During the last few days due to sudden and sharp decline in crude oil prices, the share prices of oil sector entities have witnessed a lot of volatility, and particularly the share prices of the upstream companies have been hit hard. In addition, due to failure of talks of OPEC+ to arrive at an agreement on production cut, oil prices declined drastically. Key oil producers have since adopted a strategy of “Fight to Finish” and have besides announcing increase in production, have also offered huge discounts to Asian Markets making capturing of markets as key priority at this juncture.
All these major developments bring in some uncertainty for oil and gas sector and specifically for oil and gas producing companies. While the decline in oil prices has affected the offtake of the exporting upstream companies, the companies operating in net importing countries like India have no such issues relating to offtake. Global oil markets are regulated by fundamentals and the prices cannot sustain at such levels for long, as being witnessed today.
Outbreak of Corona virus and its declaration as a pandemic by the UN has exacerbated the demand side and it is apprehended that for the first time over the last two decades oil demand may in fact go down in absolute terms. It is very difficult to separately identify the extent to which the oil price decline is attributable to either of these factors.
ONGC is of firm belief that notwithstanding the recent developments and decline in the crude prices, the right level of prices at which the industry can operate and some sort of equilibrium can be achieved will restore sooner than later. Historically, in previous instances of sudden oil prices decline, the recoveries have also been sharp and in some cases V shaped.
Given the present situation, it may be stated that ONGC has performed satisfactorily on production as well as on profitability front. The company has sufficient funds to continue its operations. The decline in crude prices has additionally created a need for us to carry out detailed review of activities to look for opportunities to optimize operating costs to preserve liquidity. The company has already started taking steps to create a detailed strategy to get over this situation if the crisis prolongs.
We also believe, that the time is also right for certain policy measures which are understood to be at different levels of consideration in the Government to move further. If some of the measures are taken at this critical juncture, will address long pending issues being faced by upstream companies and will help domestic companies to contribute towards reducing import dependency in the long term.
As regards ONGC, as a Group it is fully balanced across the value chain i.e. upstream, refining and marketing and is better positioned to face any headwinds. It is felt that while at upstream level, lower oil prices are temporary headwinds, as a Group, in medium term the company will get strong boost through contribution from downstream units. ONGC Group fundamentals continue to be strong and as an integrated group it is far more strongly positioned to face present situation.
ONGC Board deliberated on these matters in its meeting held on 16th March 2020. The Board emphasized on need for close look at emerging scenario and advised to adopt a balanced approach towards capital spending. The board also approved payment of interim dividend @ Rs. 5 per share (i.e. @100% of face value of Rs. 5 per share) to the shareholders.
Oil and Natural Gas Corporation Ltd
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