ET NowThe oil industry and the government must come together so that the industry grows, apart from being just sustainable, says Cairn India's MD & CEO Mayank Ashar. In an interview with ET Now, he also states that the gas segment of the business has witnessed growth. Edited excerpts:
ET Now: You have recently made a statement that the company is at the risk of shutting down the operations if the cess structure is not reworked. Why is that?
Mayank Ashar: Yes, that is not quite correct. In our fields in Rajasthan, we have a variety of fields, and some of the fields have a higher cost structure. What I said was that as the oil prices come down, we do not know where the low watermark is. But below $30, some of the fields, and these are small fields, may become uneconomic and we have to always consider when some fields are uneconomic, what we do.
Having said that, we do have coal fields of Mangala, Bhagyam and Aishwariya that have among the lowest cost structure of oil production in the world. It is always as prices keep coming down, every operator and oil producer in the world is looking at their cost, and making sure that you are making the right trade off.
I will give you an example that might help. In addition to our operating cost in our fields, whether it is Rajasthan or offshore blocks, what we have to carefully consider is the crude discount, as well as the government levies. So when the oil prices go down it is really important that the government burdens are ad valorem and their designs to reflect the realties that we see in the marketplace.
But just to answer your original question, to be very clear, as oil prices come down we look at the variety of production from multiple fields and below $30 for some of those fields would become uneconomic and we have to look at that.
ET Now: The other argument is that Cairn India is still making money because your cost production is sub $7 a barrel. How would you respond to that, and update us on the cost of production that you are currently incurring?
Mayank Ashar: Yes, our cost is approximately $7 a barrel. These operating costs are among the lowest in the world, not just in India. The difference between the Brent price that everybody knows is about $30, and the operating cost consists a variety of levies and burdens and taxes. We have been on the record along with her joint venture partner ONGC, and the industry, in making sure that those fiscal burdens are competitive.
You are absolutely right, our cost is 7 bucks, but we do not get the difference between $7 and $30. That is an issue that we hope collectively the industry and the government can work together, so that in the long term the industry is not only sustainable but it grows.
ET Now: You are not serious when you say that company is potentially shutting down, because you are a listed company now and shareholders may worry at such a statement, is that the reason?
Mayank Ashar: It is a misquote, and what I meant to say was that when the price is below $30, as with all the producers, a portion of our fields becomes less economic and we have to look at it very, very carefully. I never said the company as whole would shut down its production.
ET Now: Oil ministry has indicated that there are expectations that the structure could be reworked in the upcoming budget. How much of relief would that bring to you?
Mayank Ashar: It is necessary and overdue. We would certainly support the minister in those efforts. For us, currently the cess burden is about 9 dollars and 50 cents a barrel approximately, and if the government goals to ad-valorem cess rate of 5% to 8%, so that it is consistent with when oil price was $100. Then we could see relief of the order of $6 a barrel, $6 to $7 a barrel.
But I want to emphasise this is not a handout per se to the industry, this is reduction of a burden which was bearable at $100. It is unbearably high for the industry at today’s prices.
ET Now: Update on your capex plans and also on the gas side of the business, what is the plan in the near term?
Mayank Ashar: If you look at our capex, we did keep an eye on the commodity prices and we did lower it. It is still pretty healthy when you look at the capital profile of oil and gas companies. The other part which is healthy for us is still our focus on ensuring that we have positive cash flow.
If you look at the gas part of our business, there has been some growth. Last quarter was our highest ever quarter for gas production in our history. We are continuing even in these low price environments, looking at how we increase our gas production by looking at our facilities and our fields. We are using technology and fracking to make sure that we do increase gas production in the short term as well.
ET Now: Can you update us on gas on books, and what are the utilisation plans for these resources?
Mayank Ashar: Cash on books is about $4 billion. We do manage that with treasuries and fixed investments to make sure those returns are good. Clearly we are looking at the oil price environment. It makes sense for us to be prudent with our capital investments. Our short term plan is to make sure that we invest wisely, and investments that we do make do get a proper return.
ET Now: Select analysts on the street expect that the production sharing contract on your key fields maybe extended soon. What is update on that?
Mayank Ashar: We remain hopeful on the PSC. As you know, we have had a dialogue with the government for year-and-a-half on this.
More recently, the directorate general of hydrocarbons have asked us for information, and whenever they ask us for information, we always supply it relatively quickly. We share this with our joint venture partner ONGC as well.
We remain hopeful of quick and timely resolution on PSC and that is very important for investment as well, to the extent that we have an investment horizon that has a level of certainty for 15 years versus four years. It gives us good visibility to invest with some confidence. This is a very necessary step and that will help not only Cairn India but Cairn, ONGC and the government.
ET Now: You have recently made a statement that the company is at the risk of shutting down the operations if the cess structure is not reworked. Why is that?
Mayank Ashar: Yes, that is not quite correct. In our fields in Rajasthan, we have a variety of fields, and some of the fields have a higher cost structure. What I said was that as the oil prices come down, we do not know where the low watermark is. But below $30, some of the fields, and these are small fields, may become uneconomic and we have to always consider when some fields are uneconomic, what we do.
Having said that, we do have coal fields of Mangala, Bhagyam and Aishwariya that have among the lowest cost structure of oil production in the world. It is always as prices keep coming down, every operator and oil producer in the world is looking at their cost, and making sure that you are making the right trade off.
I will give you an example that might help. In addition to our operating cost in our fields, whether it is Rajasthan or offshore blocks, what we have to carefully consider is the crude discount, as well as the government levies. So when the oil prices go down it is really important that the government burdens are ad valorem and their designs to reflect the realties that we see in the marketplace.
But just to answer your original question, to be very clear, as oil prices come down we look at the variety of production from multiple fields and below $30 for some of those fields would become uneconomic and we have to look at that.
ET Now: The other argument is that Cairn India is still making money because your cost production is sub $7 a barrel. How would you respond to that, and update us on the cost of production that you are currently incurring?
Mayank Ashar: Yes, our cost is approximately $7 a barrel. These operating costs are among the lowest in the world, not just in India. The difference between the Brent price that everybody knows is about $30, and the operating cost consists a variety of levies and burdens and taxes. We have been on the record along with her joint venture partner ONGC, and the industry, in making sure that those fiscal burdens are competitive.
You are absolutely right, our cost is 7 bucks, but we do not get the difference between $7 and $30. That is an issue that we hope collectively the industry and the government can work together, so that in the long term the industry is not only sustainable but it grows.
ET Now: You are not serious when you say that company is potentially shutting down, because you are a listed company now and shareholders may worry at such a statement, is that the reason?
Mayank Ashar: It is a misquote, and what I meant to say was that when the price is below $30, as with all the producers, a portion of our fields becomes less economic and we have to look at it very, very carefully. I never said the company as whole would shut down its production.
ET Now: Oil ministry has indicated that there are expectations that the structure could be reworked in the upcoming budget. How much of relief would that bring to you?
Mayank Ashar: It is necessary and overdue. We would certainly support the minister in those efforts. For us, currently the cess burden is about 9 dollars and 50 cents a barrel approximately, and if the government goals to ad-valorem cess rate of 5% to 8%, so that it is consistent with when oil price was $100. Then we could see relief of the order of $6 a barrel, $6 to $7 a barrel.
But I want to emphasise this is not a handout per se to the industry, this is reduction of a burden which was bearable at $100. It is unbearably high for the industry at today’s prices.
ET Now: Update on your capex plans and also on the gas side of the business, what is the plan in the near term?
Mayank Ashar: If you look at our capex, we did keep an eye on the commodity prices and we did lower it. It is still pretty healthy when you look at the capital profile of oil and gas companies. The other part which is healthy for us is still our focus on ensuring that we have positive cash flow.
If you look at the gas part of our business, there has been some growth. Last quarter was our highest ever quarter for gas production in our history. We are continuing even in these low price environments, looking at how we increase our gas production by looking at our facilities and our fields. We are using technology and fracking to make sure that we do increase gas production in the short term as well.
ET Now: Can you update us on gas on books, and what are the utilisation plans for these resources?
Mayank Ashar: Cash on books is about $4 billion. We do manage that with treasuries and fixed investments to make sure those returns are good. Clearly we are looking at the oil price environment. It makes sense for us to be prudent with our capital investments. Our short term plan is to make sure that we invest wisely, and investments that we do make do get a proper return.
ET Now: Select analysts on the street expect that the production sharing contract on your key fields maybe extended soon. What is update on that?
Mayank Ashar: We remain hopeful on the PSC. As you know, we have had a dialogue with the government for year-and-a-half on this.
More recently, the directorate general of hydrocarbons have asked us for information, and whenever they ask us for information, we always supply it relatively quickly. We share this with our joint venture partner ONGC as well.
We remain hopeful of quick and timely resolution on PSC and that is very important for investment as well, to the extent that we have an investment horizon that has a level of certainty for 15 years versus four years. It gives us good visibility to invest with some confidence. This is a very necessary step and that will help not only Cairn India but Cairn, ONGC and the government.
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