With crude oil prices hovering below the $40 per barrel mark, it has come close to India’s biggest oil explorer’s average cost of production, implying that any further decline will push most of ONGC’s fields into operational losses.

This can have far-reaching implications for the company, from jeopardizing its planned Rs.50,000 crore investment in the much-touted KG basin fields to the enhanced oil recovery programmes worth Rs.20,000 crore for its ageing fields in the Arabian Sea.

In case the investments are not pared, ONGC will have to raise debt to fund its investment programme, said analysts.

The other major Indian explorer, Cairn India Ltd, is still cushioned as its cost of production is just around $10 per barrel due to operating onshore fields, which are cheaper to operate and also relatively newer.

ONGC’s average cost of production was approximately $35 per barrel, including capital expenditure. Its realization per barrel after discounts to oil retailers stood at $48.83 per barrel, while the Brent crude averaged at $53.73 per barrel. It helped the company post a profit of Rs.4,800 crore in the September quarter.

With Brent seeing levels of $37-38 per barrel in the past three days, the pain has begun for ONGC, said analysts.

“Anything below $40 per barrel for the company is a pinch. And with every dollar fall, ONGC moves a step closer,” said Piyush Jain, equity research analyst, energy, industrials and basic materials, at Morningstar Investment Advisor Pvt. Ltd, a financial services firm.

Investors are worried that with the continuous fall in the price of crude, ONGC will have to eventually resort to debt to compensate for fall in cash flows to invest in its capital expenditure.

This is reflected in the company’s share price. On Friday, ONGC dropped 0.5% to Rs.224.30, down more than 30% from a year ago. On Monday, ONGC’s share price touched a 52-week low of Rs.211.25.

On 15 December, the price of Brent was $38.59 per barrel, up 1.8% from $37.92 posted a day ago and down 41.6% from a year ago. The Indian basket of crude oil, which is a derived basket comprising 72% grades of Oman and Dubai average and 28% grade of Brent crude, stood at $34.39 per barrel on 14 December, according to the Petroleum Planning and Analysis Cell, a data tracker of the oil ministry.

“At this price, ONGC is just at break-even,” said an analyst with an international brokerage who declined to be named. A more alarming concern for the company is the accumulating losses of its overseas subsidiary ONGC Videsh Ltd (OVL).

OVL contributes 26% to ONGC’s revenue and 20% to profit after tax, according to numbers reported at the end of the last fiscal year. For the first half of the current financial year, OVL posted a loss of Rs.184 crore.

“We expect the loss to keep increasing this quarter, which will bring down ONGC’s overall realization on a consolidated basis,” said the analyst.

An email sent to ONGC on Tuesday remained unanswered.

ONGC has two parts to its cost—development and social—a company executive said, requesting anonymity. Since ONGC is a state-owned oil company, it cannot ignore one for the other.

“We know the current situation is very tough for us and we have limited options,” he said. “The company is currently aggressively involved in negotiating service contracts, rig movement and inventory management which can bring down the cost.”

ONGC’s debt stood at Rs.51,000 crore on 31 March and it had cash worth Rs.16,000 crore.

If crude prices continue to be below $40, the government will step in to protect the company, analysts say.

“With the crude now ruling below $40, the case for a $10 per barrel cess reduction becomes very strong,” said the analyst from the international brokerage cited above.

Domestic brokerage Axis Capital said in a 23 November report that share prices of upstream oil companies will get a much-needed boost if the government reduces the cess burden on them.

“Earnings of upstream will remain muted due to (a) lower crude and domestic gas prices and (b) muted volume growth. However, the cess cut will partly address the issue and provide a bump-up to stock prices,” the report said.