India’s biggest oil producer, Oil and Natural Gas Corporation (ONGC), says producing every additional barrel of oil has become more difficult, complex and costly in the country and managing costs is vital to securing profitability in the business.

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In its annual report for FY19 released recently, the company has stated that higher taxes are impacting its profitability and the cess imposed on domestically produced crude oil is taking a toll on earnings performance. The perpetual uncertainty pertaining to subsidy-sharing during periods of high crude prices adds another element of risk to cashflows.

The impact of US sanctions on Iran is not unknown. India has been a top buyer of both Iranian and Venezuelan oil. ONGC says the recent crises in these countries force domestic buyers to reassess their sourcing destinations, a development that adds another layer of stress to an environment in which crude prices are on the rise.

The ongoing US-China trade war is another potential crisis in the making. The trade war at a time when major markets are experiencing slowdown could significantly dampen global oil demand. The only silver lining could be implementation of International Maritime Organisation (IMO) regulations from January 1, 2020. Otherwise globally, rising costs are another source of risk for upstream operators

According to ONGC, in the gas exploration business, the current domestic prices are low, which is a risk factor. Despite gas prices being higher by 50 percent in the last two years at $3.69/mmBtu, overall the prices are lower than the pre-existing regulated APM prices of $4.2/mmBtu. A low price point is a significant disincentive for any major capital programme. “While numbers for FY19 are relatively better, the financials are still far from ideal,” the company noted.

The company’s overall business project break-evens are anywhere between 30 percent-40 percent lower than 2014 levels.

There had been a lot of criticism over ONGC taking debt to fund HPCL’s acquisition. It turned into a debt-laden company from a net debt free company post the actuation and the cash flow also fell substantially. In FY19, company has been able to reduce its debt by Rs 4,000 crore.

First Published:Aug 14, 2019 4:29 PM IST