Home / OPINION / Analysis / Petrol may soon be ‘cheaper than water’

Petrol may soon be ‘cheaper than water’

Print Friendly, PDF & Email

Petrol and diesel are set to become cheaper than bottled water after a collapse in the value of oil, experts have predicted.

The RAC said that fuel prices may drop as low as 86p a litre — the lowest for at least seven years — after a dramatic fall in wholesale costs.

Oil and Natural gas Corp (ONGC) is perilously close to suffering losses as oil prices have collapsed to the level comparable to its cost of production, a dramatic change for the company that earned Rs 26,000 crore in 2013-14 and has been India’s top firm in market value and profit for years.

Crude oil prices have collapsed to a 12-year-low of $30 a barrel, losing about 20 per cent in the new year and nearly three-quarters since June 2014 when it started tumbling from $115. The commodity market is awash with dire predictions of further drop, with Standard Chartered betting crude could touch $10 a barrel before rebounding.

This has naturally worried ONGCBSE -2.69 % and raised prospects of losses although there is no consensus about the price at which the state explorer breaks even.

Some analysts say the average cost of production is about $30 a barrel, including $10 for finding and development, about 10 per cent royalty, $9 in cess and the balance in depreciation and amortisation. ONGC does not publish its per barrel cost, but a senior company executive said the average cost is about $36 a barrel, without disclosing the breakup.

If the oil prices stayed above $30 a barrel, the state firm could probably skip losses, three analysts said, but cautioned that the risk would rise significantly if prices dropped further. “ONGC will start incurring losses if the oil falls below $25 a barrel,” said Vaibhav Chowdhry, an equity analyst at brokerage KRChoksey Shares and Securities. At $25 a barrel also, the company would stay cash positive although flows would shrink, forcing the firm to rethink its investment strategy, he said.

Another analyst, who didn’t want to be named, said the chance of losses would rise with the quantum of write-offs and depreciation that can’t be easily estimated from outside. Another analyst said weak cash flows may not become a constraint for the company as it is a state firm and carries virtually no debt, and, therefore, could easily borrow to fund its investment plans. “But the question would be whether it still wants to invest in a project when oil prices are at $25,” the person said.

For ONGC, the last decade had been highly successful with rocketing oil prices turning it into the most profitable company in the country; in 2013-14 it held the top slot with a profit of more than Rs 26,000 crore although it was toppled by Reliance IndustriesBSE 1.21 % in 2014-15.

In the middle of 2014, when crude oil started its slide from a peak of $115 a barrel, the story started shifting for ONGC and other oil producers. Uniquely for ONGC, the entire gains of the commodity super cycle didn’t reflect in its bottom line all these years as part of its gains were offset by the subsidies it had to bear to help state companies sell fuel at the government-set rates. That is why when the government deregulated the sale of petrol and diesel in recent years that cut subsidies,  ONGC’s net realisation per barrel actually rose even though oil prices had started sliding.

ET View: ONGC, time for some cost-cutting

Now that oil prices are much lower, the cess on domestic crude output needs to be promptly recalibrated. ONGC needs to undertake a cost-cutting exercise in its domestic fields. It would also make perfect sense to boost oil production in its producing assets abroad, particularly those in West Asia. It needs to pitch for exploration rights in the region, for instance in Oman and especially in hydrocarbon-rich Iran. Despite low oil prices, the economics of oil production should remain favourable in the Persian Gulf. And like the global oil majors, ONGC needs to purposefully foray into the domain of renewables.