Gas price hike will augment production

T K Ananth Kumar
Director (Finance), Oil India Limited
Oil India Limited (OIL) is one of the domestic E & P players in the upstream sector. The depreciation of rupee against the dollar is going to work out favorably for upstream companies. The doubling of gas prices from USD 4.2 per mmbtu to USD 8.4 per mmbtu will bring improvements in margins of OIL. T K Ananth Kumar, Director (Finance), Oil India Limited talks to Offshore World about impact of Rupee depreciation against Dollar on oil and gas industry, subsidy sharing, OIL's plans of foraying into refining sector, pros and cons of recently presented Land Acquisition Bill in Parliament, and many more. Excerpts:

How will the recent drastic Rupee depreciation against Dollar impact the country's oil & gas industry value chain when India is already footing high oil imports bill? What would be the balancing act the companies will have to perform to maintain their profitability?

India's oil and gas industry is primarily divided in two sectors with companies like OIL and ONGC in the upstream sector and IOC, BPCL, HPCL in the downstream sector. Since the price of oil and gas produced by OIL and ONGC are USD denominated, the depreciation of Rupee works out favorably for the upstream companies. However, for the downstream marketing companies, the Rupee depreciation definitely has adverse financial implications as rising cost of crude oil increases their under-recoveries on sale of diesel, PDS kerosene and domestic LPG, which may adversely affect upstream companies through increase in discounts to OMCs.

As far as crude price is concerned, it is difficult for anyone to exactly predict the oil price in the future. However, any geopolitical disturbances has the tendency to affect the crude oil price adversely, though it may not be long lasting incidentally crude oil price has been quite steady over the last 30 months or so with an average of around 110 USD per barrel.

OIL is having overseas investments in various E & P assets in different geographies of the world. To the extent, we finance these overseas projects out of our internal resources. The investments in projects in Rupee terms increase due to fall of Rupee. However, from the assets, which are already producing like Carrizo, the revenue generation is also in USD, which reduces the adverse Rupee depreciation impact to some extent.

What are your views on the Government's intent on bringing changes in the subsidy regime and intends to now pass it on to the oil producers which were earlier only borne by the Oil Marketing Companies? How is this going to hit the top & bottom line margins of oil producers?

Right from the beginning of subsidy sharing mechanism in 2003-04, OIL, ONGC and GAIL are bearing a substantial portion of the subsidy on marketing of sensitive petroleum products by the Oil Marketing Companies. The contribution by oil producers has ranged in between 30 percent to 42 percent during the last several years. Though we are bearing a substantial portion of the subsidies, over the years the Government has ensured to some extent that the crude oil producers get a reasonable net price realization. However , the need of the hour is to have a transparent and predictable subsidy sharing mechanism devoid of adhocism, which would help both the upstream and downstream companies to plan their cash flow properly. We have represented to Govt and also to Kiritimati Parikh Committee suitably and are hopeful that a clear cut mechanism of subsidy sharing would be soon put in place.

May we have your comments on the recent announcement of Government on hiking gas prices from USD 4.2 to USD 8.4 mmbtu instead of deregulating the gas prices when this trend has actually been able to address the gas supply deficit in the many countries?

What the Government has approved is a formula for linking the prices of domestically produced natural gas to the prevailing international prices and based on that formula the indicative price worked out to USD 8.4 per mmbtu. The new pricing system, when implemented effective from April 2014, will link the price of domestically produced natural gas to the international prices and the prices will be floating on a quarterly basis in line with international prices.This price increase would encourage producers to undertake more and more investments in exploration, which would help in more production and hence less dependent on imported gas as gas business would become increasingly viable with higher realisations.

According to the media reports, Oil India has now plans to foray into the refining sector. What is the rationale and please share some insights into the planned project with reference to the capacity, site, investment, funding, product lineup, future expansions and adding downstream units etc? Would you be also looking at roping in international partners?

OIL already has 26 per cent stake in Numaligarh Refinery in the state of Assam. In line with our policy of selective diversification, we are looking for partnerships in more such refinery projects. However, a decision about the size of our participation in the project will be taken by the management at appropriate time as and when some good opportunity is available. We also wish to reiterate that our primary focus shall continue to be E & P and diversification would be very selective in value chain with good economics.

Does Oil India intend to get into shale gas exploration at some point of time?

OIL will certainly go for shale gas exploration as and when the Government of India's shale gas policy is announced and the exploration activities commence. With an intention to get on hand experience in the shale exploration, OIL has acquired 20 per cent stake in a shale oil asset in USA, which is also giving us consistent revenue since acquisition and has improved company's international visibility.

How favourable is Land Acquisition Bill presented recently in the Parliament for the industry in your opinion?

We are already facing some difficulties in land acquisition for our E & P activities. The new Land Acquisition Bill to the extent we understand at present may make such acquisitions a bit more costly. We are yet to get a full insight into the new legislation and are, however, hopeful it may reduce the time gap being taken for land acquisition.

With the next round of bidding for NELP just around the corner, what are your thoughts on the success of attracting investments into the country after the gas price revision by the Indian Government?

With the announcement for increase in the natural gas price by the Government of India and linking it with the prevailing international prices from time to time, the Government has made its intention clear that the country is looking for more investments in the E & P sector and the Government is willing to facilitate such investments. We expect good participation in the Xth Round of NELP after clarity on gas pricing.

Please apprise us about the status of OIL's Mozambique asset purchase?

OIL along with OVL has signed a definitive agreement for acquisition of Videocon's 10 percent stake in Mozambique's Rovvuma basin at a price of USD 2.475 billion. We are awaiting approval of the Government of India for this deal. Once the deal is finalised, this will be the single largest investments by OIL overseas so far in a giant oil field.

What is OIL's CAPEX for 2013-14 and how does the company plan to invest it? Please share the overseas acquisition plans lined up for the near future.

OIL has drawn plans for investment of USD 600 million for 2013-14. Out of this about 80 percent investments will be in the E & P activities within the country with remaining expenditure being incurred in the ongoing overseas projects. Apart from the ongoing overseas projects, presently we are in the process of closing the Mozambique deal.

In the current turbulent times, what strategy is Oil India adopting to maintain and accelerate the growth momentum?

OIL has drawn a Strategic Plan for medium term till 2020. Our main strategies include maintaining and enhancing production from current fields through various means including EOR/IOR activities, accelerated exploration initiatives, inorganic growth (both within India and overseas) and selective diversification.