Understanding the Disconnect: Decreasing Crude Oil Production and Increasing Profit for ONGC

ONGC, the Oil and Natural Gas Corporation Limited, is one of India's largest national oil companies. Despite a decrease in crude oil production, ONGC has managed to report a significant increase in profit. This article explores the multifaceted factors that contribute to this apparent contradiction.

Crude Oil Production Trends

For the fiscal years FY18 and FY19, ONGC's production of crude oil, including ONGC JVs, dropped from 25.435 MMT to 24.231 MMT, marking a 4.7% reduction. Typically, such a decrease in production would be expected to lead to a proportional decrease in profit. However, this was not the case for ONGC.

Revenue and Factors Influencing Profit

Profit is a function not just of quantity but also of market conditions, including the price of crude oil. Several factors contribute to changes in crude oil prices, such as supply and demand dynamics, political crises in producing countries, sanctions, and economic growth. During FY19, the rate of crude oil saw an increase, directly contributing to ONGC's improved profit margins.

Impacts from Subsidiaries and Value-Added Products

ONGC's success in sustaining and even increasing its profitability was also due to a positive contribution from its subsidiaries. Subsidiaries such as OVL and ONGC Videsh Limited increased their crude oil production from 9.353 MMT to 10.097 MMT. Additionally, ONGC increased its natural gas production from 24.610 BCM to 25.811 BCM, as well as the production of value-added products, which went from 3385 KT to 3641 KT.

Considering all these factors, ONGC reported a profit after tax (PAT) of 26,716 crores, demonstrating that the overall revenue and profit margins could increase despite a dip in crude oil production alone.

Efforts to Reduce Lifting and Process Costs

Another significant contributor to ONGC's improved profitability is the reduction in lifting and process costs. ONGC has been consistently working to optimize its cost structure. Lower lifting and process costs ensure that even with declining production, the profit margin per barrel can remain healthy, thus enhancing overall profitability.

Conclusion

ONGC's achievement of increasing profitability despite a decline in crude oil production highlights the significance of diversified revenue streams, pricing dynamics, and cost management. These insights provide valuable lessons for businesses in the oil and gas sector, emphasizing the importance of strategic planning and operational efficiencies.