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Business News/ Companies / ONGC’s benefits from gas price hike shrinking as crude oil keeps falling
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ONGC’s benefits from gas price hike shrinking as crude oil keeps falling

Decline could have a stand-alone impact of `2,400 cr on revenue and `1,350 cr on net profit this fiscal year

For every one dollar rise in natural gas price, ONGC’s annual net revenue increases by `4,000 crore and net profit by `2,300 crore, according to D.K. Sarraf, chairman and managing director. Photo: BloombergPremium
For every one dollar rise in natural gas price, ONGC’s annual net revenue increases by `4,000 crore and net profit by `2,300 crore, according to D.K. Sarraf, chairman and managing director. Photo: Bloomberg

Mumbai: The fall in global crude oil prices threatens to erode the benefits of higher domestic gas price for Oil and Natural Gas Corp. Ltd (ONGC), India’s biggest energy explorer.

The government raised the price of locally produced natural gas from $4.2 per million metric British thermal units (mmBtu) to $5.6 with effect from 1 November, a move that helped ONGC, which has faced soaring production costs in the last five years as prices remained flat.

For every one dollar rise in natural gas price, ONGC’s annual net revenue increases by 4,000 crore and net profit by 2,300 crore, according to D.K. Sarraf, chairman and managing director. Therefore, for the remaining five months of the fiscal year (as gas price was hiked only from November) ONGC’s net revenue and profit could have gone up by around 2,300 crore and 1,300 crore, respectively. However, this has turned out to be a mirage as falling crude oil prices has dealt a blow.

A.K. Banerjee, director of finance at ONGC, said that while a rise in natural gas prices will definitely benefit the company, the drop in crude oil prices is definitely eating into the gains.

He said every one dollar per barrel drop in crude price trims annual net revenue by roughly 800 crore and net profit by 450-475 crore. Therefore, considering that the average crude price has dropped by nearly $3 per barrel in the current fiscal as compared with that of last fiscal, there could be an overall stand-alone impact of 2,400 crore on revenue and 1,350 crore on net profit. If crude price continues to fall, it could get worse.

The price of the Indian crude basket averaged $105 per barrel in the last fiscal year. This fiscal year, however, it has averaged around $102 and is still falling, according to the Petroleum Planning and Analysis Cell (PPAC), a statistical body under the ministry of petroleum and natural gas.

“From this perspective, the meeting of the Opec (Organization of the Petroleum Exporting Countries) leaders on 27 November becomes important for us, because if they decide to cut production, the crude price will again start rising. However, I think the bigger issue for ONGC is of the subsidy burden," said Banerjee. Opec is a cartel of 12 crude oil producing countries.

This week’s Opec meeting at Vienna in Austria is expected to discuss if production should be reduced to support crude oil prices. Opec accounts for 40% of global oil production, which currently stands at close to 90 million barrels per day.

What is good for ONGC may not be good for the country. If Opec cuts production, that will push up oil prices and help ONGC but impact India, which is a net importer of energy.

Sarraf said one should look at how ONGC can reconcile its interests with those of the country.

The relationship of falling crude price and rising gas price is not completely linear in India, said Sarraf, as the net realization per barrel is capped due to the subsidy burden borne by upstream companies such as ONGC, Oil India Ltd and Gail (India) Ltd.

“Last year, ONGC’s net realization (net profit on sale of crude oil) was capped at $40.9 per barrel approximately due to the impact of the subsidy burden. If crude prices continue to stay low, then the subsidy burden also comes down and that could mean a higher net realization for ONGC," he said.

According to the subsidy-sharing mechanism, which ended in the September quarter, ONGC gives a discount of $56 per barrel while selling crude to oil marketing companies (OMCs) to partly compensate them for the losses they make on selling fuel below cost. Even though the recent decontrol of petrol and diesel has reduced OMCs’ under-recoveries, the government is yet to come out with a new subsidy-sharing mechanism for ONGC.

A 14 November report by brokerage JP Morgan Securities Llc said that due to the impact of subsidy burden and the $56-cap, ONGC’s net realization stood at $42.7 per barrel for the second quarter, nearly $6 less than in the year-ago period.

“This highlights the risk of contracting realizations, as subsidies may not decline enough to offset the fall in crude prices," said the report.

Analysts from brokerage ICICI Securities Ltd in an 18 November report pointed out that while the gross realizations of ONGC will come down due to the fall in crude prices, its net realizations or profit on sale of crude price could still be cushioned if the government tweaks the subsidy sharing mechanism.

“An increase in $10/barrel in net oil realization would increase ONGC’s EPS by almost 6.5. Currently, we expect net realization of $44.3/barrel, $45.5/barrel and $57.5/barrel for FY15E (fiscal year 2015 estimated), FY16E and FY17E, respectively," the analysts said in the report.

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Published: 27 Nov 2014, 01:00 AM IST
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