India's Biggest Oil Explorer Doubles Down Against Low Crudeby and
ONGC approves $5 billion for project off India's east coast
Chairman says energy slump reduces cost of upstream projects
As the biggest oil crash in a generation prompts producers from Royal Dutch Shell Plc to ConocoPhillips to cancel or delay almost $400 billion in projects, India’s state-run explorer is sticking with plans to keep drilling.
Oil & Natural Gas Corp.’s board on Monday approved the $5.07 billion development of the KG block in the Bay of Bengal off the country’s east coast. The New Delhi-based company has said it will maintain its exploration activities in spite of the collapse in oil, while shrinking costs are allowing it to spend less.
ONGC’s counter-cyclical approach to investing is based on a fact and an assumption, Chairman Dinesh Kumar Sarraf said in an interview in New Delhi on Tuesday. The fact: with other companies abandoning projects, costs will never be cheaper. The assumption: that same abandonment means prices will rise in coming years as growing demand overwhelms supply that’s fallen due to lack of investment.
“I don’t see any reason why we should be withholding investment now in such an environment where the cost of services and oil-field material is very low,” Sarraf said. “Our capital cost will be frozen forever,” while oil and gas prices will rise in the future, he said.
The KG project, which is scheduled to be completed by June 2020, is targeting total production of at least 23.5 million metric tons of oil and 50.7 billion cubic meters of natural gas.
The development would have cost $7 billion two years ago, Sarraf said. Rig rental costs have since fallen from $110,000 a day to less than $50,000 today with oil prices less than half what they were in the summer of 2014.
That collapse in crude, and a potential rebound in prices, informs the other half of ONGC’s investment bet. The oil and gas that the KG Block would produce won’t be sold for another three or four years. By then, Sarraf said, crude will probably recover to a level that makes the project profitable. PetroChina Co.’s chairman last week said prices should gradually rise to about $60 to $80 a barrel in the five years to 2020.
The International Energy Agency has even warned that the spending cuts by producers increase the possibility of oil-security surprises in the “not-too-distant” future. Wood Mackenzie Ltd. estimated in January that explorers had delayed projects worth $380 billion since prices started their slide in late 2014.
“The investments that we are making today won’t produce until next three years,” Sarraf said. “We presume that three years is quite a reasonable time frame for the prices to again go up significantly.”
ONGC is also seeking to forge partnerships with oil-service companies such as Halliburton Co. and Schlumberger Ltd. to revive output from some aging fields.
“They would invest in our fields, take the risk and will have commitment to deliver in terms of increased production,” Sarraf said. “We would give them some remuneration based on the increase in production."
The explorer will finalize the tie-ups in a couple of months, he said.
Indian Prime Minister Narendra Modi has made energy security a priority, and has set a target of cutting oil imports by 10 percent in the next six years.
“It’s a big challenge," Sarraf said. "Everybody in the industry is fully committed to achieve this."