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BW Businessworld

Low Crude Prices May Hurt India's Long-Term Plan Of Cutting Oil Imports

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Indian finance ministers have always enjoyed the times when crude oil price hovered around less than $50 per barrel in the global market. Lower crude oil prices augur well for an economy that imports 75 per cent of its domestic requirement. However, the same falling price will also ensure that India remains an oil importing nation in the long run as the Indian upstream companies are forced to lower their capital expenditure on exploration business.
Cairn India Ltd, a unit of London listed Vedanta resources Plc, has already reduced its capital expenditure for FY16 by about 60 per cent to $500 million from $1.2 billion.
While ONGC has claimed that it will spend Rs 36,000 crore as capital expenditure in FY16 as against Rs 32,309 crore spent as capex in FY15, it would be difficult for other Indian companies to do the same as they try to cover their margins. The benchmark Brent crude on 24 August fell below $45 a barrel for the first time since March 2009. The stocks of ONGC, Oil India (OIL) and Cairn India have touched 52-week low this year.
Lower crude prices bring a double whammy for companies that operate the Pre-Nelp blocks as they are paying a fixed amount of Rs 4,500 per tonne of oil produced from their fields.  According to industry sources, the companies have been lobbying hard with the government to get rid of this cess.
Apart from this, ONGC has 165 marginal fields (86 onshore and 79 offshore). These fields become financially unviable for production at the current price of crude oil. The government wanted to put 69 of these blocks for auctions, as it was felt that the private sector would be able to extract crude oil or gas from such blocks, but given the falling realisations for the upstream companies, it is unlikely that the private sector would like to put money into these fields.
Some experts also feel that none of the international players would be interested in exploration business in India if the price of crude oil remains below $50 per barrel. The hydrocarbon fields in India are difficult and require higher investments compared to African countries.
A silver lining for the upstream sector in such a scenario is the reduction in the price of rigs and other assets required for exploration business. It would be interesting to see, how the Indian companies negotiate their contracts for rigs to safeguard their margins.
Deepak Mahurkar, , Leader Oil & Gas PwC says, "While crude oil prices sustaining around $40 in mid and long term is hard to think of, but the producers clearly are getting ready to be fit at $50. Marginal fields' developments around the world have to wait in these circumstances. In general, companies which adeptly take up efficiencies induction will do well. Unbelievable success has been achieved on cost reduction and technology deployment in the US including in the shale play. Service providers as much as operators have understood the sensitivities of costs."

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