ONGC says may break even after gas price hike

State-owned Oil and Natural Gas Corp (ONGC) will barely break even at the new natural gas price that will come into effect from October 1, its Chairman and Managing Director Shashi Shanker has said.

ONGC has long complained that gas price is unremunerative and it incurs loss on the business. As per a new mechanism approved by the government in October 2014. Image source: Reuters

State-owned Oil and Natural Gas Corp (ONGC) will barely break even at the new natural gas price that will come into effect from October 1, its Chairman and Managing Director Shashi Shanker has said. The government has announced a 10 per cent higher price for natural gas at USD 3.36 per million British thermal unit for six month period beginning October 1. Shanker said the average cost of production of natural gas by ONGC during 2017-18 was USD 3.59 per million British thermal unit.

In the current fiscal, it may be slightly less as cost of service has come down and so "maybe we will just be able to break even after the new gas price", he told reporters here. ONGC's average cost of production of natural gas during 2016-17 was USD 3.10 per mmBtu and at the government mandated prices it was incurring significant under-recoveries from its gas business, he said.

Loss of revenues on gas business significantly impaired the company's ability to fund its capex plans and hampers most ongoing and future development projects. ONGC has long complained that gas price is unremunerative and it incurs loss on the business. As per a new mechanism approved by the government in October 2014, the price of domestically produced natural gas is to be revised every six months -- April 1 and October 1 -- using weighted average of rates prevalent in gas surplus markets like Henry Hub (US), National Balancing Point (UK excluding Russia), Alberta (Canada) and Russia.

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Using this formula, the price for October 2018 to March 2019 came to USD 3.36 per mmBtu as compared to USD 3.06 in the previous six months. ONGC officials said the USD 3.59 per mmBtu average cost is without taking into account return on capital and after considering a decent return the price should be not less than USD 4. India's largest natural gas producer is demanding a floor or minimum price of natural gas be fixed at USD 4.2 per mmBtu for the business to make economic sense.

The official said ONGC's significant discoveries in KG basin and Gulf of Kutch would need a higher price to bring them to production. Gas discoveries in the shallow sea off Andhra Pradesh on the east, and off Gujarat on the west are economically unviable to produce at the current government-mandated price of USD 3.36, he said, adding that in the absence of a viable gas price, it will have to mothball the USD 1.5-billion projects.

The official said the Krishna Godavari basin block KG- OWN-2004/1 is in shallow water and does not qualify as a difficult field, which get higher gas price of USD 7.67 per mmBtu from October 1. On the western side, the block GK-28 in Gulf of Kutch is a nomination block which does not qualify for higher rates, he said. While the KG block will produce a peak output of 5.35 million standard cubic metres per day, the same from Gulf of Kutch block will be around 3 mmscmd. It would take a minimum of three years to bring the gas finds to production.

The combined output is about 14 per cent of the ONGCs current output of 60 mmscmd. He said the KG block discoveries are in water depth of just about 8-metres, developing which is costly since ultra- shallow rigs are scarce and therefore expensive. ONGC also has a couple of smaller fields with a total expected peak production of 1.1 mmscmd, which cannot viably produce at the current domestic gas prices.

Natural gas constitutes around 45 per cent of ONCG's total crude oil and natural gas production volume. It produces around 75 per cent of the country's natural gas output.

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