“The pandemic and lockdowns (around the world) have created very challenging times for the exploration and production sector. The disruptive impact of the pandemic and developments in the global oil market will continue for some time. So, we have suggested some measures for the finance ministry’s consideration so that companies such as ONGC and other stakeholders can stay in business,” oil minister Dharmendra Pradhan told TOI.
“Lockdowns erased major demand. Before that, three big global producers — Saudi Arabia, Russia and the US — were locked in a competition for market share and producing more. This resulted in a glut. Commodity has become cheap but there is no demand. Now price is slowly rising as demand revives in India and elsewhere. We are working in a changed scenario. No one knows where prices will stabilise,” he said, explaining the need for relief to producers.
TOI had on April 23 first reported that the government was working on a lifeline for producers.
A relief package has become crucial for the survival of companies such as ONGC as the price crash since March has turned oil production into a loss-making proposition. For example, the total cost of a barrel of oil produced by ONGC works out to $45 after including royalty, cess and other sundry levies. So at Friday’s $35/barrel price of global benchmark Brent, ONGC actually loses $10/barrel. Brent had on April 22 crashed to a 21-year low of $16/barrel.
ONGC is also losing Rs 6,000 crore annually on gas due to a pricing formula based on benchmarks in surplus markets. While it costs $3.75 to produce each unit, the current price is $2.39. ONGC pays 10-12.5% royalty to the Centre on oil produced from offshore areas. State governments charge 20% royalty on the price of oil produced from onland fields. Then there is 20% ad-valorem oil industry development (OID) cess on the price that producers get.
OID cess has increased from $3 to $13 over the years and is causing financial stress to current and new projects. This cess is levied as excise duty under the Oil Industries (Development) Act of 1974. The cess is being levied on crude oil from nominated blocks and pre-NELP exploratory blocks only.
The OID cess was raised from Rs 2,500 per tonne to Rs 4,500 per tonne in March 2012. The price of the Indian basket of crude oil stood at around $110 per barrel then.