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Crude oil price fall cheers some, distresses others

Lower crude oil prices mean lower realisation from crude sales for companies like Cairn India

Kalpana Pathak  |  Mumbai 

Falling prices of crude oil may have brought cheer for the state-run Oil and Natural Gas Corporation (ONGC) and Oil India but not for all oil producing

Global crude oil prices were $85.14 a barrel on Friday. Brent crude is down over 26 per cent since its high of $116 in June. Goldman Sachs, the US investment bank, in a research note cut its forecast for Brent to $85 a barrel from $100 for the first quarter of 2015 and reduced its projection for US crude or West Texas Intermediate to $75 from $90. Both are expected to slip even lower.

Lower crude oil prices mean lower realisation from crude sales for like Cairn India - promoted by Anil Agarwal - which is primarily engaged in the business of oil and gas exploration, production and transportation.

Cairn India put up a dismal show on the back of lower production, higher costs and soft realisations in the July-September quarter.

Lower volumes from Rajasthan pulled down Cairn's revenue in the quarter. "The average crude price realisation for the quarter was $91.5 per barrel, an implied 10.2 per cent discount to Dated Brent, and was lower than the same period last year due to softening of crude oil prices globally," Cairn India said in its report for the quarter.

The Rajasthan block, which accounts for over 90 per cent of Cairn's output, experienced a production decline due to a planned maintenance shutdown at the Mangala Processing Terminal for nine days. The average daily production of barrels of oil per day dropped six per cent from 2,03,720 to 1,90,557 year-on-year and nine per cent quarter-on-quarter. During the April-June quarter of this financial year, the crude oil production stood at 2,09,846 barrels of oil per day.

During the quarter, average price realisation for crude oil stood at $92.1 per barrel, down five per cent against the corresponding previous quarter at $96.7. On a quarter basis, it was down six per cent at $98.2 per barrel.

Cairn did not reply to an email questionnaire.

ONGC and Oil India on the other hand, stand to gain from the crude oil slide. Analysts say ONGC's net realisation - the net amount it realises from its products after providing discounts to oil marketing - should increase as the subsidy burden that ONGC bears is expected to reduce sharply. ONGC bears the lion's share or nearly 85 per cent of the discounts to the oil marketing companies - IndianOil Corporation Limited, Bharat Petroleum Corporation Limited and Hindustan Petroleum Corporation Limited.

ONGC, Oil India and GAIL have been providing for 40-50 per cent of the total under-recovery burden of the oil marketing companies with the government sharing the remaining.

"We are perhaps the only crude oil producing company in the world which feels happy about prices coming down," ONGC chairman and managing director D K Sarraf had said earlier, at a press conference.

Under-recoveries have dented ONGC's net realisations over the years. While in 2009-10, ONGC's net realisation was around $56 a barrel, it fell to $41 a barrel in 2013-14. Low crude oil price could mean a net realisation of about $55-60 a barrel. Last year ONGC said it had paid out Rs 60,000 crore as subsidy. The company could have used this money for acquiring hydrocarbon assets abroad, it had said.

In addition to improved net realisation from its crude oil production, ONGC stands to gain around Rs 4,700 crore in profits post the increase in gas price, Sarraf said last week.

Oil India, on the other hand, bears around 10 per cent of the subsidy burden and would see its net realisation improve from $47 a barrel in 2013-14. The company will also benefit from the gas price increase.

CONTRASTING SITUATIONS

  • Goldman Sachs cut its forecast for Brent to $85 a barrel from $100 for the first quarter of 2015 and reduced its projection for US crude oil or West Texas Intermediate to $75 from $90. Both are expected to slip even lower
  • Lower crude oil prices mean lower realisation from crude sales for companies like Cairn India
  • ONGC and Oil India on the other hand, stand to gain from the crude oil slide
  • Analysts say ONGC's net realisation should increase as the subsidy burden that ONGC bears is expected to reduce sharply
  • ONGC bears the lion's share or nearly 85% of the discounts to the oil marketing companies - IndianOil Corporation Limited, Bharat Petroleum Corporation Limited and Hindustan Petroleum Corporation Limited

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First Published: Mon, November 03 2014. 00:15 IST
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