ONGC seeks crude price assurance of $45 per barrel, cuts capex by 15%

Topics ONGC | Crude Oil Price | Lockdown

Oil produced by domestic companies is linked to global benchamark for similar crude. The domestic producers arrive at a price linked to that in line with contracts signed by refiners.
Hit badly by the lower crude oil price, state-run Oil and Natural Gas Corporation (ONGC) has sought a price assurance of $45 a barrel from the government. Owing to the lockdown and Covid-19 impact, the company has also cut its capital expenditure by over 15 per cent or Rs 5,000 crore for 2020-21.

The largest domestic oil and gas producer had budgeted a capex of Rs 32,502 crore for the financial year, which has now been cut to around Rs 27,500 crore. In addition to this, the company’s operational expenditure for the financial year will also be reduced by Rs 2,000 crore.

“There is no conscious effort to cut the capex. This is out of deferment in activities because of the delays that are occurring due to the Covid-19 situation. As far as production is concerned, it is at the same level as prior to the Covid-19 outbreak,” said a senior company executive.  
Along with a floor price of $45 a barrel for crude oil, it has sought a waiver on payment of cess and royalty because plummeting international oil prices make production unviable. “For ONGC, having a minimum price will be advantageous. It will be almost like China, where they have a lower threshold of crude price at $40 a barrel. This would also ensure that fuel prices will not come beyond a certain level,” said a Mumbai-based analyst.

Oil produced by domestic companies is linked to global benchamark for similar crude. The domestic producers arrive at a price linked to that in line with contracts signed by refiners. 

Brent prices for month starting May 20 increased to an average of $28 a barrel, as OPEC cut production by a record 9.7 million bopd. “The increase was led by a revival in demand owing to lifting of lockdown by various countries,” said a report by Motilal Oswal Financial Services. The Indian basket crude price averaged $19.90 a barrel during April 2020, as against $33.36 a barrel during March 2020 and $71 during April 2019.

The company had last month asked the government to abolish oil development cess if price realised by producers is less than $45 a barrel, in addition to a waiver on royalty from offshore areas. 

“In the case of gas, we are bleeding every day. Our average production cost is around $3.75 per million British thermal unit (Mbtu), while we are selling it at a lower range. With prices expected to come further down to around $2 a mbtu, the business will become completely unviable for us,” the official said.

According to estimates, the drop in natural gas prices to $2.39 per mBtu (effective from April to September this year) is expected to hit the company by around Rs 6,000-7,000 crore on an annual basis.

Soon after the lockdown, the Association of Oil and Gas Operators had approached the government seeking a reduction and deferment of royalty, cess, and profit petroleum paid by companies to the government. Brent prices had collapsed to a low of $17.3 a barrel and WTI turned negative and was at $10 a barrel on April 20, hit by global supply surplus at 26.3 million barrels per day during the month. However, it has more than doubled now. 

On Friday, Brent prices were seen at $37.32 a barrel at one point, while WTI prices at $35.06 a barrel. The Indian Basket crude oil prices were seen at $40.09 a barrel on Thursday.

According to the data available with the Petroleum Planning and Analysis Cell, indigenous crude oil and condensate production during April 2020 was lower by 6.4 per cent than that of April 2019 as compared to a de-growth of 5.5 per cent during March 2020. ONGC production fell 0.5 per cent during April.

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