ONGC lobbies for better marginal fields terms

Vol 15, PW 1 (14 Jul 11) Exploration & Production

ONGC is hoping important revisions to its outdated policy on marginal field service contracts can be approved by the oil ministry by the end of July, in time for the company’s next board meeting.

PETROWATCH learns a team from ONGC met oil ministry officials in Delhi on July 11 to ask them to guarantee ‘fair payments’ to service contractors for work developing its marginal fields. ONGC’s present marginal field policy contains archaic elements like a ‘net realisation’ or maximum return from oil production of only $35/barrel.

This is partly because of the government’s policy of subsidising the retail price of diesel, kerosene and LPG to end consumers, which results in losses to state-owned oil marketing companies IndianOil, Hindustan Petroleum and Bharat Petroleum. ONGC is forced to share these losses.

But at the July 11 meeting ONGC clearly told the oil ministry it wants a ‘net realisation’ of at least $60/barrel on production from marginal fields if the prevailing Brent price is $100/barrel. ONGC even suggested marginal fields should be exempt from sharing in losses stemming from the government’s fuel retail subsidy policy, or ‘subsidy burden’.

ONGC argues it is almost impossible to attract service contractors to develop marginal fields because of poor investment returns. If the oil ministry accepts its proposal, ONGC could offer service contractors up to 60% of its $60/barrel ‘net realisation’.

In other words, service contractors will get $36/barrel if Brent is $100/barrel leaving $24/barrel for ONGC. If Brent increases beyond $100/barrel, ONGC wants a minimum net realisation of $70/barrel.

But there’s a catch: ONGC is ready to offer a better return to service contractors, but they could now be forced to pay a proportion of royalty, ‘cess’ and other production taxes.