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State-run Oil and Natural Gas Corporation (ONGC), the country's largest exploration and production company, is trying to get offshore drilling service providers to cut their prices.
The slump in oil prices has prompted it to seek lower rates from these drillers. At high rig rates and less realisation from crude oil, it would be difficult for ONGC to clock profits. Rates for offshore drills are down 15-20 per cent.
“We already bear a subsidy burden. If the cost of production is high, it will significantly impact us. Thus, we have asked the drillers to lower their rates,” said an ONGC official.
The sharp fall in crude oil prices impacted net profit for the October-December 2014 quarter, halving it to Rs 3,571 crore from Rs 7,126 crore a year before in the same period. Brent crude averaged $77.07 a barrel, reducing ONGC’s realisation to $35.57 a barrel for the quarter. This was after factoring in the discount given to oil marketing companies.
“Globally, the deepwater rig rates are down. What we are asking the drillers is not out of place,” added another senior official. “Existing contracts will not be meddled with. This window is being looked only for new ones.”
Globally, rig rates are down from $600,000 a day to $400,000 a day.
Drillers, however, have not taken this move positively. They argue that when oil prices rise, ONGC does not approach them to raise rates but does so when prices are falling.
“One needs to understand that the operational cost we arrived at when signing a contract includes a lot of parameters such as salary of the crew at the rig, spare parts and logistics, among other things. If we have to lower rates, salaries will have to be cut. This cannot be done so easily,” said an official from Jindal Drilling.
Jindal Drilling has a five-rigs contract for five years at an effective day rate of $119,000, much lower than the $170,000 a day in the international market.
The Greatship Group, which has three rigs with ONGC, said, “If ONGC wants us to cut prices, the flexibility has to be both ways. Plus, all our rigs are new and with latest technology. We do not see a reason to cut prices.”
Companies said drilling was a long process and a price correction in rigs would take time. Going ahead, the industry expects a further correction of 10 per cent in rig prices.
In the domestic market, new rigs are not expected to see correction as the technology provided is the latest but the older rig prices might fall to even $50,000 a day.
