Govt must include opportunity cost of imports in gas pricing: ONGC chairman

ONGC chairman and managing director Shashi Shanker
India’s move towards gas-based economy has slowed because of the gap in its domestic natural gas production and the market’s inability to absorb the high cost of imported LNG. In an interview with Jyoti Mukul, Shashi Shanker, chairman and managing director of India’s biggest oil and gas producer ONGC, talks about India’s transition to gas and hopes for a better price for domestic gas. Edited Excerpts:


1. What in your view would be the change in energy dynamics in India as the world undergoes energy transition for a greener future?


In the last 4-5 years, the global energy environment, particularly the oil and gas business, has gone through a lot of volatility and swings in its fortunes. We had the dramatic resurgence of oil and gas in the US on the back of remarkable growth in shale, highlighting the continuing significance of technology in our business. That was followed by the crash which witnessed crude oil prices go to as low as $26 a barrel. A period when geopolitical events just did not seem to matter and when E&P activity was severely hit as companies executed aggressive cuts on capex and expenditure plans to protect balance sheets.


While this was happening in oil and gas industry, the renewable energy sector was growing at a quicker pace. Globally, renewable energy consumption grew by 18% in 2019 and averaged over 14% in the last 10 years. Every year, we are seeing more and more renewables being added and their costs dropping to the extent that some of the recent projects are being bid at grid parity. But oil will still have a crucial role to play not just in the short or medium term but also in the longer term. When I say oil, I mean oil and oil-equivalent – which means gas as well. Most industry outlooks confirm that.


Going forward, the role of fossil fuel will undergo change with increasing dominance of green fuel and the resultant decrease in share of coal and oil in the energy basket mix by 2040. Gas is largely being promoted as a green fuel and will gain prominence as many consumers will adapt to this mode of fuel.  So, as the largest oil and gas operator in one of the most energy-hungry economies on the global map, I also see a lot of opportunities for ONGC in this evolving scenario.


2. How important will be the role of natural gas in contrast to crude oil?


Gas is increasingly gaining importance and projected as a clean fuel. Our government has set clear targets for expanding the share of gas in the nation’s energy mix from around 6-7 per cent to 15 per cent in the next few years. Our gas production, accordingly, is on the rise and we witnessed a jump of 6 per cent, year-on-year basis for the last two consecutive years. Our gas production has already crossed 70 MMSCMD – which is the highest ever. We produced 45.86 million tonne of oil equivalent in FY’19, largely driven by a 5.4 per cent uptick in gas output. Gas production was 24.75 billion cubic metre - it is the fourth successive year of growth in gas supply.


3. What can be done to develop a vibrant gas market?


If economic growth has to sustain at similar pace, it can be achieved by growth in the gas business. However, market forces need to be allowed to play. It is difficult for the producers to recover the cost of production if the prices are kept very low. Just to give an illustration, from November 1, 2014, domestic gas price is being determined and notified by the ministry of petroleum and natural gas. The price dropped significantly from initial notified price of $5.05 to $2.48 a million British thermal unit (mmBtu). Even the latest notified price of $3.23 on GCV basis (equivalent to $3.59 on NCV basis) is lower by 14.52 per cent compared to last administered price mechanism gas price of $4.20 Mmbtu on NCV basis which was applicable till October 2014.


As a result, during FY18, cost of production of natural gas by ONGC was $3.59/ MMBTU against average domestic gas price of $2.69 and loss from gas business was Rs 4,272 crore. Similarly, during FY19, cost of production was $3.48/ MMBTU against average domestic gas price of $3.21 and loss was Rs 861 crore. 


Typically, gas imported in the Asian markets is costlier than many international benchmarks. In fact, the price of domestic gas is lower than that of gas imports. This acts as disincentive to domestic producers and not remunerative enough to invest in development of new discoveries and fields. Hence, we are taking up with the ministry to consider review of existing gas pricing formula based on opportunity cost of imported gas.


Going forward, we are also committed to exploit challenging discoveries in Ultra-deep and HPHT to achieve and surpass the ambitious mark of 40 BCM. This space is witnessing lot of activities with pipeline network forming gas grid, development of consumers of gas, sourcing of LNG in spot and long term contracts, liquefaction and regasification terminals coming up in the LNG space. 


4. How well placed is ONGC's growth strategy in balancing cost of production with returns?


Over the last couple of years, the company has focused aggressively on project management for completing our ongoing projects in time. Ten major projects, of which 3 (MHN Redevelopment PH-III, Development of C-26 Cluster and Redevelopment of Gamij) directly contribute to production, were completed during the year. As many as 23 projects, with an estimated outlay of over Rs 86,000 crore around $12 billion, are currently under execution, of which 18 would directly contribute to hydrocarbon production. Envisaged lifecycle gains from these projects are over 190 MMToe with oil accounting for over 65 MMT. We believe these projects will make critical contributions and balance the cost of production with returns.


Beyond domestic upstream, the overseas oil and gas markets is also an area that we are looking at keenly to provide impetus to our growth. ONGC’s wholly-owned subsidiary mandated with international operations, ONGC Videsh Limited, has achieved a stellar landmark by achieving its highest ever production of 14.83 MMToe for the previous fiscal. This constitutes 23 per cent of ONGC group production for the year, indicating the significance that the Group ascribes to its overseas operations.


During the last five years, ONGC Videsh has ramped up its production from 8.87 MMTOE in FY’15 to 14.83 MMTOE in FY’19, i.e. a commendable CAGR of 14%. Also during this period, ONGC Videsh grew its 3P reserves from 647.485 MMTOE in FY’15 to 706.675 MMTOE in FY’19. The organization has created tremendous value during this period with Turnover at Rs 175,941 million for FY’19 and PAT at Rs 16,823 million for FY’19. These significant metrics establish that ONGC Videsh continues to be the second-largest E&P company of India, second only to its parent.


With the capital restructuring of Opal and OMPL done, these companies are poised to take advantage of the demand in the petrochemical market. 


5. How well is HPCL integrated into the group?


As an integrated energy company, we are focused on consolidating our downstream portfolio. Acquisition of majority stake in domestic retailer HPCL is part of this value-chain integration process. The group has now presence in all the segments of the oil and gas portfolio maintaining a healthy upstream – midstream / downstream – retail ratio of 1:1:1.2. We are in the process of taking measures as per our strategy document “Energy Strategy – 2040”. It envisions ONGC as “A diversified energy company with strong contribution from non E&P businesses; 3x revenues and Rs 5-6x market capitalization”. The document has identified key enablers intended to offer critical support as the organization embarks upon this transformative journey to 2040 – organization, R&D, digital, finance, partnerships and advocacy. Energy Strategy 2040 has the potential for transformational impact - in our operations as well as on our approach to business and will have a lasting influence on ONGC’s evolution as an Energy entity over the next 20 years and beyond.


6. What is the status of ONGC's enhanced oil recovery (EOR) and improved oil recovery (IOR) projects?


There is now a government support in terms of EOR schemes. We have done preliminary screening studies of 53 reservoirs. Few of these have been approved recently and more are under process of screening.  We have today 5 EOR schemes – which are under Field Scale Implementation. We are going ahead with low salinity water flood EOR scheme for Mumbai High Offshore, Cyclic steam stimulation at Lanwa and Polymer Injection at Bechraji. These hold a lot of promise. 


If implemented successfully, it will put ONGC on a robust growth path. Also, we have been able to develop competencies to arrest the decline with many IOR and EOR schemes implemented from time to time, which otherwise would have been quite steep as experienced in other parts of the world. And this is despite not adding any significant acreages. It’s a big strength to maintain the level of volume.


7. How far have you progressed on your KG basin blocks?


We are on schedule. KG-DWN-98/2 deepwater project is a flagship project with committed investment of Rs 35,000 crore.  This marks ONGC’s big ticket entry into the deepwater arena. All the contracts for the major activities have already been awarded and we are expecting first gas this fiscal and first oil in later half of next year. Along with reduced hiring and field services costs, the government’s favourable policies such as premium prices for difficult fields also supported our move to develop the deepwater hydrocarbon reserves.


At its peak, the project will produce 17 per cent and 24 per cent of our current oil and gas output, respectively. We are confident of leveraging our proven shallow-water expertise in this new frontier. The block will redefine the domestic upstream space. 


8. When does ONGC plan to finalise contracts for its 64 fields? 


It is moving as per the schedule fixed by the Cabinet. The technical bid submission was extended only to give opportunity for more firms to participate and submit their bid, as many foreign players had winter vacations and needed more time. The technical bids have been opened and the participation has been overwhelming.


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