The crash in oil prices has landed ONGC in a financially precarious position

• According to sources, ONGC has reached out to the government and asked for a waiver of oil cess and royalty

• In a letter to Prime Minister Narendra Modi, former ONGC employees have highlighted the same concerns

New Delhi: With the global crude oil prices plunging to a record low on April 20, state-run ONGC (Oil & Natural Gas Corporation) is now finding itself in a precarious position financially as the average price realisation will not even be enough to cover its operational costs. According to sources, ONGC has reached out to the government and asked for a waiver of oil cess and royalty.

The world witnessed an unprecedented crash in global crude oil prices with US crude rates plunging below the $0 mark into negative territory for the first time in history and benchmark Brent touching multi-year lows of $26 a barrel. This essentially means that sellers were paying buyers to take deliveries in a bid to avoid incurring storage cost with demand for oil falling globally in the aftermath of the COVID pandemic.

USD $22 per barrel will not be enough to cover operating cost: ONGC

Sources added that the ONGC management has told the government that its average price realisation of US$22 per barrel in April will not be enough to even cover its operational cost. And to make things worse, the fall in natural gas prices to a decade-low of US$2.39 per million British thermal unit is leading to a loss of about Rs 6,000 crore annually.

ONGC is believed to have asked the Centre to waive oil development cess and royalty payments off if the price realised by producers is less than US$45 per barrel.

Former ONGC employees highlight same concerns in a letter to PM

Separately, in a letter to Prime Minister Narendra Modi, former ONGC employees have highlighted the same concerns. "Due to COVID-19 induced global lockdown, oil prices have been on a rapid and unrealistic decline with the demand-supply of oil & gas now in the mismatch. Lower international oil prices present a good opportunity to our country, with nearly 80 percent oil imports, and may bring relief during an economic slowdown. However, E&P company like ONGC may face severe financial crisis in future due to the open market price mechanism because ONGC's operational costs (including pay, allowance, welfare and other costs for ONGCians and Ex.ONGCians) bring the cost to USD 25 to USD 30 per barrel of oil. In comparison and stark competition, the international oil prices stand at USD 10 to USD 20 per barrel of oil."

The backdrop

As of now, there is a 20 percent ad-valorem oil industry development (OID) cess on the price that producers get. Also, ONGC and OIL (Oil India Limited) are required to pay 20 percent royalty on the price of crude oil it extracts from onland oil blocks to the state governments. The Central government levies 10-12.5 percent royalty on oil produced from offshore areas.