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ONGC: Awaiting better policies on prices
Jun 29, 2009

We recently attended the analyst meet of ONGC to understand the company's view on the sector, its performance and growth prospects going forward. What is the company's business?
ONGC is India’s largest upstream oil & gas company accounting for more than 80% of the domestic production. It holds 105 blocks out of 206 blocks in the 7 rounds of NELP, 91 nomination exploration licenses and 295 mining leases. Its overseas subsidiary, ONGC Videsh has 39 projects in 17 countries. It has recoverable reserves of 10.2 bn barrels of oil equivalent and the average production is 1.2 m barrels of oil equivalent per day. It holds a 72% stake in Mangalore Refinery & Petrochemicals. The company also has stakes in Petronet LNG, Pawan Hans Helicopter, ONGC Petro-additions, ONGC Mangalore Petrochemicals, Kakinada Refinery & Petrochemicals, ONGC Tripura Power, Dahez SEZ, Mangalore SEZ and ONGC Mittal Energy.

Here are the key takeaways from the meet:

Industry

  • National oil companies (NOCs), .i.e. public sector companies of various countries as opposed to independent oil companies (IOCs), now account for most of the world’s oil & gas reserves. The IOCs comparatively incur more capital expenditure. Hence, the NOCs and the IOCs will find it beneficial to cooperate in the future.

  • View on oil prices: Established oil fields the world over are ageing and it is an uphill task to prevent huge erosion in production levels. As such, the company believes the world will face supply problems in the future. It does not expect crude oil prices to go below US$ 50 per barrel again. In fact, it believes that the marginal cost of production from such sources as the Canadian tar sands and ultra deep water fields will determine oil prices, which will be at least US$ 70 to US$ 80 per barrel.

Company specific

  • Volumes: 4QFY09 production was down because of certain development projects in Mumbai High which could not be executed in time. It may be noted that ONGC usually registers its highest production in the 4th quarter.

    The company expects volumes to recover in FY10. Over the long term, the company plans to improve recovery rates from its Mumbai High field from the present 30% to 40%. The company is also appraising several deep water fields in India. Work is also under progress in overseas assets in countries like Nigeria and Vietnam through ONGC Videsh (OVL).

  • Oil prices and subsidy: For FY09, ONGC realised US$ 43 per barrel. Although the company was told in 3QFY09 that ad hoc subsidy won’t be imposed in 4QFY09, they received a subsidy bill of Rs 8.2 bn in May. However, the subsidy formula for 4QFY09 is not yet known. The company believes that the present government is keen to address the subsidy issue, although expectations of completely market determined prices are not realistic.

  • Gas prices: The realisation from natural gas during FY09 stood at around US$ 1.85/ m British thermal unit after accounting for the depreciation of the Rupee. ONGC sells its natural gas production at administered prices, which have remained unchanged for 9 years. The company expects a price hike during the forthcoming budget.

  • Capex: ONGC plans to incur a capex of Rs 209 bn in FY10. In the next 2 years, the company has planned an outlay of Rs 247 bn.

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