An engineer of Oil and Natural Gas Corp works inside the Kalol oilfield in the western Indian state of Gujarat. The company’s crude output for the year ended March 31 rose for the first time in eight years and it projects another increase this fiscal year.
Bloomberg/New Delhi
India’s Oil & Natural Gas Corp, grappling with ageing fields, is prepared to sacrifice profits by retaining a plan to pump Rs11tn ($176bn) into a search for reserves despite the slump in crude.
The decision sets India’s biggest explorer apart from global producers such as Chevron Corp, which are tightening budgets. Crude’s drop has already taken a toll: ONGC’s profit fell the most in at least nine years in October through December, and the shares are down 4% in 2015.
“We’ve decided not to cut any capital expenditure,” chairman Dinesh Kumar Sarraf said in an interview in New Delhi.
“Higher spending in a low oil-price scenario will have an impact on our earnings. But we don’t have a choice.” ONGC by 2030 plans to spend a sum roughly equivalent to the size of Vietnam’s economy to find more oil, as Indian Prime Minister Narendra Modi seeks energy security. While investing as profits drop signals potential stress for the company, longer term ONGC could benefit as its output rises and oil prices recover, according to Emkay Global Financial Services. “We just hope crude prices will recover going ahead,” Sarraf said in the April 13 interview. “Our capex now will come to good use when we are back in days of higher prices.” ONGC shares rose as much as 3.7% to the highest in more than a month before closing up 3.3% at Rs327.65 in Mumbai on Thursday. The S&P BSE Sensex equity index fell 0.5%. The shares are down 22% since crude began sliding June 20.
Brent crude has fallen 46% since June 20 to $62 a barrel. The US Energy Information Administration’s Short-Term Energy Outlook expects it to average $59 this year.
Lower prices have squeezed margins for New Delhi-based ONGC, whose cost of production is about $40 a barrel. Net income halved to Rs35.7bn in the quarter ended on December 31 from a year earlier.
“It’ll be a difficult job to sustain such exploration spending if earnings continue to fall,” said Dhaval Joshi, an analyst at Emkay in Mumbai. “But ONGC will have to explore as much as it can.” The state-run business currently pumps from 350 fields in India. Of those, 15 that account for 70% of total production have crossed their peak levels of production, said its Exploration Director Ajay Kumar Dwivedi.
“We’ll invest about Rs100bn on exploration during 2015-16,” Dwivedi said in an interview in New Delhi last week. “ONGC plans to drill 50 wells, including 10 shale wells, during the year.” The explorer will focus on oil-bearing areas in the southern part of India, including the Cauvery, the Krishna- Godavari, the Cambay and the western offshore basins. Work has started in about 80 new local fields that can help push up production, Dwivedi said.
The slide in crude prices has one silver lining for ONGC: a lower subsidy burden. The company pays a part of the subsidy the government gives to oil refiners to compensate them for selling cooking fuels below market rates. That bill drops along with the decline in the cost of crude.
Compared with other explorers around the world, ONGC is “insulated” as a lower subsidy payout can bolster profit margins, said Gagan Dixit, a Mumbai-based analyst with Quant Broking Pvt., adding he’s “very bullish” on the company. ONGC’s crude output for the year ended March 31 rose for the first time in eight years and the company projects another increase thanks to newer fields.
“Our exploration efforts will be aimed at improving production to help fill the drop in output from the mature fields,” said Dwivedi. “We are adding new reserves in established basins that can be put to production quickly.”
