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Energy: Upstream investments an imperative - Views on News from Equitymaster
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  • Aug 24, 2001

    Energy: Upstream investments an imperative

    Crude oil production has been declining over the past few years. However, FY01 did provide reprieve to the Indian upstream sector with production increasing marginally by 1.4%. Both the public and private sector recorded a growth in output. But fortunes have once again slipped for the sector with production declining by 4.6% in 1QFY02.

    Oil & Natural Gas Corporation (ONGC) is the biggest culprit with production declining by 5.8% YoY in 1QFY02. The Assam and Bombay High fields are proving to be a drag on production growth. The two fields have registered degrowth in all three months of the quarter ended June '01. ONGC has announced a redevelopment plan for Bombay High (production share 63.5% in 1QFY02) with an investment of Rs 75 bn over a period of five years to push up recoveries from 24% to 40%. Assam field (production share 8.2% in 1QFY02) is amongst the oldest in the country and improvement in yields is difficult.

    Although the ONGC scrip has gained 19.6% since start of fiscal '02, this was largely due to the high dividend yield on the stock. The company announced a dividend of Rs 11 for FY01. Nevertheless, the scrip has come down by 16.8% from a high of Rs. 181.

    Crude production Refinery throughput
    (MMT) 2000 2001 % change 2000 2001 % change
    April 2.6 2.6 -0.3% 8.0 7.9 -1.4%
    May 2.7 2.6 -5.7% 8.3 9.0 8.8%
    June 2.7 2.5 -7.5% 8.2 9.1 11.8%
    Total 8.0 7.6 -4.6% 24.5 26.0 6.4%

    Crude Imports* POL Imports** (Rs bn)
    (MMT) 2000 2001 % change 2000 2001 % change
    April 5.5 5.4 -2.0% 56.2 55.5 -1.3%
    May 5.5 6.4 15.9% 59.3 68.3 15.2%
    June 5.5 6.6 21.2%      
    Total 16.5 18.4 11.7% 115.5 123.8 7.2%

    * Extrapolated as difference between crude throughput and production. ** Estimates

    The drop in domestic production has increased the country's dependence on imported crude. Consequently, petroleum, oil & lubricant (POL) imports have grown by 7.2% in rupee terms for the first two months of FY02. However, a large part of the increase is due to sharp depreciation of the rupee in FY01, estimated at 6.9%. In dollar terms there is a marginal increase of 0.2% over the same period. POL imports primarily consist of crude. With commissioning of fresh refining capacity over the past two years the import for petroleum products has reduced. Share of petroleum products in POL imports was only 6.6% in volume terms for FY01. Consequently, the rise in import volumes while foreign exchange outgo remained stationary could indicate lower crude procurement prices during the first two months of the fiscal.

    The Government has initiated measures to enhance India's self-reliance in hydrocarbons. The Government has awarded oil blocks under The New Exploration Licensing Policy - II (NELP-II) based on international bidding. Also, it has completed road shows for 7 coal bed methane (CBM) blocks. The gas reserves in these blocks are estimated at 262.4 bn cubic meters (bcm) with a life span of 25 years. However, significant contributions from the new fields could accrue only in the medium term to long term. Consequently, the administration can only hope for lower hydrocarbon prices to keep the POL import bill under control.



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