India's ONGC aims for new drilling contracts in cost-saving drive-sources

Jindal Drilling and Industries

10/02/2016 23:00

* Company agreed rig contracts when prices were high 
    * Drilling costs have fallen along with tumbling oil 
    * Final decision yet to be taken on cost-cutting plan 
 
    By Promit Mukherjee 
    MUMBAI, Feb 11 (Reuters) - 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.  urn:newsml:reuters.com:*:nL6N0WX2XW 
    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. 
    ($1 = 67.8500 Indian rupees) 
 
 (Editing by Sumeet Chatterjee and Adrian Croft) 
 ((promit.mukherjee@thomsonreuters.com; +91-22-6180-7516; 
Reuters Messaging: 
promit.mukherjee.thomsonreuters.com@reuters.net)) 
 
Keywords: ONGC DRILLING/