The country's oil and gas public sector bluechip Oil and Natural Gas Corporation (ONGC) is in a catch 22 situation today. While on one hand the government has increased gas prices from $4.2 to $8.4 per mmbtu with effect from April 2014 which would lead to an increase in its cash reserves, there is also a discussion on the need to provide subsidy to fertilizer and power sectors to make up for their losses due to increase in the cost of gas. This means whatever gains ONGC may get due to gas price hike, may go into providing higher subsidy to other sectors. Speaking to Neeraj Dhankher, ONGC’s Director (Exploration), N.K. Verma talks of the problems faced by the company with respect to lack of clarity on formula for calculating under-recoveries, NELP-X bidding plans and future investments. Excerpts:
Now that gas price hike has been officially approved by the government, what are your plans for bidding in the forthcoming NELP-X round?
We are waiting for the NELP-X policy announcement. We have to look at a lot of things. First, what are the types of blocks and their location. Second, there has been some debate on the new revenue-sharing model under NELP production sharing contracts (PSCs) whereby the Rangarajan Committee has recommended some changes. It depends finally what comes out. We have to assess the impact of the new revenue-sharing model and risk perception on those blocks. All these have to be taken into account before taking any decision. We are open to forming consortium for bidding.
What will be the likely impact of gas price hike on ONGC’s exploration plans?
Gas price hike will provide us some relief of around Rs 4,000 crore per year. But again we are concerned because there has been some discussion that upstream companies may be asked to channelize the additional inflow into some kind of subsidy for the fertilizer and power sectors. If that happens, then there will be no benefit to ONGC. Plus, there is another uncertainty. We are struggling to have surplus resources for deployment in exploration because aggressive exploration is the only solution for sustaining production and bringing new reserves on a long-term basis. At present our cost of production almost matches the remuneration we are getting after subsidy. So there is nothing left as surplus. In the coming years, the cost of production will increase further and if remuneration does not increase, we will end in red.
Do you think that with increased cash surplus after the gas price increase, there will be a new push towards development of marginal and deep-water blocks?
Definitely! That’s why I am saying that if you want ONGC to invest sufficient money in frontier areas of exploration, then we must get such remunerative prices. Even to acquire properties overseas, we need internal resources. Only then can we expand overseas and explore frontier and challenging areas and take risks.
Under-recoveries on diesel have shot up to close to Rs 14 per litre and there are talks that the price of diesel may be increased at one go. What are your views?
Let’s see what happens. Uncertainty is the biggest problem. If we are told that we have to pay a certain amount every year till the next three years then we can plan accordingly. We will reduce our exploration or adjust according to that. But we are not getting any concrete decision. Every quarter we are told that we have to deposit a certain amount.
ONGC has tasted lot of success in ultra deep-water drilling in recent times. Recently the company surpassed its own earlier world record set in January 2013, for drilling a well in deepest water depth in the well number 1-D-1 in exploratory block KG-DWN-2005/1, off the east coast of India. What do you feel about that?
That reflects our risk taking ability. As a national oil company, we are taking maximum risks, going in the deepest waters to bring new reserves. We are doing our best at the moment.
What are ONGC’s investment plans for exploration?
On an average we are investing around Rs 10,000 crore to Rs 11,000 crore per annum on exploration. We need to have similar kind of reserves in future otherwise from where will we support it? At times, it is discussed that ONGC’s cost of production is low so we should not be given that much. But ultimately if you see the surplus is being utilized either domestically or overseas.
ONGC is faced with this challenge of developing both domestic and overseas assets. Which ones will be a priority in future?
It needs to be seen in proper perspective. Based on the perception of Indian sub continent, there is an estimation of probable resources available further. Out of 28 billion tonne of prognosticated resources, 11 billion tonne have already been converted into reserves. The remaining gap gives us the feeling that we can find another 4-5 billion tonne. But we are not sure on how prospective they will be, how big discoveries will they be and where will they be located. All of this will be based on new data which we have to collect.
What is ONGC’s rig availability scenario?
There is hardly any service company’s market available in India. So where are the rigs? For shale gas and CBM we need hundreds of rigs. Everything cannot be procured. Service companies have to be developed. It is not conventional drilling, as here we have to drill about 100 wells in a year.
What support is ONGC looking for from the government?
First is remunerative prices which are reasonable enough to provide cushion for exploration and second is to remove uncertainty in calculation of under-recoveries.