 "crude oil, oil")
Brent crude oil prices have spiked 7 per cent (to $74 per barrel) after the war began between Israel and Iran.
Iran’s oil production is 3.5 million barrels per day (mmbpd) with around 2.5 mmbpd of exports. And, China is the buyer of over 80 per cent of this.
The Israeli assault targeted Iranian infrastructure.
There is also some chance of disruption of shipping via the Straits of Hormuz, which is a choke point for 20 per cent of global oil and gas traffic. It includes exports from Saudi Arabia, Iraq, Iran, UAE, Kuwait and Qatar.
Even if Iranian production is curtailed, the OPEC+ decision to ramp up production implies that other supply would compensate.
A blockade of the Straits of Hormuz is a low probability, but it would create a huge issue if it occurs. Even without that, crude and gas prices will be somewhat elevated on the threat of supply disruptions.
ONGC and Oil India (OIL) are key beneficiaries of high crude price. Their current valuations discount realisations of $65 per barrel. Every dollar per barrel of higher oil prices boosts earnings by 1.5-2 per cent.
ONGC and OIL are pushing production up by 15 per cent and 25 per cent, respectively, in the next two-three years.
Importantly, the windfall tax on crude was removed in December 2024 and there is a low probability of windfall tax being re-levied. This is due to the recently enacted Oilfields (Regulation and Development) Amendment Bill, 2024, which tries to encourage exploration & production (E&P).
Conversely for oil marketing companies (OMCs), the gross marketing margin (GMM) for auto fuels is a blended ₹3.5/litre at $77 per barrel (Brent) and ₹5.5 per litre at $73 per barrel (Brent). Every $1 per barrel rise in crude oil prices reduces GMMs by ₹0.5 per litre.
OMCs are still witnessing under-recoveries in gas.
Oil India has seen delays in gas production schedule due to capacity constraints in pipelines with expectations of upstream gas field connectivity with the national grid only in H1FY27.
But OIL targets 25 per cent growth in crude oil & gas production between FY25 and FY30 with 200 per cent capacity expansion at Numaligarh Refinery (NRL) seen by Q4FY26 and accelerated drilling plans.
If oil prices sustain higher, the near-term prospects will also improve.
OIL’s Q4 net profit was down 22 per cent year-on-year (Y-o-Y) due to lower crude realisation.
Operating and net profits were ₹1,980 crore and ₹1,590 crore, respectively, in Q4FY25. They were down 15 per cent and 22 per cent respectively.
OIL had a provision of ₹200 crore for goods and services tax (GST) demand on royalty paid on oil & gas production.
Gas realisation, at $6.5 per metric million British thermal units or mmbtu, was steady.
OIL plans to increase production to 10-12 mntoe by FY30 from 8.8 million metric tonnes of oil equivalent (mmtoe) in FY25. It expects 7-8 mntoe from domestic fields, 1-2 mntoe from new wells and 1-2 mntoe from international assets.
OIL is accelerating plans to drill 75-80 wells in FY26 (versus 62 wells in FY25).
It is also awaiting commissioning of the IGGL pipeline (which may need 18 months to complete post-approval by the PNGRB).
This will connect to GAIL’s national grid.
Expect strong growth in production (at least 25 per cent in oil and 50 per cent in natural gas in the next four years). The valuation of OIL’s 69.6 per cent stake in NRL.
ONGC had better oil & gas volumes in Q4FY25 but lower realisations. Operating profit was up 9.2 per cent Y-o-Y but net profit was hit by high dry well write-off of ₹4,200 crore.
The appointment of BP as a technical service provider for Mumbai High improves the prospects.
ONGC’s oil and gas production and sales volumes are improving after a long period of stagnation.
Oil production from own fields was up 0.6 per cent for FY25 and gas sales rose 2.2 per cent Y-o-Y in Q4.
Gas production will rise due to higher KG-98/2 volumes and higher production from fields with a new well gas (NWG) pricing at 20 per cent premium to the administered price mechanism. The production outlook is positive.
