Oil firms to invest windfall gains in new projects

Last Updated: Mon, Jul 01, 2013 04:29 hrs

The decision of the Cabinet Committee on Economic Affairs to double natural gas prices to $8.4 a million British thermal unit (mBtu) from April 2014 will not only multiply margins for exploration and production companies but also make further exploration attractive, firms believe.

The gas price has been revised from $4.2 an mBtu and would be applicable for five years, with a provision to be revised every quarter.

State-run Oil and Natural Gas Corporation (ONGC) says its average cost of gas production at present is $3.7 an mBtu, and at $8.4 an mBtu, the company would get higher realisation, which would be invested in further exploration.

A K Banerjee, director (finance), said: "We were making a small profit even with the current pricing of $4.2 an mBtu but a price increase was necessary, because a lot of new blocks that are coming up are deep-water ones, which need more investment. At $8.4 an mBtu, our average production cost would go up to $4.25 an mBtu, including royalty and tax. This means we would get a higher margin that can be invested in exploration of blocks."

At $8.4 an mBtu, ONGC's net profit might zoom another Rs 8,500 crore, while it would add another Rs 1,050 crore to the bottom line of Oil India Ltd (OIL). ONGC has already lined up a capex plan of Rs 35,000 crore for the current financial year and Rs 1,64,000 crore during the 12th Five-Year Plan period. According to ONGC, additional revenue would also boost their foreign acquisition plans, lined up by ONGC Videsh Ltd.

In deep-water, ONGC's Krishna-Godavari (KG) offshore discoveries include G-1, G-2, G-4, Vashista, S-1 and G-4-6 where integrated development is under way. Production from GS-15 has started. G-4 is planned to be developed along with discoveries in the Northern Discovery Area of KG-DWN-98/2. The company has planned an integrated development of VA and S1 by 2015. It plans to develop its KG-DWN-98/2, KG offshore by 2016-17.

OIL has its average cost of gas production at $3.2 an mBtu. The company has already asked its team to look into the blocks where they can ramp up production. The current average cost of production of OIL is in around $3.2 an mBtu, which they expect to increase to $4 a unit in the new pricing regime. OIL holds nearly 30 blocks in the country in partnership with other state-owned players. T K Ananth Kumar, director (finance), said: "We are also reviewing our investment plans. In the next four years, we had lined up a capital expenditure plan of Rs 19,000 crore, including exploration and development. With this increase in prices, we are planning to review this target."

Among private entities, Cairn India's Rajasthan field direct operating expenses, including transportation, was $3 a barrel for the year, much lower than its guidance of $5 a barrel. Cairn India, during the last financial year, began gas production from the Rajasthan block. Rajasthan block's current oil production is at 175,000 barrels of oil a day.

Reliance Industries (RIL), operator of a KG block, did not give the cost of production from its field. RIL, which began production from the block in April 2009, has since 2010 seen production fall 75 per cent due to water and sand ingress.

RIL and its partner BP have been seeking higher prices of natural gas. BP is RIL's partner in the basin. While RIL is the operator of KG-D6 with 60 per cent equity, BP holds 30 per cent share and NIKO Resources holds the remaining 10 per cent.

RIL and its partners plan to invest around $6 billion in the exploration and production in the next three to four years.

According to Motilal Oswal, the gas price hike "would result in fast tracking of the capex by RIL in its satellite fields in KG-D6 and also development on NEC-25." Currently, RIL holds nine blocks other than KG-D6, NEC-25, Panna-Mukta-Tapti and two coal-bed methane blocks.

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