Oil and gas in the capitals

Even though the 10-month-long slump in global crude prices has come as a boon to India’s overall economy, the country’s major E&P companies are still reeling under its adverse impact. To measure the extent of the collective loss to these companies, one needs to look at the crude oil scenario in India. Total production in India during fiscal 2013-14 was just about 37.788 MMt, and its demand almost three times as much.

While indigenous production has remained stagnant over the past few years, the demand for petroleum products has been on the rise continuously, necessitating higher and higher imports each year. India spent $125 billion annually, or thereabout, during the past five years on the import of crude, alone. Now with the price hovering around $60/bbl, this huge yearly burden has come down almost 50%, thus saving India nearly $65 billion to $70 billion every year, thereby reducing its trade deficit substantially.

Large declines. All the E&P companies in India have reported nearly 50% erosion in their top lines. Oil & Natural Gas Corporation Ltd (ONGC), India’s high-profile national oil company, lost its shirt when its third-quarter net profit dropped 50%. In absolute terms, its quarterly profit fell from Rs 7,125 crore (Rs 71.25 billion, or $1.13 billion) to about Rs 3,571 crore (Rs 35.71 billion, or $566.3 million). Oil India Ltd (OIL), the second government-owned E&P company, also registered a sharp decline of nearly Rs 400 crores (Rs 4 billion, or $64.3 million) in its net profit.

However, for Cairn India Ltd—a unit of London-listed Vedanta Resources Plc—it was not a double- but a triple- whammy. First, it posted a sharp drop of 53.2% in the third quarter, as its net profits fell from Rs 2,884 crore (Rs 28.84 billion, or $457.3 million) in the preceding year’s quarter to Rs 1,349.64 crore (Rs 13.50 billion, or $214.1 million). In a reaction, described as “hasty” by some analysts, it laid off 453 of its estimated 1,500 employees. To further compound its woes, the Indian tax authorities issued, on April 6, a tax demand of $3.3 billion, claiming that Cairn had failed to deduct “withholding tax” on the capital gains made by its former parent, Cairn Energy Plc. Cairn has, of course, challenged the tax demand in the Delhi High Court, but the demand nevertheless will continue to hang like a Sword of Damocles over its head, until some judicial remedy comes to its rescue.

If this enormous tax jeopardy was not enough, Cairn’s despair was aggravated further, when its stock fell over 28% on the Bombay Stock Exchange, even as, ironically, the benchmark Sensex had gained 29.57%. Despite the fall in its profits and the retrenchment of personnel, Cairn’s financials continue to be robust, and its assets very invaluable, and there is no doubt that it will soon recover from this hiccup. It is, indeed, a remarkable feat for Cairn to have become, in just 20 years, the biggest private oil company in India, producing 28% of the country’s total oil output.

With annual production of 37.788 MMt and just a 1.04% share of world crude output, India is just a blip on the global oil map. Of this amount, India’s oil conglomerate, ONGC, produced just about 22.245 MMt in 2013-2014. Its overseas arm, OVL, added a meager 5.491 MMt from its properties across 16 countries. OIL contributed about 3.466 MMt to India’s domestic oil kitty. Likewise, production by private and joint venture companies operating on their own, or under Production Sharing Contracts (PSC), together produced 12.077 MMt. Of this, Cairn India’s share, alone, was an impressive 10.273 MMt.

ONGC’s outlook. Even though low prices have hurt ONGC’s top line, it has deep pockets and large cash reserves. Undeterred by low crude prices, ONGC is, nonetheless, going ahead with its ambitious Perspective Plan 2030, launched in 2012. It aims to achieve output of 60 Mtoe and a six-fold growth in production from its overseas operations by 2030. It plans to spend $176 billion by 2030, with a view to achieving energy security, as visualized by Prime Minister Narendra Modi. “Though higher spending in a low oil-price scenario will have an impact on our earnings, we don’t have a choice,” ONGC CMD D.K. Sarraf told Bloomberg in a recent interview. Ajay Kumar Dwivedi, who has taken over recently as exploration director at ONGC, is quite optimistic. “We will invest about a hundred-billion rupees during the current fiscal year and drill 50 wells, including 10 shale wells,” Dwivedi told
the interviewer.

ONGC Offshore Director T.K. Sengupta also sounded optimistic, when he told an interviewer that hopefully the days of stagnant production had ended, and that ONGC would be able to sustain a steady rate of growth in the future. Sengupta also added that the much-delayed and highly anticipated production from Krishna-Godavari (KG) would start in fiscal 2019, thereby helping to sustain the rise in production. Its aging onshore fields are already in “diminishing returns” mode. Though there is a marginal increase from the western offshore fields, it may not be enough to make up for the decline from onshore wells. Hence, there is an utmost necessity of putting on production, as early as possible, from the KG deepwater fields.

One is not sure if there is any noticeable movement or progress toward the targets set forth in The Perspective Plan 2030, even four years after its launch. While this optimism by the ONGC brass may be justified, there is an urgent need to inculcate a sense of urgency at all levels in the organization, if its prognostication is to come true.