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ONGC Aims to Cut Operational Cost on Falling Crude Oil Prices

With oil prices sliding to 12-year low, state-owned Oil and Natural Gas Corp (ONGC) plans to cut operational cost by at least 10 per cent by prioritizing activities and putting off the less-important ones to future.
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ONGC Aims to Cut Operational Cost on Falling Crude Oil Prices
New Delhi: With oil prices sliding to 12-year low, state-owned Oil and Natural Gas Corp (ONGC) plans to cut operational cost by at least 10 per cent by prioritizing activities and putting off the less-important ones to future.

ONGC plans to hire a consultant to suggest cost cuts and controlling operating expenditure as Brent falling to $31 per barrel almost equals to the company's cost of production of every barrels of crude oil, sources with direct knowledge of the development said.

The company's cost of producing every barrel of crude oil is $36 and after including return on investment as well as taxes and levies, the cost comes to $51.52 per barrel.

The slump in oil prices to 12-year low will means that ONGC pays less royalty and assuming the government lowers its Rs 4,500 per tons burden of cess, the cost of production will come to about $30 per barrel.

This compares to realisation of $30-32 per barrel in the current quarter, just about squaring off the cost.

Sources said the company has already initiated measures to cut avoidable expenditure and is putting money only in priority tasks or activities needed to sustain its oil and gas exploration and production. There will be no cut in capital expenditure in oil and gas projects as such investment will help the company sustain or increase output, they said.

The drop in international prices has also resulted in a corresponding drop in oilfield services cos, which the company wants to captalise on and continue exploration and development works. Sources said ONGC is unlikely to cut capex but only look at triming its operating expenditure by shedding non-priority spendings.

ONGC produces 24 million tons of crude oil annually which is sold at international parity price. It loses Rs 900 crore in revenue on every $1 per barrel drop in oil price.

The company had planned a capital expenditure of Rs 36,249 crore in the current fiscal and another Rs 34,000-35,000 crore in the next.

ONGC's gross billing for crude oil it produced in the first half of the current fiscal was $57.33 per barrel as compared to $105.75 for the first half of last fiscal. The net realisation after subsidy payout was $53.72 per barrel.

In the third quarter, its gross billing was about $43 per barrel.

Sources said ONGC is hoping to get exempted from paying subsidy on LPG and kerosene after the oil price drop.

Upstream firms like ONGC sell crude oil to refiners at a discount so as to allow them to sell cooking fuel at government controlled rate. ONGC is also hoping that the Rs 4,500 per ton cess on domestically produced crude oil is made ad valorem to help cut the statutory outgo by $6 per barrel to $8-9.

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