New Delhi: Oil and Natural Gas Corp. Ltd (ONGC) may have to dip into its reserves to help it meet its capital expenditure requirements for 2013-14 and 2014-15, indicating the challenges facing the state-owned explorer whose fields are ageing, yields diminishing, and which ends up funding some part of the subsidy the government extends to oil marketing companies.

It is likely the country’s largest hydrocarbon explorer will have to seek loans for its domestic operations in 2014-15, according to an executive at ONGC—a first for the usually cash-rich company.

“In the exploration and production business, one has to put in equity for which internal resource generation is very important for the exploration programme," the ONGC executive said, requesting anonymity. “Of the cash reserves, around 5,000 crore will go towards deficit financing and another 4,000 crore for current liabilities. Then is the question of acquiring a stake in Indian Oil Corp. Ltd."

ONGC had cash reserves of 13,200 crore on its books as on 31 March. The firm has a capital expenditure plan of 35,000 crore and 36,000 crore for the current and next fiscal years, respectively. At the government’s insistence, ONGC plans to acquire a 5% stake in Indian Oil Corp., part of an effort to contribute to the former’s disinvestment programme.

“We may go for loan in the next fiscal for domestic operations. In the last 10 years, there has been no loan taken for ONGC’s domestic operations. The gas price hike in the next fiscal may help," added the ONGC executive.

Domestic gas prices are set to increase from 1 April. The higher expected price of around $8 per million British thermal units (mmBtu) is a significant increase from the current prices of bet-ween $3.5 and $5.73 per mmBtu.

ONGC did raise some money for its subsidiaries ONGC Videsh Ltd (OVL) and Mangalore Refinery and Petrochemicals Ltd, but it may approach banks to raise money to fund its domestic exploration and production activities. The company invested 22,700 crore during the 10th Plan (2002-07) and increased it to 1.7 trillion in the 11th Plan (2007-12). It is seeking to spend 2.65 trillion in the ongoing 12th Plan (2012-17).

Sudhir Vasudeva, chairman and managing director, ONGC, said his company may not seek a loan but admitted that it was hard-pressed for funds. “We will have to draw down on our cash reserves for the current fiscal and also for the next fiscal. We are expecting to bridge around 4,000 crore gap this year by drawing down on the cash reserves," Vasudeva said. “We have said that if the current situation continues, our cash reserves can only sustain us for the next two years."

ONGC’s share of subsidies to state-owned oil marketing companies such as Indian Oil Corp., Hindustan Petroleum Corp. Ltd and Bharat Petroleum Corp. Ltd—which lose money on account of selling diesel, domestic cooking gas and kerosene below cost—was 13,764 crore in the third quarter (October-December) of 2013-14.

The company is yet to announce its results for the third quarter. ONGC’s net profit rose 2.8% in the quarter ended 30 September on account of the rupee’s depreciation. Net profit increased to 6,064 crore on a 12.7% increase in revenue to 22,384 crore.

The explorer’s net profit decreased 16.7% in the fiscal year ended 31 March to 20,926 crore on account of its subsidy burden hitting a record 49,421 crore. Revenue increased 8.4% to 82,552 crore.

“We have this kind of capex every year. Last fiscal we didn’t have to draw on our cash reserves as of the 35,000 crore capex last fiscal, we only spent 29,000 crore," Vasudeva added.

ONGC will have to make significant investments of around $9 billion in its deepwater block off the east coast adjacent to Reliance Industries Ltd’s D6 field off the Krishna-Godavari basin in Andhra Pradesh which is estimated to hold 125 mt of oil and 3 trillion cu. ft gas.

ONGC has been battling concerns over its production capabilities and diminishing yields at its ageing oil fields. While its domestic reserves increased to 1,287 mtoe in 2011-12 from 1,243 mtoe in 2010-11, its production of oil and gas declined to 52.4 mt from 52.6 mt.

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