Date:04/02/2008 URL: http://www.thehindubusinessline.com/2008/02/04/stories/2008020451520100.htm

ONGC’s marginal fields: $35 cap on crude pricing may go

‘Lucrative fiscal package will attract competent bidders’

Richa Mishra

New Delhi, Feb. 3 The cap on crude pricing from Oil and Natural Gas Corporation’s (ONGC) marginal fields is likely to be removed, making development of these fields by the service contractors lucrative.

Currently, ONGC enters into service contracts with companies having expertise in development of marginal fields through a bidding process, and there is a cap of $35 a barrel on the price at which the contractor sells the crude to the exploration major.

By a cap of $35 a barrel, it is meant that whatever be the international crude prices, the price of oil produced from marginal fields cannot be above this price.

This makes it unattractive for the prospective bidders, as all development cost has to be borne by the service contractors, a senior ONGC official said. In fact, some service contractors are unable to develop the fields awarded to them, as the cap makes it an unviable proposition.

Reviewing mechanism

ONGC and the Directorate-General of Hydrocarbons (DGH) were asked by the Petroleum Ministry to review the existing mechanism for development of marginal fields which would result in attractive fiscal packages for the service contractors.

“A good fiscal package will encourage many competent bidders to participate in the marginal fields tenders, attracting better competition,” he told Business Line. However, the crude price after removal of the cap would still be lower than what ONGC realises by selling crude to oil marketing companies, which was somewhere around $54 a barrel.

A substantial amount of hydrocarbon is locked up in marginal fields and as these fields cannot be produced economically on a standalone basis, or with a conventional approach, the best possible way to exploit the full potential is when outsourced to smaller companies.

Under the current dispensation, ONGC finds it tough to attract bidders, as the fiscal package offered to the service contractors is not very lucrative, he said.

For better yield

The Petroleum Ministry has also asked the DGH, which monitors the blocks awarded under the New Exploration Licensing Policy (NELP) rounds, to work out a formula for the exploration major that would yield better results from these fields.

Marginal fields have low oil and gas reserves which are economically viable when produced with low capital cost and overheads.

The company holds 165 marginal fields (including offshore and onshore). Out of these, 63 are already monetised, 71 are under monetisation and 31 are to be monetised. ONGC has initiated action to put about 96 per cent of the reserves of marginal fields on production in the Eleventh Plan.