Subsidy outgo hitting new investment in ageing fields: ONGC

Company says it needs a minimum price of $65 per barrel, without which the investments planned in redevelopment of old and ageing fields will not be commercially viable

State-owned Oil and Natural Gas Corp (ONGC) today said it cannot make new investments needed to arrest falling oil production from ageing fields as its net price realisation has sharply fallen due to subsidy outgo.

Oil and gas producers like ONGC and Oil India make up for a part of losses fuel retailers incur on selling diesel and cooking fuel at government controlled rates. This subsidy payout is by way of discounts they offer on crude oil sold to them.

"Our net price realisation (after paying fuel subsidy) is $43 per barrel as against international oil price of $100," said Dinesh K Sarraf, Chairman-elect of ONGC, at the third World Energy Summit here.

ONGC's cost of production is $40 per barrel without considering any return on investment.

"Easy oil is already produced. This is an era of difficult oil (which needs more investments to produce)," said Sarraf, who is currently Managing Director of ONGC Videsh Ltd and has been selected to head ONGC when incumbent Sudhir Vasudeva retires at end of February 2014.

Most of the ONGC fields are old and ageing where the easy oil and gas have all been produced. Consequently, production has started to dip and new investments are need to produced oil from difficult zones in those fields.

"IOR and EOR (improved oil recovery and enhanced oil recovery schemes) cannot be implemented if pricing reforms are not there," he said.

Downstream fuel retailers are not allowed to sell diesel, cooking gas (LPG) and kerosene at a rate equivalent to cost of production, and so the differential is borne by the government and upstream firms.

Currently, diesel is sold at Rs 9.99 per litre lower than its actual cost while LPG is sold at a loss of Rs 542.50 per 14.2-kg cylinder. Kerosene costs Rs 36.20 a litre less than its cost of production.

Since 2004, the company has paid Rs 216,336 crore in fuel subsidy, but for which its net profit would have been higher by Rs 125,477 crore that is enough to buy properties producing 10-15 million tons of oil per annum.

ONGC says it needs a minimum price of $65 per barrel, without which the investments planned in redevelopment of old and ageing fields will not be commercially viable.

The company has laid out plans to spend over Rs 163,000 crore in 12th Five Year Plan which will rise further because thrust on overseas acquisitions.

The company said if it is stripped of $56 per barrel in form of subsidy discounts, there would be significant shortfall of cash during XII Plan period.