Lateral buying swells oil capex
Gross figure less impressive if HPC & GSPC investment by ONGC is excluded
Officially, capital spending by the 11 public sector undertakings (PSUs) in the petroleum sector was an impressive ~1.11 trillion in the first 11 months of this financial year.
Yet, more than a third of this is not new capital expenditure (capex) but represents shifts of equity between PSUs.
The government’s capex target for the sector in 2017-18 (the financial year ends this Saturday) was about ~860 billion; hence, this has been far exceeded. The bulk of this comprised Oil and Natural Gas Corporation (ONGC)’s ~677 bn; the company’s target for FY18 was ~3 billion.
Yet, almost ~445 billion of ONGC’s gross figure was due to its acquiring — on central government orders — equity from Hindustan Petroleum Corporation (HPC) and Gujarat State Petroleum Corporation (GSPC). It took a 51.11 per cent stake in HPC, paying the government about ~369 billion. And, an 80 per cent in GSPC’s Deendayal Upadhyay block (Krishna-Godavari or KG basin) for ~75.6 billion.
Of the 11 companies, ONGC and GAIL have met their capex target. If one was to exclude the investment in HPC and GSPC's block, oil PSUs spent close to ~674 billion up to end-February. About ~183 billion less than the year’s target. And, while it is believed this shortfall will be made good this month, the final one of 2017-18, it is clear that the gross capex figure includes a lot of spending which was not made to create newer assets.
The ~860 billion to be spent in 2017-18 is lower from the nearly ~1.1 billion of 2016-17. However, oil PSUs are expected to continue spending at a healthy rate for some more time.
“ONGC’s KG basin and oil marketing companies spending on refinery and petrochemical expansion, with the upgradation to BS-VI emissions standards, is predominately driving this expansion and this will continue for some time,” said Debasish Mishra, partner at consultancy Deloitte Touche Tohmatsu India.
ONGC, for instance, plans to spend almost ~321 billion in the next financial year.
In a November 2017 report, ratings agency ICRA said: "The profitability of upstream (exploration and production) companies will improve following the rise in crude oil prices. By our estimates, till an Indian Basket crude price of $65/barrel, the PSU upstream companies might not have to bear material under-recoveries. Thus, their net realisation and cash accruals will improve, unless the extant under-recovery sharing formula is changed. Beside, a 16 per cent hike in domestic gas prices for the second half of FY18 and likely increase in future with a rise in global gas indices would add to improvement in their profitability. PSU upstream companies continued with their capex plans even in a low crude oil price scenario. However, private E&P companies had scaled down their capex plans due to soft crude prices. Higher crude oil prices, if sustained, will lead to an increase in capex by the private players, too."