ONGC Reaps Cheap Oil Windfall 22 Months Later

State-run Oil and Natural Gas Corporation Ltd. expects to save thousands of dollars in rig and drilling costs as India's largest explorer hired services at about a third of the current rates.

ONGC is reaping benefits of signing pacts when the crude was at $30 a barrel, Chairman and Managing Director Shashi Shankar said at an event recently. “As a strategy, we contract services for three to five years. Earlier, an offshore jack rig cost $100,000 a day. We hired them at $30,000-35,000 a day,” he said.

Oil prices and service costs move in tandem due to demand-supply correlation. Crude has more than doubled from $30 a barrel in January last year to trade as high as $64 this month. The drilling and rig contract prices hit their peak in 2014 when oil traded above $100. Rates plunged over the next two years as a shale boom in the U.S. and falling oil demand triggered an equipment glut.

The day rate for hiring a shallow-water jackup rig that ONGC mostly uses declined 55-65 percent over two years, Sanjay Grover, leader (oil and gas), at EY, told BloombergQuint. The fall is steeper at 70-80 percent for deepwater rigs. The service price for drilling has fallen 60-75 percent during the period, he said.

ONGC deployed the highest-ever 35 offshore rigs and drilled a record 501 wells in the year to March, according to its annual report. Lower costs pushed up its net realisation from its assets by 6.9 percent over the year-ago period in the September-ended quarter to $51.22 a barrel, its exchange filing said.

And it could gain more. “The way Saudi-Iran tensions are escalating and crude oil prices are moving up. If they do, the cost of these services will increase more,” said RS Sharma, former chairman and managing director at ONGC.

ABN Amro has revised its oil forecasts higher, with WTI Crude potentially reaching $70 a barrel by end of next year and Brent at $75, according to Bloomberg.