ONGC says offshore deepwater gas viable at $5-6 per million British thermal units

This March, the government approved a new pricing formula for gas sourced from difficult to reach terrain


Oil and Natural Gas Corp. Ltd has in the past said that gas prices below $6 per mBtu will not be viable from this deepwater field, called KG-DWN 98/2. Photo: Bloomberg
Oil and Natural Gas Corp. Ltd has in the past said that gas prices below $6 per mBtu will not be viable from this deepwater field, called KG-DWN 98/2. Photo: Bloomberg

Mumbai: State-run Oil and Natural Gas Corp. Ltd (ONGC) said gas output from its deepwater eastern offshore block could be viable at prices of $5-6 per million British thermal units (mBtu) thanks to drop in costs of exploration and related services.

This March, the government approved a new pricing formula for gas sourced from difficult to reach terrain. The formula will be based on a weighted one-year average of prices of fuel oil, naptha and imported coal.

“ONGC has done viability test at gas price of $6 per million metric British thermal unit (mBtu) and future gas price of $6.8 per mBtu while considering oil price of $50 per barrel,” Edelweiss Securities Ltd said in a 16 September note, quoting the company’s chairman and managing director D.K. Sarraf. 

ONGC has in the past said that gas prices below $6 per mBtu will not be viable from this deepwater field, called KG-DWN 98/2. An email sent to ONGC’s spokesperson went unanswered. 

An ONGC official said the drop in crude oil prices has helped the company lower its operating expenditure for exploration. “Service costs have come down across the industry... Hiring charges for vessels, rigs and barges, etc., have come down providing us a cost reduction of nearly 30%,” the official said on condition of anonymity. 

Crude oil prices have dropped 53.07% from their peak of the last two years. That has reduced offshore rig rates by 30-40% while onshore rig rates have fallen by 20%. 

In March, Sarraf had said that ONGC would be spending Rs34,012 crore over the next four years to produce gas from the field in the Krishna Godavari (KG) basin. It is currently developing one of three parts of the field. 

“At its peak in 2023, the field will contribute 3.5 million tonnes of oil, around 15% of the total oil production envisaged by then,” Sarraf had said on 29 March. 

The offshore gas output will start from June 2019 and oil from April 2020. The part under development has reserves of 94.26 million tonnes of crude oil and 73.6 billion cubic metres of gas. 

Under the current administered price mechanism for gas produced domestically, ONGC sells gas at $3.06 per mBtu, which is set to be revised downwards to $2.5 per mBtu by October. 

Sarraf had on 8 September said that ONGC has written to the government to revise the domestic gas-pricing formula. 

“We have asked the government to relook into the gas price formula as this does not leave us any money to carry out more projects. Every dollar decrease in gas price affects ONGC’s revenue by Rs4,200 crore,” Sarraf had said. 

In the April-June quarter, ONGC posted a net profit of Rs4,232.54 crore, down 21.6% from Rs5,362.36 crore a year earlier. Net sales fell 21.46% to Rs17,670.37 crore from Rs22,498.75 crore.

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