ONGC Oil: Find a Big Boost, But Subsidy a Worry

After years of production stagnation, ONGC’s huge new discovery in western offshore is something that can really end its production woes. Since the full benefit of this incremental production will come in FY14 and there are other discoveries set to begin production in FY15 and onwards, the current fiscal could very well be the last year of stagnating production for the oil behemoth.
Along with the June 2012 quarter results, ONGC also announced discovery of an additional reservoir in an already producing D1 field in western offshore. Since the field is already producing, the new discovery can be quickly put to production. The output expected jump will add nearly 1.15 mt to ONGC’s annual production, which is 4.8% of its FY12 production at the standalone level. This will be a very big moment for the company, which has seen its production steadily fall from 26.05 million tonne in FY07 to 23.71 million tonne in FY12 – a decline of nearly 2% annually. Its woes seem to exacerbate in the first quarter of FY13, with the production falling 4.9% to 5.64 million tonne. It was surprising for ONGC to post a resounding 48% jump in profit for the June 2012 quarter. Not just that its production was down, the company also had to bear a bigger burden of subsidies while the average international oil prices were down.
The profit rise was made possible by a heavily-depreciated rupee. ONGC’s net realisation – what it is allowed to retain after giving mandatory discounts to oil marketing companies – was 16% higher at . 2,527 per barrel, although in dollar terms it fell 4.4% to $46.62. For the quarter, the company extended discounts of . 12,346 crore – . 300 crore more than what it gave in the June ’11 quarter. Similarly, its overall expenses were up nearly . 1,200 crore from the year-ago period due to oil cess. With oil prices risng and the outlook positive for ONGC’s production, its future should be considered bright, barring for one thing – its share in petroleum sector under-recoveries. The government’s limited ability to fund these losses and a lack of political will would raise retail fuel prices, a rising proportion of this burden could be transferred to the upstream firms like ONGC. Due to uncertainty over this key matter, market’s reaction to ONGC’s strong results and the new discovery should remain muted. 

KEY POINTS The expected jump in production will add nearly 1.15 mt to ONGC’s annual production
It’s surprising for ONGC to post a resounding 48% jump in profit for the June 2012 quarter