ONGC losses on gas business to widen to Rs 6,000 cr in FY21

India's top oil and gas producer ONGC is likely to see its loss on natural gas sales widen by nearly 50 per cent to Rs 6,000 crore in the current fiscal after the government-mandated rates for the fuel dropped to a decade low.

Oil and Natural Gas Corp (ONGC) had posted Rs 4,272 crore loss on gas business in 2017-18, which is likely to widen to over Rs 6,000 crore in the current fiscal (April 2020 to March 2021), sources said citing a company communique to the government.

The accounts for 2019-20 are yet to be finalised but the loss on gas business should be around Rs 4,500 crore.

ONGC has seen incurring losses on the 65 million standard cubic meters per day of gas it produces from domestic fields shortly after the government in November 2014 introduced a new gas pricing formula that had "inherent limitations" as it was based on pricing hubs of gas surplus countries such as the US, Canada, and Russia.

Rates according to this formula were revised every six months. Prices effective April 1 have been cut to USD 2.39 per million British thermal unit - the lowest in more than a decade.

Sources said ONGC in the communique stated that the break-even price of major ongoing/planned projects to produce gas from newer discoveries was in the range of USD 5-9 per mmBtu.

In previous years, loss from the gas segment was getting offset from the gain from the oil business. But with oil business itself coming under severe strain due to a sharp slump in benchmark prices to a low of USD 20 per barrel, it has become difficult for the company to meet even the operating expenses, they said.

The company wants gas pricing to be completely freed with a floor rate of USD 4.2 per mmBtu (equivalent to rate given in the regulated regime), they added.

The price applicable from April 1 is the lowest that ONGC will realise since 2010 when the government had moved towards deregulating gas pricing.

In May 2010, the Cabinet had approved an Oil Ministry proposal to raise the rate of gas sold to power and fertilizer firms from USD 1.79 per mmBtu to USD 4.20.

ONGC and Oil India Ltd (OIL) got USD 3.818 per mmBtu price for the gas they produced from fields given to them on nomination basis and after adding 10 per cent royalty, the fuel cost USD 4.20 per mmBtu for consumers.

The Congress-led UPA had approved a new pricing formula for implementation in 2014 that would have raised the rates but the BJP-led government scrapped it and brought a new formula.

The new formula takes into account the volume-weighted annual average of the prices prevailing in Henry Hub (US), National Balancing Point (the UK), Alberta (Canada), and Russia with a lag of one-quarter. Prices are set every six months -- on April 1 and October 1 each year.

The rates at the first revision, using the new formula, came to USD 5.05 but in the subsequent six-monthly reviews kept falling till they touched USD 2.48 for April 2017 to September 2017 period. Subsequently, they rose to USD 3.69 in April 2019 to September 2019 before being cut by 12.5 per cent in October 2019 to USD 3.23.

Oil Minister Dharmendra Pradhan, in a written reply to a question in the Lok Sabha on March 20, 2017, had stated that the cost of production of natural gas in the prolific Krishna Godavari basin is between USD 4.99 -7.30 per mmBtu. The same for other basins is in the range of USD 3.80 -6.59 per mmBtu, he had said.

For ONGC, which produces most of its 64 million standard cubic meters per day of gas from western offshore, the breakeven is around USD 3.8.