ONGC to Spend $9 Billion Developing New Oil Discoveries in India

Oil & Natural Gas Corp. (ONGC), India’s biggest energy explorer, plans to spend about $9 billion over the next decade to produce crude oil and natural gas discovered in new blocks off the nation’s east coast.

Production from three wells drilled in the Bay of Bengal last year is commercially viable, Director N.K. Verma said in a phone interview today in New Delhi, citing a report sent to the oil ministry’s Directorate General of Hydrocarbons on Dec. 27. The new reserves will be developed along with the earlier gas finds in the area and output may start in 2016, he said.

The discoveries will ease ONGC’s struggle to increase oil and gas production in India from fields more than three decades old and reduce the energy import bill of a nation that buys almost 80 percent of its crude oil needs from overseas. Lower production and below-cost oil sales to state refiners have driven ONGC’s profit margins to the lowest in 12 years.

“Indications are these discoveries have good quantities of oil,” he said. “We’re trying to do our best to raise production and address the criticism that we haven’t been finding enough new hydrocarbons.”

ONGC shares rose as much as 1.4 percent to 285.75 rupees and traded at 281.75 rupees as of 11.18 a.m. in Mumbai. The shares gained 7.8 percent in 2013, the most in three years, compared with a 9 percent rise in the key S&P BSE Sensex. (SENSEX)

Net income margin, or net profit as a percentage of sales, dropped to 25.21 percent in the 12 months ended March 31, 2013.

Production Plan

A production plan to develop the oil and gas discoveries together will be given to the government within a year, Verma said. ONGC had initially planned to start producing gas from the Bay of Bengal’s KG 98/2 block last year.

ONGC informed the government in December 2010 about the gas discovery in the block, which lies near India’s biggest gas field operated by Reliance Industries Ltd. (RIL) Those reserves would be viable to produce at a price of $5.2 per million British thermal units, then junior oil minister R.P.N. Singh said in May 2012.

India’s cabinet in June allowed producers to charge a higher gas prices starting April 1. The new rate, a weighted average of the price of the fuel in the U.S., U.K., and import costs in Japan and India, will be almost double the current price of $4.2 per million Btu.

ONGC sells its crude oil at a discount in India to partly compensate state-run refiners including Indian Oil Corp. for selling its diesel and kerosene below the cost of production. This drove down profit by 17 percent to 209 billion rupees in the year ended March 31 and is eroding cash reserves.

Oil production fell 3 percent to 26.12 million metric tons in the year, compared with a year earlier, and gas output decreased 0.7 percent to 25.33 billion cubic meters, the company said May 29.

“The 98/2 block has been very good for us,” Verma said. “Viability of production is based on volumes and we’re starting to build that up now.”

To contact the reporter on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

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