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Cash reserves sliding, ONGC trims exploration and development works

Expenditure on development wells or wells drilled in fields that already have proven reserves of oil and gas has been comparatively stable, but has seen a decline.

Written by Karunjit Singh | New Delhi |
February 15, 2021 4:21:33 am
Amar Nath, Additional Secretary (Exploration) in the Ministry of Petroleum and Natural Gas, on April 1, wrote to ONGC Chairman and Managing Director Subhash Kumar giving a seven-point action plan, ‘ONGC Way Forward’ that would help the nation’s largest oil and gas producer raise output by one-third by FY24.

A steady fall in cash reserves at state-owned ONGC, a key player in India’s crude oil and natural gas production landscape, has coincided with the upstream major being forced to pare investments in exploration and development. The trend, which has been sharply pronounced since FY18, comes at a time when the Centre is seeking to boost domestic production to reduce dependence on imports.

ONGC’s cash reserves are down from Rs 10,799 crore at the end of FY14 to Rs 968 crore at the end of FY20, largely on account of acquisitions of controlling stake in Hindustan Petroleum Corporation Ltd (HPCL) and majority stake in Gujarat State Petroleum Corporation’s (GSPC) KG Basin gas block in FY18. The upstream utility’s expenditure on exploratory wells too fell sharply from Rs 11,687 crore in FY14 to Rs 4,331 crore in FY20, according to company data.

Expenditure on development wells or wells drilled in fields that already have proven reserves of oil and gas has been comparatively stable, but has seen a decline. This fall has occurred during the same time period where ONGC’s annual finance costs have jumped from Rs 0.36 crore in FY14 to Rs 2,824 crore in FY20. ONGC had raised debt of around Rs 24,881 crore to complete the Rs 36,915-crore acquisition of the government’s 51.1 per cent stake in HPCL and had raised Rs 7,560 crore to complete the acquisition of an 80 per cent stake in GSPC’s KG Basin gas block.

ONGC accounts for about 63 per cent of the domestic crude oil production and over three-quarters of the domestic gas production. It continues to be the most important player in the nation’s crude oil and natural gas output landscape, having won seven of the 11 hydrocarbon blocks offered under the fifth round of bidding under the Open Acreage Licensing Policy (OALP), with state-owned Oil India Ltd (OIL) bagging the other four blocks on offer.

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A source close to the company management told The Indian Express that ONGC had incurred more capital expenditure on re-development of plant, property and equipment to boost production at the expense of expenditure on exploratory wells.

The source noted that ONGC realised that there was no more “easy oil” to be discovered in the country and that it had to work on investments in logistically difficult areas which entail higher infrastructure costs.

ONGC did not respond to emailed requests for comment.

Experts noted ONGC was set to pay off most of its debt in FY22 and this would likely lead to an increase in its cash reserves, which would also be boosted by the rise in global crude prices. FY15 was an abnormal year, when cash reserves had fallen sharply as the company’s accounts receivables rose amid high crude oil prices but recovered in the next fiscal.

“ONGC’s cash reserves had gone down and that should reverse now that they are repaying their debts,” said an analyst who did not wish to be quoted. With a recovery in the price of crude oil and natural gas, ONGC would be able to generate sufficient cash to support its capital expenditure, the analyst added.

ONGC’s total borrowings fell from Rs 21,593.6 crore at the end of FY19 to Rs 13,949.1 crore at the end of FY20.

Analysts said that ONGC is only looking to maintain its existing production levels as reserves from existing wells are going down. It is key that ONGC maintains a reserve replacement ratio above one. A replacement reserve ratio indicates if the company has added to its existing reserves as much as it has extracted for production and that the company’s reserves will be able to sustain its existing level of output.

While ONGC has maintained a reserve replacement ratio of over 1 for 14 consecutive years, the state-run utility’s total crude oil and natural gas production have been declining. ONGC’s total crude oil production in FY20 was 19.2 million tonnes, falling from about 21.1 million tonnes in FY16, as its expenditure on exploratory and development wells has fallen.

While ONGC’s expenditure on exploratory wells has declined by an average of 13.7 per cent every fiscal between FY14 and FY20, OIL has increased the same by an average of 8.8 per cent during the same period.

OIL’s expenditure on development wells has also increased by an average of 7 per cent during this period, while that of ONGC has declined by 1.9 per cent every fiscal from FY14 to FY20.

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