Aloke Kumar Banerjee, Director of Finance at ONGC believes switching to market-driven prices will be a big positive. He expects crude prices to remain around the USD 100 per barrel mark, unless there is an untoward surprise.
Oil marketing companies have come into favour ever since the government signaled its intension to switch to market-linked soon, helped by a softening of global crude oil prices.
"The decision of the government, which stands today, is reduction in diesel subsidy by 50 paise per month, which means, increase in prices by 50 paise. So, the logical conclusion is that as and when that is over, it will become market driven," Finance secretary Arvind Mayaram said at an event organised by industry body Assocham.
The Indian government, which used to force oil companies to sell automotive fuels steeply below cost, last year gave them the freedom to price petrol at a profit while initiating a 50-paisa monthly hike for diesel till prices reached breakeven – under pressure to cut its yearly Rs 65,000 crore fuel subsidy bill.
Also Read: Crude below $100/bbl may hasten diesel price decontrol
Below is the transcript of Aloke Kumar Banerjee's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Sonia: The finance secretary has said that diesel will now be made market driven very soon. Do you think that is a realistic assumption and what impact do you think it would have on upstream companies if the overall subsidy burden comes down?
A: I think it has a major impact of the international price also. Today we are in a very comfortable position that crude price is coming down. This is one part.
Also, medium-term to long-term crude price is about less than USD 100 per barrel. So from that angle, I think government can continue as far as diesel is concerned unless and until there is a major oil shock, which is perhaps not very likely. But at the same time with that contingency that if there is any major oil shock then some rethinking may be required there.
Sonia: The worry during the United Progressive Alliance (UPA) regime was that any cut in under-recoveries will be used by the government to address its own fiscal deficit and upstream companies would continue to finance the burden. Has the new government given any signals of a change in that stance?
A: In fact, for quite sometime we have been requesting the government to review this subsidy mechanism because they are deducting USD 56 per barrel and because of condensate consideration, ONGC's net subsidy is coming almost about USD 62-63 per barrel. As a result our net retention price is squeezing. At the same time, the cost of production is increasing day-by-day.
Keeping this in view, we have already represented to the government that we need a better price so that our retention is sufficient enough to take care of exploration and production (E&P) as well as overseas acquisition because we have to support our overseas acquisition through OVL.
The government has also conveyed that they would look into this aspect with all this consideration and we feel that with the reduction in the overall under-recovery drastically, we can expect reduction in our contribution to the under-recovery or discount. So definitely we are optimistic.
Sonia: What kind of realisations do you think would be fair? I know you want USD 65 per barrel but that is not possible in the current scenario, so you are currently making about USD 41 per barrel, what kind of realisations is a realistic assumption?
A: This oil operation is something very peculiar. In some of the fields, the production cost is quite high while in some of the fields, it is quite moderate. Some of our fields like - marginal small fields, the production cost is more even in existing fields. Also we are going for schemes for enhancing the production and there also the cost is increasing.
So we have already requested government in that cases, our price should be remunerative enough so that we can go for even production in some cases unless until you get a remunerative production -- our production will not be remunerative at all. So, breakeven price also we need a certain level, which is more than what we are getting today. This is one aspect.
As far as even general existing production from the existing field, there also the retention last year was abysmally low, this year till last quarter it was USD 47 per barrel. So we feel that this may not be sufficient enough for our long-term capital projects.
We are going for two major capital projects, one in east coast and other one is west coast. So for these two fields we will require quite a substantial investment. So naturally we feel that we need sufficient retention for deployment of funds for this development programmes.
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