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Business News/ Industry / Energy/  Barmer block may turn out to be ONGC’s most profitable venture
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Barmer block may turn out to be ONGC’s most profitable venture

Cost of production at Barmer is much lower than that at the ageing, deep sea field of Mumbai High

The Barmer block is expected to touch production of 300,000 barrels per day by 2016-17 under Cairn India’s three-year capital expenditure programme.Premium
The Barmer block is expected to touch production of 300,000 barrels per day by 2016-17 under Cairn India’s three-year capital expenditure programme.

Mumbai: Oil and Natural Gas Corp. Ltd (ONGC) makes double the money on each barrel of crude from its jointly held Barmer field in Rajasthan than Mumbai High, its biggest field off India’s west coast.

At this rate, the operations at Barmer could turn out to be the most profitable venture for India’s largest oil and gas producer in three years when it surpasses production at Mumbai High, said two company executives involved in operations in Rajasthan. The difference in profits from the two fields is mainly because cost of production at Barmer is much lower than that at the ageing, deep sea field of Mumbai High, the said, requesting anonymity.

The Barmer hydrocarbon block is operated by Cairn India Ltd, a unit of London-listed Vedanta Resources Plc, which owns 70% share in the field.

The field, which has seen five major discoveries—Mangala, Bhagyam, Aishwariya, Raageshwari and Saraswati—and several small ones yet to come into production, now produces 185,000 barrels every day.

The Barmer block is expected to touch production of 300,000 barrels per day by 2016-17 under Cairn India’s three-year capital expenditure programme.

That would take it to the current production level at Mumbai High, which is expected to stay at that level for the next three years.

“Being a relatively new asset, the cost of production from the discovered fields in Barmer is $10 per barrel. After adding the impact of various levies and taxes, the total outgo to produce each barrel stands at a total of up to $20 per barrel," said one of the executives.

Therefore, for a market-linked crude oil price of $90-95 per barrel (Cairn’s crude sells cheaper by about $5 per barrel than the crude oil from Mumbai High), the net money earned on a barrel of crude sold at Barmer stands at $70-75 per barrel, said the ONGC official.

In contrast, the overall net realization for ONGC stands at $40-45 per barrel, especially because the company has to bear the burden of losses of state-run oil marketers.

“Due to the soaring cost of maintaining the level of production in the flagging Mumbai High basin, the net realization from the asset stands below $35 per barrel," the second executive said.

It is half of what the company makes from Barmer crude.

This realization from Mumbai High, the second official said, could come down further when the third phase of redevelopment kicks in, which is expected to cost ONGC 16,000 crore. The impact of the cost of redevelopment is expected to reflect on the company’s balance sheet in 2015-16.

D.K. Sarraf, chairman and managing director of ONGC, refused to comment on the cost of production from the field after redevelopment at a media briefing on 6 September. “We have various oil and gas fields and each of them has different cost of production based on their location and age and so we should look at the total net realization for the company," he said.

“You have to understand that Mumbai High is a very old asset and yet we have been able to maintain production from the asset for over 50 years," T.K Sengupta, director, offshore, ONGC, said on 6 September in Mumbai. “And this will go on at least till 2040 but will require several costs and higher technology to be put in." He too refused to comment whether the cost of redevelopment will surpass cost of production at Mumbai High in the coming years.

But, Sarraf’s predecessor Sudhir Vasudeva in November 2013 had pointed out that the Mumbai High redevelopment will not be viable even at $70 per barrel as the cost of production will increase significantly, thus lowering the company’s net realization. At the approximate current realization level of $35 per barrel, ONGC makes $3.8 billion per year in profits from Mumbai High as against $1.42 billion per year profits made for its 30% share in the Barmer basin at realizations of $70 per barrel.

“While logically if Cairn India reaches a production of 300,000 bpd (barrels per day), Barmer could become a more profitable venture but I have my concerns on how long Cairn India will take to reach that production." said Amit Agarwal, an analyst with the brokerage arm of SBI Capital Markets Ltd.

ONGC’s production from Mumbai High and other fields have been flat for over three years now, Agarwal said. More production from Barmer will definitely increase profitability, but will largely depend on how fast and how much Cairn India can increase output, he said.

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Published: 17 Sep 2014, 12:40 AM IST
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