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Year 2014: When India's oil economy marked new beginning

Complete decontrol of diesel marketing, new pricing formula for domestic gas and plunge in global crude prices flagged a new beginning for country's oil economy in 2014.

Biswajit Choudhury        Last Updated: December 17, 2014  | 17:39 IST
Year 2014: When country's oil economy marked new beginning
Photo: Reuters

Complete decontrol of diesel marketing, new pricing formula for domestic gas after five years and a plunge in global crude prices flagged a new beginning for country's oil economy in 2014 but there was little news on stake sale in state-run oil firms and fresh auctions for hydrocarbon assets.

After years of selling diesel below cost and of subsidising the rich consuming this key transport fuel, the government in October allowed its deregulation in the face of profits accruing on its sale from the fall of international crude prices - from around $140 per barrel to around $63.

Together with the decision on revising the price of natural gas, the decision made the industry watchers give a stable outlook for India's oil industry - as opposed to the negative outlook which they were planning for lack of reforms. But they also had their set of warnings.

"The rating outlook for Indian oil and gas entities remains stable in 2015. The benefits from oil price reforms and lower global oil prices for refining and marketing companies will be offset by their large capex needs in the medium term that will lead to negative free cash flows," Fitch Ratings said.

Earlier, prior to the Narendra Modi government taking over the reins in May, the price of diesel was being raised by oil marketing companies in marginal doses of 50 paise a litre since the previous government's decision in January 2013 to reduce subsidy load on the fiscal deficit.

At the time of deregulation in October, the oil marketing companies were making a profit of over Rs 3 a litre, of which the government took back a portion in excise duty towards compensating the states. Petrol pricing had already been deregulated since June 2010.

On India's quest for energy security by scouting for hydrocarbons assets abroad, the overseas arm of the Oil and Natural Gas Commission made some headway in 2014, acquiring new blocks in New Zealand, Myanmar, Bangladesh and Brazil, besides signing pacts with South Africa, Vietnam, Mozambique and Turkey.

There was some movement forward in pricing of gas as well. After elections forced the previous government to delay notifying a new gas price, an upward revision to $5.61 per unit was finally announced against the industry's demand for at least doubling it to a little over $8 per unit.

Accepting the recommendations of the Rangarajan panel, constituted by the previous government, would have meant a gas price of $8.4 per unit, instead of the $5.6 effective from November for five months.

But the decision was only partial. While the price of $5.61 per unit was to apply for the normal discoveries, for all new discoveries in the ultra-deep, deep-water areas and high pressure-high-temperature areas, all that the government said was that a premium will be given.

But it did not spell out further details on how it will be calculated. While shallow-water blocks are at a depth of up to 100-500 metres, deep-water blocks descend to around 1,000 metres. Those at depths beyond 1,500 metres are classified as ultra-deep-water blocks.

The main company affected by this decision was Reliance Industries, as it was not immediately entitled to avail of the new price, as it remained locked in an arbitration with the government over alleged shortfall in production from its Krishna-Godavari basin fields.

To make up for fall in taxes due to the sustained decline in international crude prices, the government hiked the excise duty twice in November-December, saying the money would fund welfare schemes. This deprived consumers lower retail price to the extent of the fall in global crude prices.

For oil companies in the downstream sector, analysts forecast that their profit after tax will increase by Rs 33-Rs 36 billion year-on-year in 2014-15 and by another Rs 7-Rs 10 billion in 2015-16, said Crisil Research in the post-reform prospects for the oil and gas sector.

"Their interest cost will decline and they wont have an under-recovery (loss) burden," Crisil Research said in the post-reform prospects for the oil and gas sector," it said.

Full Coverage: Newsmakers of 2014


"On the other hand, upstream companies (companies engaged in oil exploration and extraction) will see a sharper improvement of Rs105-210 billion year-on-year in profit-after-tax in 2014-15 and a further improvement of 70-75 billion in 2015-16."

Indeed, with the dramatic fall in global oil prices towards $60 a barrel at this point, its favourable impact on country's current account and fiscal deficits has quickly changed the macro-economic scenario of the country, increasing the clamour for rate cuts by the central bank.

Going forward, analysts expect the government to take a call on further sale of stake in some of the oil companies, both in the upstream and downstream sectors, notably the Oil and Natural Gas.

Highlights of country's oil economy in 2014:

- Diesel prices deregulated giving the freedom to oil firms

- New gas price announced after elections delayed its notification

- Deep water, difficult blocks to get new gas price in New Year

- Reliance denied new gas price pending arbitration decision

- Government hiked excise duty on petrol, diesel

- Plunging oil prices changed country's macro-economic scenario

(IANS)

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