McKinsey tells ONGC to renegotiate rig rates

Vol 19, PW 16 (21 Apr 16) Exploration & Production

McKinsey believes it is in ONGC's best interest to renegotiate offshore rig hire rates, a move that could possibly breach its contracts with drillers.

A senior ONGC source confirms ONGC received a preliminary report in late March from the US-based global management consultant with a recommendation to renegotiate offshore rig rates against a backdrop of weak global economic growth. ONGC, it seems, believes the mild recovery in oil prices to around $44/barrel is unsustainable.

"Nevertheless it is up to our Board to take a call," says our ONGC source. "Cairn and Reliance have renegotiated contracts down by at least 20%.

This is happening globally so why shouldn't we do the same?" ONGC, he adds, is in an unprecedented situation where its income from crude sales matches or is even slightly below production costs. "Keeping strictly to original contracts in such times when our margins are under pressure is not in our best interests," he adds.

Naturally drillers are unhappy and believe ONGC management should not "get carried away" by recommendations from consultants. "To justify their existence these consultants will tell you anything," says a driller.

If ONGC chooses to go in for price renegotiations, he adds, it should also be prepared for lawsuits from angry drillers. "Will ONGC raise our rates when the oil prices go up again?" questions our source.

"I very much doubt it!"

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