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ONGC: A look at its production costs - Views on News from Equitymaster
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ONGC: A look at its production costs
Oct 6, 2008

In this article, we shall take a look at the costs of production for ONGC. The drivers of production cost
Considerable costs are incurred for the exploration and development of oil fields. These costs are called ‘finding’ costs, which vary by region. While the average finding cost over 2004 to 2006 in the Middle East was around US$ 5 per barrel, it was around US$ 64 per barrel in the US offshore (Source: US Energy Information Administration).

The direct costs associated with removing the oil from the ground are called lifting cost. Characteristics of the geography, the reservoir (such as pressure) and the crude determine lifting costs. Lifting costs are a function of the method used.

Types of lifts
Primary methods
Natural lift Uses the natural reservoir pressure
Artificial lift Uses mechanical pumps
Secondary methods
Waterflood Water injected to increase pressure
Tertiary methods
Steam, gases or chemicals injected for pressure

In mature oil fields, primary methods account for 40% of production, secondary methods account for 50% and tertiary methods 10%.

ONGC’s production cost over the years
ONGC defines its finding cost as total cost / ultimate reserves in barrels of oil equivalent (boe). ONGC’s average finding costs per boe over 2002 to 2006 was US$ 2 as compared to US$ 5.2 for Chevron and US$ 2.9 for Exxonmobil. While the company’s finding costs has been rising over the years, it is still low compared to its international peers.

 

The company defines its lifting cost as (operating production cost + depreciation charged to production) / total production in boe. ONGC’s average lifting costs per boe over 2002 to 2006 was US$ 4.4 as compared to US$ 5.5 for Chevron and US$ 4.0 for Exxonmobil.

We believe lifting costs have risen much sharply than finding costs for ONGC because of spike in rig hiring rates. Another reason is that finding costs are divided by ultimate reserves (UR), which includes a larger base of possible and probable reserves while lifting costs are divided by current production, which comes out of developed proved reserves (a much smaller subset of UR).

Also read- ONGC: Applying the margin of safety

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