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“Two steps forward, one step behind” is ONGC’s dilemma with its marginal fields.
The public sector oil and gas explorer, which was ready with a new fiscal regime for these fields and was all set to call bids, has to now rework the entire mechanism due to the change in subsidy-sharing formula.
“All our calculations for marginal fields have gone wrong because of the subsidy formula. The Government should treat marginal fields differently. If differential pricing is not allowed, tax incentives should be there,” said Sudhir Vasudeva, Chairman and Managing Director, ONGC.
Marginal fields are those that ONGC was given before the licensing rounds.
A good amount of hydrocarbon is locked in these fields, but they cannot produce economically on a stand-alone basis, or with a conventional approach.
The best possible way to exploit the full potential of the fields is to outsource the work to smaller companies as service contracts.
To make it attractive for service contractors, ONGC planned to offer international crude oil rates and do away with the current cap of $28-35 a barrel on the price of crude produced from these fields. The produce is bought by ONGC from the service contractors.
Subsidy cap
By the time ONGC got all the approvals for the new fiscal regime, the Government capped the crude subsidy at $56 a barrel. All crude oil produced by ONGC is sold to public sector oil refiners at a discount, capped at $56 a barrel.
“Everything got twisted because of the change in subsidy calculation…the system should be such that developing marginal fields is viable,” Vasudeva told Business Line.
The company gave examples of how this was done in other countries, such as Nigeria, where the royalty paid was based on slabs, Vasudeva said, adding: “If you are producing more, then the royalty is higher and vice-versa.”
ONGC holds about 165 marginal fields (including offshore and onshore), of which 26 are to be offered on service contract, 58 are producing oil and gas, 39 will commence production, and the remaining are at appraisal stage. Those already producing or are ready to commence production have been developed by ONGC itself.
The terms of contracts to be offered under the new fiscal regime to the service contractors has been approved by the company board. ONGC was hoping to float tenders inviting bids from service contractors to develop these fields shortly.
These 26 fields are in Krishna Godavari onshore (six fields), Western onshore (seven fields) and Western offshore (13 fields). It has already got the approval of its board. ONGC enters into service contracts with companies having expertise in the development of marginal fields through a bidding process.
These fields are affected by several parameters, which include environmental concerns, political stability, access, remoteness and, of course, the price and price stability of the produced gas/liquids.
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