The oil and gas sector plays a predominant role in the energy mix. Notwithstanding the Covid pandemic, India’s energy sector, including the oil and gas sector, has bounced back. Energy demand has almost recovered to pre-Covid levels on the back of a revival in economic activities. The government has come up with a number of policy reforms and initiatives for increasing the exploration and production (E&P) of domestic petroleum resources to address issues of energy access, energy efficiency, energy sustainability and energy security. In an interaction with Indian Infrastructure, Prashant Vasisht Vice-President and Co-Head, Corporate Ratings, ICRA Limited discussed the progress under the oil and gas sector, impact of government initiatives, challenges associated with the sector and future outlook.
What has been the progress in the oil and gas sector over the past one year?
The past year witnessed volatility in oil and gas prices due to a global economic recovery, increasing vaccination coverage, limited supply increases and the Russia-Ukraine conflict. One of the key highlights of last year for the Indian oil and gas sector has been the freeze on retail prices of auto fuels (motor spirit [MS] and high speed diesel [HSD]) despite high crude oil prices and crack spreads. Owing to the price freeze, oil marketing companies (OMCs) have been facing huge under-recoveries on retail sales and it remains to be seen when prices will be revised. However, some of the impact of the under-recoveries has been softened by the high crack spreads that the refiners are enjoying on gas, oil and aviation turbine fuel. Additionally, the past year witnessed a huge jump in liquefied natural gas (LNG) prices owing to a number of factors such as low stocks, odd weather patterns and the Russia-Ukraine conflict. Due to this, spot LNG procurement by India has reduced and capacity utilisation for LNG terminals has fallen. Another important trend witnessed is the net zero commitments by different oil and gas companies, and increasing investments in renewable energy.
What has been the impact of the initiatives taken by the government?
The government instituted a gas pooling mechanism for the CGD sector wherein GAIL (India) Limited, as a gas aggregator, pools domestic gas, high pressure high temperature gas and long-term and spot LNG. These are provided to all CGD entities for their compressed natural gas (CNG) and piped natural gas (PNG) (domestic) segments as against the earlier practice of providing domestic gas only. Due to this measure, there has been a pan-Indian runup in the prices of CNG and PNG (domestic). This measure could impact the returns of CGD entities as high prices could deter conversions and adversely impact the economics vis-à-vis alternative fuels. The government has also imposed windfall gains tax on crude oil production and levied a special additional excise duty on exports of HSD, MS (since withdrawn) and ATF. The windfall tax is negative for upstream companies and would impact the earnings before interest, taxes, depreciation and amortisation (EBITDA) of the industry by about Rs 310 billion in 2022-23. For the downstream industry, the special additional excise duty would impact the overall gross refinery margins of exporters by up to $1.5 per barrel depending on their proportion of exports and the EBITDA impact on the industry is expected to be Rs 160 billion for 2022-23. In August 2021, the government announced a National Monetisation Pipeline, which included assets such a gas and petroleum product pipelines as well as effluent treatment plants of several PSUs. However, none of the oil and gas assets has been monetised till date. Lastly, BPCL’s divestment has been shelved following the withdrawal of two bidders citing inability to attract global investors.
What are the key challenges that need to be addressed?
Delays in getting statutory approval for E&P blocks, litigation by the industry against the PNGRB as regards various tariff-related anomalies for gas pipelines and giving open access to the incumbent CGD networks where marketing exclusivity period is over, are some of the key issues that remain unaddressed.
What is the sector outlook for the next one to two years?
Crude and natural gas prices are expected to remain high. This will aid the profitability of upstream companies even after the windfall tax provision. Domestic gas prices are expected to increase further in the next revision due to the elevated prices at various international hubs and continuing high spot gas prices. In 2022-23, the demand for petroleum products is expected to increase by 3-4 per cent and capacity utilisation of PSUs and private refiners is anticipated to remain high. However, any further waves of the pandemic and elongated lockdowns remain a key concern. Refining margins are currently robust and are expected to remain healthy, although these might reduce from the current high levels. Domestic gas consumption has recovered from the impact of Covid-19 and is expected to grow by 8-9 per cent year on year in 2022-23. In the medium term, there could be a structural shortage of LNG capacity, given the net zero commitments of different countries. The LNG market is expected to remain tight and prices are likely to remain elevated. This would impact demand growth. The domestic demand for gas is expected to grow owing to the commissioning of new fertiliser plants and increase in sales from new CGD GAs.