The Indian upstream and oilfield sector is going through tough times, impacted by the challenging environment due to the soft global crude prices. This situation will continue in the near to medium term, despite modest increase in crude prices post-OPEC deal. According to an ICRA note the outlook for the Indian upstream sector will be negative as a result and due to play of other factors.
The Organisation of the Petroleum Exporting Countries (OPEC) had on November 30, 2016, agreed to cut total crude oil production of its member countries by 1.2 million barrels per day (mbpd) from January 2017 which had led to a spike in global crude oil prices by ~15-20% to levels of $55-57/bbl. However this rise in prices has largely been reversed due to increased production of shale oil by the US and by OPEC members – Iran, Libya and Nigeria who were exempt from the deal. Currently crude oil prices are hovering around $47-48/bbl (beginning July) as a result of oversupply in global crude oil market.
Says K. Ravichandran, Senior Vice President, Group-Head, Corporate Sector Ratings, ICRA, “A key sensitivity for the prospects of the upstream sector in the medium term will be sustained recovery in crude oil prices, which appear unlikely in the near term with the market in the midst of rebalancing with competing forces at work. Apart from this, the fall in the domestic gas price in H1 FY2018 would adversely impact profit levels of the upstream players. However, PSU upstream companies are likely to benefit with a nil under-recovery sharing burden (till crude oil prices of ~US$ 60/bbl) as per the existing subsidy-sharing formula.”
The Government of India (GoI) has commenced the first round of bidding under the Open Acreage Licensing Policy and its success in increasing exploration and production (E&P) activities would critically depend upon the availability of comprehensive seismic data repository which can be used by the prospective bidders before selecting blocks. ICRA believes the reforms announced by GoI to be positive for the sector fundamentals in the long-term. Moreover the ability of several small and medium companies who have been awarded discovered fields, to successfully exploit the E&P assets remain to be seen.
As for an upside in crude oil production in the medium term, the same may be driven by Vedanta Limited ramping up production of its Rajasthan assets, ONGC commercialising its marginal fields, in addition to the enhanced oil recovery/improved oil recovery (EOR/IOR) initiatives of ONGC and OIL. Vedanta plans to invest $3 billion over three years to raise the production of its Barmer field to 300,000 bopd (160,000 bopd in FY2017).
“However, even after factoring in the increase in production, dependence on import of crude oil is expected to remain high, given the large demand–supply gap (domestic production met only about 17% of demand in FY2017); and the growth in domestic consumption of petroleum products,” adds Ravichandran.
ICRA projects gross under-recoveries (GUR)s of OMCs to decrease to ~Rs. 150-180 billion for FY2018 (with average Indian basket crude oil price of US$50-55/bbl and INR/US$ of 65.5 for FY2018) following soft crude oil prices, regular increase in retail prices of sensitive products and anticipated fall in sales volumes of subsidised kerosene. Further, the GoI’s initiative to increase penetration of domestic LPG into rural areas will increase LPG consumption consequently resulting in higher GURs for LPG. Low domestic gas prices for H1 FY2018 have adversely impacted the profitability on gas sales. Domestic gas prices are expected to remain subdued owing to increasing LNG supply globally, amidst shrinking demand from Japan and South Korea.
“As for the profitability of domestic upstream companies, it will be subdued in the near to medium term. Though the credit metrics of some players improved in FY2017 due to increase in profits and the same continue to be comfortable, going forward the leverage and credit protection metrics would be a function of the level of debt-funding for overseas acquisitions, domestic M&A deals, along with profitability levels. In this regard, some of the private E&P companies have already curtailed their capex plans given the soft crude oil prices,” concludes Ravichandran.
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