P Elango, Managing Director, HOEC
Despite crude oil and natural gas prices remaining range bound, technological enhancements and lower production costs have come to the rescue of upstream oil and gas companies, according to industry players and analysts.
The changed nature and composition of upstream oil and gas operators have also brought down the cost of production, according to domestic companies.
Managing Director and CEO of Petronet LNG, Prabhat Singh said, “After the shale revolution, there are people who are ready to produce at operating profit only. And there are smaller players who are drilling in their backyard on shoe string budgets, utilising the unutilised rigs in their garages so everything has become very low cost now. And therefore a molecule that used to cost x dollars for production has become as cheap as 0.1 x. So the price of gas to rise is actually a very tough now.”
The depressed price of hydrocarbons has led to reduced domestic production costs too.
Managing Director at Hindustan Oil Exploration Company, P Elango told BusinessLine, “The rate at which service providers offer the rig at $100 per barrel of crude oil is very different from the price they will offer the rigs at $50 per barrel…Now the volatility is over and the price of crude is settling at $50-60 per barrel and the industry is bracing itself for it.”
Giving his company's example, Elango said, “When we started the Assam project, the gas price was above $5 per mmbtu. By the time production starts, it is likely to come down to $2.48 per mmbtu.
“But my operating cost is just 60 cent per mmbtu, so I would still make money. This is because the production costs are also decreasing and companies can protect their margins.”
Upstream companies are also cutting corners to maintain margins.
“In May 2015 when we went in for the Dirok block development, we had estimated the development cost as $82 million for re-entering, drilling four exploration wells and making them producer wells, plus putting up a gas bottling plant, crude gathering station and a 25-km pipeline.
“Out of that about $25 million was for kept for the gas bottling plant. We decided to outsource the gas bottling plant to Expro and paid the operating cost. This way we saved the $25 million capital cost and saved enough money to drill two more wells,” said Elango.
Even at the estimates of 2015, we are seeing a cost reduction of 10 per cent or more, he added.
But, there are other factors that are keeping hydrocarbon prices depressed. An upstream operator said, “Oil and gas were never priced according to their production costs, the monopoly of the traditional oil and exporters in the Middle East has been disturbed with the exports of American crude oil.”
This has reflected in Indian Oil Corporation's crude oil purchase patterns. The refining and marketing major has been allowed to procure one VLCC (very large crude carriers) of crude oil from the US each month by the government.
Indian Oil Chairman Sanjiv Singh said, “We will procure crude oil from the US till there is a price differential in our favour.”
He added that due to various grades of crude, the scope for value addition also increases.