Realisation for upstream firms to remain unchanged: India Ratings

Rating agency, India ratings & Research has maintained a stable outlook on oil and gas sector for FY17. According to the ratings agency, no subsidy support will be required in FY17 from upstream companies in the oil and gas sector and hence their gross and the net realisations will be the same, assuming crude prices stay under $45 per barrel.

For upstream companies in India, the net realisations are an inter-play of the subsidy burden and the price of the Indian crude basket. However, when crude prices rise above $45/bbl, the subsidy sharing will come into play.

Globally, the decline in crude prices has resulted in a decline in the net realisations of exploration and production companies, according to the agency.

"However, for upstream companies in India, the net realisation has increased in H1FY16, on account of the interplay of the subsidy burden and the price of the Indian crude oil basket", says the report.

While the price of the Indian crude basket has declined, so have the gross realisations of upstream companies (Oil India Limited and Oil and Natural Gas Corporation Limited) in India.

However, the net realisation post the impact of the subsidy payments to oil marketing companies has been higher as the Indian petroleum product subsidy regime has changed. During H1FY16, the subsidy per barrel for Oil and Natural Gas Corporation Limited declined to $4 per barrel from $40 per barrel in FY15, adds the report.

India ratings estimates, that if the average price of the Indian crude basket rises to $60 per barrel, the net realisation for upstream companies will be near $48 per barrel, while if the average crude basket were to decline to $40 per barrel, the net realisation will be $40 per barrel, as the entire subsidy burden could be absorbed by the government at lower crude prices.

However, sustained lower crude prices may also result in lowering of the capital expenditure undertaken by the upstream players, provided the service providers do not reduce their costs of providing services.

The total under recovery is thus expected to be contained at Rs 300 billion in both FY17 and FY16 assuming crude prices average at $48 per barrel in FY16 and $47.5 per barrel in FY17 and an exchange rate of 66 against the dollar for the base case analysis.

The agency further expects 96 per cent of the subsidy burden to be shared by the government during FY17 with the share of upstream companies' subsidy just at Rs12 billion. The subsidy sharing by the upstream companies would primarily be on account of the kerosene.

While arriving at the subsidy, India Ratings assumes a budgetary support on kerosene and LPG up to a maximum level of Rs 12 per litre and Rs 18 per kg respectively as applicable in FY16. This mechanism is in contrast to the earlier ad-hoc subsidy sharing mechanism until FY15.

The subsidy will continue to remain sensitive to crude prices and the exchange rate. In a stress scenario of $55 per barrel and USD/INR of 70, the subsidy may increase to Rs 483 billion, which will still be lower than the peak subsidy burden of Rs1, 610 billion in FY13.