Page 10 - AsianOil Week 19

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Pricing problems
New Delhi sets domestic gas prices every six months using the weighted average price of gas in hubs in the US, Canada, the UK and Russia. These prices are also set at a three-month lag to prevailing market rates in those hubs and come with a built-in $0.50 per mmBtu ($13.83 per 1,000 cubic metres) discount to the international average.
The government slashed prices for con- ventional gas production to $2.39 per mmBtu ($66.11 per 1,000 cubic metres) for the six- month period from April 1, its lowest level since the mechanism’s introduction. PTI reported on May 11 that ONGC’s breakeven price for its gas output averages around $3.8 per mmBtu ($105.11 per 1,000 cubic metres).
As such, ONGC is set to post a INR60bn ($791mn) loss from its gas business in finan- cial year 2020-2021, up from INR42.72bn ($566.4mn) in 2018-2019. The segment is pro- jected to post a INR45bn ($596.7mn) loss in 2019-2020, unnamed sources told the local newswire, adding that the year’s accounts were still to be finalised.
ONGC is understood to have told the gov- ernment that the break-even price for major new projects is around $5-9 per mmBtu ($138.3- 248.94 per 1,000 cubic metres).
While the company has previously managed to offset its gas losses thanks to its oil-related operations, the twin pressures of the corona- virus (COVID-19) pandemic’s destruction of fuel demand and a global oil supply glut have squeezed the company’s other segments.
What next
ONGC enjoyed strong financials in 2018-2019, surpassing state-run refiner Indian Oil Corp. (IOC) in terms of profitability. The oil and gas producer posted a 34% year-on-year increase in its net profit for the 12-month period to INR267.16bn ($3.55bn). The company’s finan- cial outlook for 2019-2020 is all but guaranteed to worsen, thanks to the collapse in oil and gas prices and the country’s lockdown in response
to COVID-19 sending domestic energy demand into freefall.
India has announced plans for a third exten- sion to its lockdown, which began on March 24 and was supposed to expire on May 17. Now, however, a fourth period of social quarantine measures will begin on May 18 with new rules that are to be unveiled before that date.
Moody’s Investors Service warned on May 7 that depressed oil prices would hurt ONGC and OIL’s earnings, owing to their upstream exposure.
“We expect ONGC’s earnings to decline and its credit metrics to weaken because of lower oil prices over the next 12-18 months,” Moody’s said.
ONGC’s downstream arm only contributed only about 30% of the company’s earnings before interest, taxes, depreciation, and amortisation (EBITDA) in 2018-2019. Crude oil, meanwhile, contributed nearly 80% of its upstream revenue in the same period.
Moody’s noted that Asia’s state oil companies were likely to embrace austerity measures in order to ride out market volatility.
“National oil companies (NOCs) will likely scale back capital spending and investments to preserve cash to tide over the low-price environ- ment. Some NOCs will be able to reduce divi- dends, while others will find it more challenging to do so given their government’s dependence on oil and gas sector revenue, especially as gov- ernments announce further economic stimulus packages,” it said.
Unnamed industry sources have already told Indian media that without tax relief it will be hard for ONGC to maintain its capital expend- iture plans. This will likely mean that the major will reduce its commitments to costlier mature fields, which account for the majority of its oil and gas output. If the committee reviewing PSCs does not find some relief for the coun- try’s upstream players producers – and quickly – Indian oil and gas production could enter a tailspin in the next few years.™
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w w w . N E W S B A S E . c o m Week 19 14•May•2020