ONGC likely to cut capex by 15% as pandemic delays projects
ONGC also faces another big challenge. Lower oil prices reduces cash flow and upsets the economics of some projects. Oil prices fell below $20 late April but have recovered to $40, giving ONGC a breather but they are still below its breakeven level
Disruption of global supply chains by the pandemic is delaying projects of Oil and Natural Gas Corp (ONGC), which may have to cut capital spending by about Rs 4,000 crore to Rs 5,000 crore, or about 15 per cent of this fiscal year’s target, according to people familiar with the matter.
The company is now reworking its capex plans. It had raised its capex target for the current fiscal to Rs 32,500 crore from Rs 30,000 crore it spent in 2019-20.
ONGC also faces another big challenge. Lower oil prices reduces cash flow and upsets the economics of some projects. Oil prices fell below $20 late April but have recovered to $40, giving ONGC a breather but they are still below its breakeven level.
However, oil prices have not impacted its capex. “It’s all due to the pandemic-related project delays,” a person familiar with the matter said. Upstream projects depend on an intricate global supply chain of men and material. Lockdown and mobility restrictions across the globe in the past few months made it difficult for equipment and people to reach project sites. “So many things and people were to come from abroad for projects but they haven’t,” he said.
Capex reduction would translate into lower fund requirements at ONGC this year but would also mean some projects would start production later than expected.
Lower oil prices have prompted several oil majors, including ExxonMobil, Shell, BP, and Total to cut capex as the pandemic destroyed demand. With easing of lockdown in India and several other countries, the oil demand has begun to recover.
Upstream activity faced multiple challenges during the nationwide lockdown in the country. The number of operational rigs sharply fell as many workers were quarantined but activity is now picking up. Onland sites faced special challenges as local administration and the population objected to the movement of equipment and people, fearing it could accelerate the spread of coronavirus. Company executives have closely worked with local administration to keep up production and exploration activity.