by INR 47,756 crore, while pulled down the profit after tax by INR 31,524 crore. In the January-March quarter, ONGC sold every barrel of crude oil for $106.65.

However, after compensating government-owned oil marketing companies for selling fuel below market cost, the net realisation stood at just $32.78/barrel. In the same months in the previous fiscal year, ONGC’s net realisation was $40.97 a barrel, while gross realisation was $113.97 a barrel.

It is evident that the heavy oil subsidy burden year after year would impact the flagship explorer's field development programmes. The cost of oil field services moves in tandem with global crude oil prices. Crude prices hovered around $105-110/barrel last fiscal year, while ONGC was getting less than $40/barrel for its crude oil sales. Investing in deep water acreages and maintaining the current output from several-decades-old fields are a capital intensive exercise that requires the company to invest billions of dollars.

The Maharatna company ended the last financial year with lower production figures for both oil and gas. In FY14 ONGC's standalone crude oil output stood at 22.25 million tonnes, marginally less than 22.56 million tonnes in the previous year. A similar trend is seen in its standalone natural gas output, which was reported at 23.28 billion cubic metres (bcm) against 23.55 bcm in FY14. The 15 projects, three of which already completed and remaining 12 under implementation, are expected to add cumulative production of 45.66 million tonnesof crude oil and 67.44 bcm of natural gas.

Last week, ONGC said it expects to pump out an additional 1.5 million tonnes of crude oil from its offshore fields this fiscal. “The output from offshore fields would likely increase by 1-1.5 million tonnes in FY15,” said T K Sengupta, director (offshore) of the company, adding, ONGC produced 25.99 million tonnes of crude oil in FY14 against 26.13 million tonnes in FY13. Of the FY14 total output, about 16.5 million tonnes had come from offshore fields.

The ONGC group's total production volume increased marginally to 59.2 million tonnes in FY14 from 58.7 million tonnes a year ago, largely driven by a 15 Percent increase in ONGC Videsh Limited's (OVL) oil and gas production outside India.

OVL reported total oil and gas volumes of 8.36 million tonnes on the back of a new production stream from ACG, Azerbaijan, the acquisition of additional 12 Percent interest in Block BC-10 in Brazil and higher production in Sudan. This increase in overseas production more than offset the decline in domestic volumes, which fell to 50.85 million tonnes in FY14 from 51.46 million tonnes in the previous year.

Source-On Request