Oil’s not well

While falling crude prices maybe good for India, they will weigh heavily on the financials of Indian oil and gas companies especially pure play crude producers like Cairn India. Cairn operates India’s largest, onshore hydrocarbons asset, the Barmer block in Rajasthan, which contributed nearly a quarter of India’s total crude production in 2013-14.

Not surprisingly, the Cairn stock has lost close to 25% of its market value since January 2014, while the Sensex has gained 30%. With an oversupply of the commodity globally, crude prices have lost as much as 55% in the last six months and are hovering around $50 a barrel. Net realisations of oil producers will no doubt be hit. The impact will be lesser for those companies that have a more diversified business model, like Reliance Industries (RIL) and Oil and Natural Gas Corp. Ltd (ONGC).

The Bloomberg consensus of Cairn India’s earnings per share (EPS) over FY15-17 has come off by 14-17% and operating an net profits are also seen declining in the three years to FY17 . On the other hand, the estimated EPS for RIL and ONGC over the same period have been trimmed by a more moderate 3-4%.

There are also concerns owing to uncertainties surrounding the production sharing contract (PSC) it has with the government for operating the Barmer block. As reported by FE in May, the Director General of Hydrocarbons (DGH) has turned down the company’s request for a ten year extension of PSC for this block that expires in May 2020.



The regulator is of the view that the contract can be extended for another five years only since the block is primarily an oil producing asset and not a gas field. It has been reported that the government may bargain for a greater share of profit petroleum and a bigger stake for ONGC in the
Barmer block, in exchange for extending Cairn India’s PSC. ONGC, the original licensee of the block, holds a 30% stake at present.

Contractually, upon expiry of the PSC, a hydrocarbon block has to be returned to the original licencee. Renegotiations of the fiscal terms and conditions of the PSC is also a key development experts seek clarity on as the government may raise its share of profit petroleum beyond the current contracted peak level of 30-40% for some fields.

Even as Cairn has guided for an annual growth rate of 7-10% in production, between fiscals 2015 and 2017, analysts feel that in the wake of this uncertainty the company may scale down its capex plan at Barmer.

According to IIFL, although Cairn India’s management is hopeful of an extension of the PSC, it is focusing on only short-term capex plans until it receives further clarity. The domestic brokerage has reduced production estimates for 2015-16 and 2016-17 by 2% and 6% respectively and sees the production peaking at 187,000 barrels per day in FY17. In fiscal 2014, Cairn India’s gross average production stood at 218,000 barrels of oil equivalent per day.

“It (Cairn India) is likely to scale down exploratory capex outside the Mangla-Bhagyam-Aishwarya (MBA) fields. This could affect its production profile in the medium-term,”  IIFL said in a research note.
For the long-term Cairn India is planning to develop natural gas assets that it has discovered in Rajasthan and is proposing to invest around $700 million to bring these assets into production. This strategy may help Cairn India’s case as it seeks a 10-year extension for the Barmer block. The company may share more on information on this development when it announces its earnings for the October-December quarter on January 22. Most analysts have factored an up to 50% decline in year-on-year net profit for the period.

In the first nine months of the current fiscal the Brent price of crude averaged $96 per barrel.
Analysts generally account for a 10% discount to this benchmark value while pegging a value to Cairn India’s net realisation by selling crude. Not surprisingly, as the outlook for global prices worsen, the company’s realisations are set to be affected.

Source: FE

Reliance, Essar to add 1,400 fuel retail outlets this year

Reliance Industries and Essar Oil plan to increase their fuel retailing presence in the country after demand for gasoline (petrol) and diesel crashed in the global market because of lower economic activity.

The private players will open another 1,400 outlets -Reliance 1,000 and Essar 400-this year, posing a tough challenge to the giant public sector retailers.

Reliance operates 400 outlets in the country at present, while Essar is much ahead with 1,400 outlets.
Reliance had 1,400 outlets in 2008, but shut down most of them after incurring a Rs 800-crore loss in its fuel retailing business in 2007-08 as its fuel rates were much higher than the subsidised prices of state-owned oil companies.

The government has recently rationalised the prices and the final piece of the lot was the diesel price deregulation in the last October. A Reliance official says the number of retail outlets will increase to 1400, mostly by reopening the earlier shut down 1,000 outlets.

Reliance is currently operating company-owned retail outlets. About 500 properties used for the fuel retail business are owned by the Mukesh Ambani-controlled group. The remaining outlets are dealer-owned and dealer-operated.

Reliance is in negotiations with its dealers for reopening the pumps. But the dealers are fighting for higher commissions. They claim that the government's oil marketing companies offer better commissions than the private players. Issues will be sorted out soon, say the sources.
As for Essar, it is identifying locations for its new outlets, which are mostly outside the crowded cities. They are also trying different models to increase the number of outlets and to gain market share.

Now that petroleum prices have been deregulated, the private players have an edge since their advanced refineries can process the low-cost crude and achieve maximum efficiency.
Essar and Reliance can both process everything from cheaper extra heavy crude to light crude oil, which gives them a huge competitive advantage over older PSU refineries in India.

Source: Business Today

Oil price slump to bring down profits of upstream firms: ICRA

The 55 per cent slump in global oil prices will result in material decline in profits of crude oil producers like Cairn India, but will help oil marketing companies cut their fuel losses, ratings agency Icra said today.

Global crude oil prices have declined from USD 112 per barrel in June 2014 to USD 50 now, primarily due to significant increase in supply with a record US crude oil production, demand slowdown in Europe, Japan and China.

"The crude oil prices are expected to remain at low levels in the near-term, although oil prices could marginally recover over the next 1-2 years with slower production growth and demand recovery (aided by lower prices)," it said in a report.

Lower crude oil prices would materially impact profits of crude oil producers in India, it said adding the operating profit of Cairn India could decrease by about 35 per cent in 2014-15.

According to K Ravichandran, Senior Vice-President and Co-Head, Corporate Ratings, ICRA, "the impact on (state-run) ONGC and OIL would be limited with around 15 per cent hit on operating profit in FY15 as their subsidy burden will likely go down with fall in under-recovery levels."

Icra expected ONGC/OIL's subsidy discount to decline from USD 59 per barrel in FY14 to USD 40-45 in FY15.

If crude oil prices sustain in the range of USD 50-55 a barrel, the extent of discount for upstream companies would be a key driver of profits in FY16.

Further, cash generation of overseas ventures of ONGC Videsh Ltd, OIL and Reliance Industries (RIL) would decrease significantly.

The significant decline in crude oil prices, if sustained, will lead to reduction of capital spending of global E&P companies due to lower realizations and deferment of development of complex fields due to poor economics, it said.

"This could lead to increase in idling assets of service providers, which could put pressure on the service providers to reduce rates leading to lower finding and development (F&D) costs for the upstream companies," Icra said.

Gross under recoveries or revenue losses on fuel sales of downstream companies are expected to decline sharply from Rs 139,900 crore in FY14 to around Rs 78,800 crore in FY15 (estimated at Indian Basket crude oil price of USD 65 per barrel and Rupee-US Dollar exchange rate of 62.5 for H2 FY15) and Rs 45,000 crore in FY16 (at crude price of USD 60 and Rupee-USD of 64).

Ravichandran said "on account of the lower crude prices, the working capital requirements of downstream oil companies would reduce leading to lower working capital debt levels. Additionally lower under-recoveries on the sale of sensitive products would also improve the profitability and liquidity of oil marketing companies."

Nevertheless, the sharp decline in crude oil prices during Q3 would lead to large inventory valuation losses for the downstream companies. "Consequently, refining margins are expected to be negative or remain subdued," Icra said.

Source: ET

Policy changes and private enterprise to boost greener India with cleaner fuel

Early this year, the World Health Organization concluded that the air in Delhi was the worst among 1,600 cities in 91 countries. This was on the basis of the most widely accepted measure of air quality: The density of particulate matter (PM 2.5), fine and extremely dangerous particles that can get lodged in the lungs. Other Indian cities are not far behind.

Pollution is also impacting agriculture, and studies show that yields of some crops have halved over the past 10 years.

Switching to cleaner fuels for transportation, and producing power through renewables could cut emissions substantially. We asked a few experts how we could get to a cleaner, greener India.

Natural Gas For Transportation
Global gas prices have begun declining sharply since the shale revolution in the US. Gas use in India did not take off in the past decade, mainly because of shortages. CNG use is limited to Mumbai, Delhi, Pune, and a few cities in Gujarat. This could change soon, thanks to increased supply: Availability is set to grow over the next few years, as gas utility GAIL has been contracted to buy gas from a variety of sellers in the US, Canada, Russia, Australia and Turkmenistan. The supplies coming in, either as LNG or through long-distance pipelines, have the potential to change India’s energy-mix substantially.

Finance minister Arun Jaitley announced the first steps to enable this in the 2014 Budget. He rolled out plans to double India’s gas pipeline network to 30,000 km.

Much of this will allow the gas to move from terminals to urban demand centres around the country. Once more gas is available easily and widely, more heavy-duty users like truckers are likely to switch.

Subsidies on diesel have been removed and this could further help reverse the process of dieselisation. One recent initiative is the ministry of railway’s plan to run trains powered partly by gas. Dual-powered (CNG and diesel) trains are being tested on the Delhi-Rohtak-Rewari section.

Grid Parity For Solar Power
The Holy Grail for solar energy advocates is the point at which solar power becomes cheaper for the consumer compared to conventional (coal-based) power being delivered by the state electricity boards. With falling prices of solar equipment, what seemed improbable in the past is now within our grasp. With tariffs coming down steeply, per unit cost in some states is already less than that of power produced from imported coal.

The big push could come from the new Ultra Mega solar power plants that the government is planning to roll out.

These new projects, of 1,500 MW and above, are being planned in Andhra Pradesh, Madhya Pradesh and Rajasthan, and are likely to have much lower capital costs.

Experts like Tobias Engelmeier of solar power consultancy Bridge To India say this could bring down unit costs to below Rs 6. Solar power plants are modular and easier to build when compared to conventional power stations.

However, they require large tracts of land and this could be a bottleneck. The other factor to work against price parity, warns Engelmeier, is the fact that coal prices are softening, and could bring down the cost of coal-based power.

Source: Forbes 

ONGC bets on Russian shale to save Imperial Energy acquisition

Oil and Natural Gas Corp. Ltd (ONGC), India’s biggest energy explorer, is banking on the world’s largest shale oil reserves to save its Russian acquisition. Stumbling blocks include oil prices at a five-year low and US sanctions. Imperial Energy Corp., which the Indian state-run explorer bought in 2009 for £1.4 billion ($2.1 billion), will drill four wells in Russia’s Bazhenov shale formation by July, seeking to find enough oil to start commercial production, said Narendra Kumar Verma, managing director of ONGC’s overseas unit, which owns Imperial. Failure would mean seeking options, including selling the unit, he said. “We’re banking on that silver lining,” Verma, the chief of ONGC Videsh Ltd, said in an interview in his office in New Delhi. “We have to think of alternative strategies. All options are open,” should Bazhenov flop, he said. ONGC plans to more than double its oil and gas production from overseas fields in four years even as it seeks to reverse declining output from Imperial’s fields, revive assets in troubled Sudan and Syria and boost output in Venezuela. It gives away 79% of its revenue from Imperial’s fields as taxes to the Russian government, which is facing the prospect of defaulting on its debt amid sanctions following the annexation of Crimea from Ukraine. “At the moment, Bazhenov is the promising thing,” Verma said. “We have to see how much it yields, as shale oil wells are costlier due to horizontal drilling and hydro-fracking.” Shale oil is trapped in non-porous, shale-rock formations, also found in the Bakken area in North Dakota. The oil can be extracted by cracking open the rocks using a mixture of water and chemicals at high pressure, a process called hydraulic fracturing, or fracking, pioneered in the 1990s in the US.

Biggest reserve 

Bazhenov may hold as much as 360 billion barrels of recoverable reserves, Bloomberg Industries said in a December 2012 report, citing estimates by Russian subsoil agency Rosnedra. Venezuela holds 298.35 billion barrels, the world’s biggest known oil reserves. Russia’s Bazhenov has yet to yield oil. The formation has proved to be tougher to drill than areas in the US, prompting Russian oil majors such as OAO Rosneft and OAO Gazprom Neft (GAZ) to seek partnerships with US and European companies.

Contract ended

Imperial had given Denver-based Liberty Resources Llc a contract to drill in its shale-oil acreage in the Bazhenov formation. Liberty ended the contract following US sanctions on Russia, Verma said. Imperial is now drilling two wells on its own and plans to drill a total of four by July, he said. France’s Total SA (FP) is reevaluating plans to explore for shale oil with Moscow-based OAO Lukoil in Bazhenov. Royal Dutch Shell Plc and Norway’s Statoil ASA may also miss out on Russian shale, Bloomberg Intelligence analyst Philipp Chladek wrote in a 3 October report. Russia can develop its shale oil resources even without foreign partners, Interfax reported on 29 December, citing Lukoil President Vagit Alekperov. The development is not profitable at current oil prices, Interfax reported in the interview. Russia has potentially the biggest shale oil resources, followed by the US, according to a January 2014 report by the US Energy Information Administration. Shale basins in the US have helped boost the country’s production to the highest in more than three decades, drawing it into a price war with Saudi Arabia as oil prices slump to the lowest since 2009.

Larger share 

The Russian government will allow companies that produce in the Bazhenov formation to retain about 40% of their revenue, compared with 21% that Imperial gets now, Verma said. “If we are able to have substantial production from Bazhenov, then our net back may improve, bottomline may improve and we may sail through,” he said. “I’m not saying we will make profits, I’m saying the company may sail through.” Current output at Imperial’s fields in western Siberia, which holds part of the Bazhenov formation, has declined to about 7,000 barrels a day from 17,000 barrels in April 2010. Even in a scenario where oil is at $100 a barrel, Imperial is left with $6 after spending as much as $15 on production, and paying oil extraction levies, Verma said. It pays about $2 a barrel as income tax to the government and the remaining $4 has to fund operating costs, capital expenditure and administrative costs, he said.

Oil glut 

Plunging crude oil prices is making it worse for Imperial, Verma said. Brent crude, a benchmark for more than half the world’s oil, declined 48% last year in London trading, the steepest annual loss since 2008. Weak economic growth in China, a global oil glut and Opec’s refusal to cut output have pushed crude into a bear market since June. In Russia, ONGC Videsh owns 20% in the Sakhalin-1 project off the country’s far eastern coast, which it acquired in 2001. The project produces both oil and gas and ONGC Videsh gets a share of the output or equivalent revenue from the sale. The company is also in talks with Rosneft, Russia’s biggest oil producer, to study the possibility of buying stakes in two other oil and gas fields in Russia, ONGC chairman D.K. Sarraf said in November.

Below expectations 

Imperial has always performed below expectations for ONGC. A plan to revive production from Imperial’s fields was scrapped just months after ONGC completed the purchase in 2009 because the fields didn’t meet expectations. The Comptroller and Auditor General of India (CAG) in March 2011 said ONGC lost Rs.1,180 crore in the 15 months ended 31 March 2010 after Imperial produced at half of the target rate. ONGC announced the plan to buy Imperial in August 2008 and completed the purchase in 195 days. Brent crude, which slumped 62% in that period, reached $36.6 a barrel in December that year as the global financial crisis deepened. ONGC then justified the acquisition saying oil would rebound to $100 a barrel. Most negotiations for the Imperial acquisition “happened in the peak price of oil,

Source: Livemint

Revenue-share model for oil explorers to debut with marginal fields

The ministry of petroleum and natural gas (MoPNG) is likely to usher in the much-anticipated revenue-share model for the nearly 60 small and marginal fields surrendered by PSUs ONGC and Oil India and are being auctioned.

The ministry is currently preparing the policy guidelines for the auction, and if the Cabinet Committee on Economic Affairs (CCEA) approves the proposals, it would mark the launch of the new bidding mechanism for hydrocarbon explorers, as recommended by the C  Rangarajan Committee.

The move comes at a time when it is widely believed that auction of hydrocarbon acreages under the next (10th) round of  the New Exploration and Licensing Policy (NELP) regime will be based on the revenue-share model.

The MoPNG also intends to offer an attractive fiscal regime for those who bid for the marginal fields.
This is in keeping with the Narendra Modi government’s strategy of plucking the low-hanging fruit first when it comes to augmenting the country’s oil and gas output. A few months ago, MoPNG came out with a model revenue-sharing contract (MRSC) to replace the PSCs and had sought industry’s comments on it.

The current model where developers grab by bidding the maximum work programme was criticised by the CAG which said it kept room for companies to keep jacking up costs and defer a higher share of profits to the government.

In the revenue-sharing regime, the companies will have to indicate the quantity of oil and gas they will share with the government at various stages of production along with the rates. So the  government’s remuneration is de-linked from the quantum of investment made in developing the block and extracting the hydrocarbons. Under the present production-sharing contract (PSC) system, applicable for blocks auctioned under all the previous NELP rounds, an explorer gets to recover costs incurred during the exploration cycle, before sharing profits with the government.

These 60 fields (five surrendered by Oil India and the remaining by ONGC) were left idle by the two firms as they found it difficult to put these acreages under production, since they were ‘not economically viable’. Petroleum minister Dharmendra Pradhan targets to increase hydrocarbon output from domestic fields by exploiting the marginal fields, a strategy he believes would yield immediate results.

“It will take a while for the auction to kick off, as post-CCEA clearance, the model production-sharing contract has to be drafted,” a senior government official told FE. The expected reserves in the 60 blocks to be auctioned are not immediately known (the total recoverable reserves of the 165 marginal fields held by the two PSUs, including these 60 were estimated at 340 million tonnes of oil equivalent, or mtoe).

In FY14, only 7.19% of ONGC’s standalone crude oil production and 13.74% of its gas output came from the marginal fields.

Sources said an explorer bidding for the marginal fields on offer would be allowed to combine multiple fields and develop them as a cluster. At the same time, if any of the auctioned marginal fields is in the vicinity of existing asset of any firm, it would be allowed to prepare a development plan in parallel with its old asset, the official added.

The ministry feels that the revenue-sharing approach leaves less room for government interference, and hence, will be attractive to investors. In addition, the model would safeguard the government’s interest in the event of any windfall gains arising out of higher-than-estimated output from unexpected finds.



According to industry watchers, the gas drilled from marginal fields not connected to the pipeline network could be filled into cylinders and transported. The life of these fields would be less than a decade and, of this, four-five years would yield higher production.

Earlier, ONGC had sought a market-driven price for the hydrocarbon produced from its marginal fields. This means the company wants these fields to be exempted while forking out subsidy for compensating oil-marketing companies.

The ONGC board, under former chairman and managing director Sudhir Vasudeva, had decided to bid out 26 marginal fields comprising six in KG onshore, seven in Western onshore and 13 fields in Western offshore to private explorers as ‘service contracts’ under a fixed international pricing model. However, fluctuations in net realisation because of the higher subsidy burden did not allow the government-run firm a go-ahead.

Source: FE

Gas pricing: Oil Mininstry plans extending formula to exempted blocks predating Nelp

The Cabinet has asked the oil ministry to examine if the recently approved gas pricing formula, from which a per-unit rate of $5.61 was derived, can be extended to several exempted blocks including the Cairn India-operated Rajasthan fields, government officials said. Cairn charges $8.4 per unit for its Rajasthan gas, ETreported in August.

The formula has applied since November 1 to several nomination blocks held by ONGC and Oil India and 254 blocks auctioned under the New Exploration Licensing Policy (Nelp). But it's not applicable to at least 17 blocks that predate Nelp, including Rajasthan and Hazira fields. Their production sharing contracts (PSCs) allow explorers to sell gas at market-discovered rates without prior approval of government, oil ministry and industry officials said.

Approved by the Cabinet on October 18 the formula based on the recommendations of a committee of secretaries (CoS) aligned prevailing domestic rates with global benchmarks, including gas from Reliance Industries-operated KG-D6 fields.

At the time, the Cabinet had said: "As suggested by the committee (of secretaries), the possibility of applying modified approach to all PSCs, which provide for arm's length pricing, but do not provide for approval of the formula/basis by the government, would be examined separately."

The committee had proposed to the Cabinet that the oil ministry could see whether the pricing mechanism should apply to exploration contracts that predated Nelp, a suggestion that's now being taken up.

Gujarat Narmada Valley Fertilizers Co. pays Cairn $8.40 per unit for gas from its Rajasthan block, ET reported on August 24. Cairn has found significant quantities of gas in the block and is currently developing some of these discoveries.

According to industry estimates, Cairn's gas fields are expected to produce at least about 7 million standard cubic metres per day (mmscmd) of gas, which is more than half the current output from KG-D6 block. A Cairn spokesman did not offer any comment on the proposal because the matter is not in public domain.

The government had constituted the CoS in August to review the gas price formula proposed by the Rangarajan committee in 2012 and approved by the UPA administration. The previous government, which had notified the new pricing mechanism in January 2014, could not announce the rate after the Election Commission vetoed its move because polls were imminent.

Source: ET