MUMBAI India's Oil and Natural Gas Corp (ONGC.NS) hopes to agree new cheaper drilling contracts for its western offshore fields, two sources involved in the matter said, in its biggest ever cost-saving drive in response to lower crude prices.
The state-owned explorer wants to end existing expensive contracts for drilling rigs signed in the 2014-15 fiscal year when crude prices averaged $85 a barrel and to sign new ones at a lower price.
That could help the company save 5-10 billion rupees ($74-$148 million) a year, analysts said.
Brent crude has fallen to just over $30 a barrel. This, along with a sharp drop in commodity prices, has led to a fall in the cost of equipment used for drilling for oil and gas.
ONGC's plan to slash costs, a final decision on which is still to be taken, would come about a year and half after crude prices first started to decline, and underscore the challenges Prime Minister Narendra Modi faces in trying to turn around large but slow-moving public sector giants.
The company is likely to post flat December quarter profit compared to the year-ago period on Thursday. Its shares fell by a third last year.
ONGC's plan comes against the backdrop of overseas explorers lowering spending and scaling back drilling, forcing rig contractors to idle or even scrap rigs, due to the prolonged slump in oil prices.
The biggest cost saving could come from hiring new jack-up rigs, drilling rigs that are used for drilling in shallow water, said offshore rig consultant, Rajeev Nair, who has worked with ONGC at its Mumbai High field.
The jack-up rigs were contracted by ONGC in 2014 at a cost of between $80,000 and $90,000 per day, he said, adding those rigs are now available for $35,000-$40,000 a day.
ONGC has close to 15 jack-up rigs in the western offshore fields, according to a company presentation in December 2014.
ONGC does not disclose the names of its contractors. Jindal Drilling and Industries Ltd (JNDR.NS) and Dynamic Offshore Drilling Ltd have said in the past they had rigs working for ONGC.
Other areas for cost-cutting could include the staffing and maintenance cost of rigs and offshore marine and air logistics costs, the sources said.
ONGC's average cost of production in the western offshore fields, India's biggest for crude oil and gas, is about $40 per barrel and, at current crude prices, the company is losing money fast, one of the sources said.
The company's western offshore interests, home to the company's biggest crude oil field Mumbai High and biggest natural gas asset Bassein & Satellite, are located off the west coast of India in the Arabian sea.
The western offshore field contributes 60 percent of the company's total crude oil production.
As ONGC makes additional investments in the near future, it expects the average cost of production at Mumbai High, the most productive field in the western offshore area, to go up to $44-$45 a barrel, the source said.
By signing new drilling contracts, the company aims to reach "a borderline (break even) figure" for production cost, he said.
Both the sources did not want to be named as the matter is not public yet. An ONGC spokesman did not immediately respond to Reuters request for comment.
(Editing by Sumeet Chatterjee and Adrian Croft)
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Updated Date: Feb 11, 2016 05:15 AM