ONGC Incurs Heavy Loss on Gas Production Due to Cap on Prices

ONGC has logged a Rs. 4,000-crore loss on natural gas output in the fiscal year ended March 31, 2018 as the government mandated price for the fuel was less than the cost of production.

As per a new mechanism approved by the government in October 2014, the price of domestically produced natural gas is to be revised every six months – April 1 and October 1 – using weighted average of rates prevalent in gas surplus markets like Henry Hub (US), National Balancing Point (UK, excluding Russia), Alberta (Canada) and Russia. Using this formula, the price for April to September came to $3.06 per mBtu as compared to $2.89 in previous six months.

According to ONGC officials, the average cost of production is about $5.14 per mBtu. “Gas production is now a loss-making business as irrespective of cost of production we have to continue paying royalty and other taxes,” they said.

‘Higher prices needed to bring new fields into production’

ONGC is demanding a floor or minimum price of natural gas be fixed at $4.2 per mBtu for the business to make economic sense. ONGC’s significant discoveries in KG basin and Gulf of Kutch would need higher price to bring them to production.

Gas discoveries in the shallow sea off Andhra Pradesh on the east, and off Gujarat on the west could become economically unviable to produce at the current government-mandated price of $3.06, and ONGC would have to mothball the $1.5-bn projects, the officials said. The Krishna Godavari (KG) basin block KG-OWN-2004/1 is in shallow water and does not qualify as a ‘difficult field’, which get higher gas price of $6.78 per mBtu. On the western side, the block GK-28 in Gulf of Kutch is a nomination block, which does not qualify for higher rates, they pointed out.

While the KG block will produce a peak output of 5.35-mn standard cubic metres per day, the one in the Gulf of Kutch block will produce around 3-mmscmd. It would take a minimum three years to bring the gas finds to production. The combined output is about 14% of the ONGC’s current output of 60-mmscmd.

Natural gas constitutes around 45% of ONGC’s total crude oil and natural gas production volume. It produces around 75% of the country’s natural gas output.