India hikes Oil Prices while ONGC Plummets

Oil and Natural Gas Corporation (ONGC)

By Priya Nigam

So, the government has finally decided to hike petrol and diesel prices. While global oil prices have been flirting with the $100 per barrel mark, the Indian government was still on tenterhooks about the hike. Petrol prices were upped by Rs2 per litre and diesel prices were raised by Re1 per litre. While this may not be good news for you and me, the decision offers some respite to companies like Oil and Natural Gas Corporation (ONGC), which produces around 80% of the country’s crude oil.

The company missed analyst expectations when it reported its fiscal third-quarter results. Net profits had plunged 6.5% to Rs4,367 crore in the quarter ended December 31. The state-run oil major’s Chairman Mr. R.S. Sharma had cited the subsidy burden as the reason for the dismal performance. ONGC is required by the government to sell its output at a huge discount. In the December quarter, the company sold crude oil for $54.52 per barrel, which is close to half of the market rate. This discount is offered to refiners like Indian Oil Corp, Bharat Petroleum Corp and Hindustan Petroleum Corp, which are also offered government bonds to keep prices of widely consumed fuels within limits and keep inflation under control. In the latest quarter, ONGC offered Rs6,080 crore in subsidies, as compared to around Rs2,204 crore in the year-ago period.

The company is now planning to spend around Rs15,000 crore on revamping its ageing infrastructure at oilfields across the country. This is a much needed investment from the company, whose infrastructure is in a bad shape to put it mildly. There have been instances of shutdowns due to recurring leaks in the pipelines from producing wells. The reconstruction is to begin with the company’s assets in Assam, where it has three fields, of which the Rudrasagar field is almost 40 years old. ONGC expects that the revamping in Assam would take three years and, following this, it would be able to increase oil production here by 20%. After Assam, the company plans to target its fields in Gujarat and the east coast. It has become increasing important for ONGC to improve the efficiencies of its existing infrastructure, thereby recovering more and more lost production, as there haven’t been any significant new discoveries over the past decade.

What really goes in favor of the company is its overseas presence via ONGC Videsh. Production from its overseas assets is likely to rise and the company does not have to adhere to any price caps for selling this output.

ONGC’s shares have been on a downswing since the beginning of this year. The shares, which were trading above Rs1,300 in early January, have now fallen close to Rs1,000. This week ONGC shares have been volatile and even plummeted to an intraday low of Rs986 on February 20.

moneycontrol.com quoted SV Prasad, MD of the Indian operations of asset management company Schroders Plc, as expressing concern over near-term prospects, while adding that the markets are likely to remain range bound.