Though the sector has been weighed down by negatives, there has been some flaring of hope. A look at what ailed the sector and the prospects ahead.
In the last one year, the Indian oil and gas sector was in the news mostly for the wrong reasons. Gas output from the KG-D6 fields of Reliance Industries plummeted, the downstream regulator (PNGRB) slashed tariffs of Indraprastha Gas, Essar Oil suffered a major legal setback, and the public sector oil marketing companies reeled under mounting under-recoveries.
But there were also positive developments. Vedanta finally acquired Cairn India, companies such as HPCL and Essar Oil expanded their refining capacities, the government raised diesel price and cut LPG subsidy, and BPCL struck it big in Mozambique.
But the negatives outweighed the positives, and the BSE Oil and Gas Index is down 8.5 per cent over the past year compared with the 4.6 per cent rise in the Sensex. What ailed the sector stocks, what benefited them and what lies ahead?
REGULATORY BLUES
Reliance Industries’ run-ins with the powers-that-be hogged the limelight. The disputes centred on cost-recovery of spend in KG-D6, approvals for development proposals, and the audit process.
Meanwhile, gas output from KG-D6 dropped further to 26 mmscmd from around 40 mmscmd a year ago. The company has been repeatedly asking for a hike in the gas price from the current $4.2 per mmbtu. But the government has not obliged so far.
Recently there seems to be some thaw, with the government approving some development proposals and agreeing to restrict the scope of CAG’s latest audit to a financial audit.
But whether and when these steps translate into production growth remains to be seen. The company’s other major segments — refining and petrochemicals — had a mixed year, waxing and waning with economic conditions and industry capacity levels. A lot hinges on improved performance in the exploration and production business and success in new forays such as telecom.
The downstream sector was also at the receiving end of regulatory action. In April, PNGRB slashed the network tariff and compression charge of Delhi-based city gas distributor Indraprastha Gas by almost 60 per cent. The stock tanked more than 30 per cent in a day.
Though there has been some recovery thanks to relief from the Delhi High Court, the case is pending in the Supreme Court. Fears of regulatory curbs on tariffs also took a toll on the stocks of most other gas companies.
Essar Oil lost a long-running sales tax feud with the Gujarat government, with the Supreme Court directing it to pay dues of around Rs 6,300 crore. This setback overshadowed positives such as expansion of the company’s refining capacity. The company has tied up debt funding to settle the tax dues. It is also in talks to come out of the corporate debt restructuring mechanism. While these are positives, high debt levels remain a concern.
UNDER-RECOVERIES
High crude oil price and the steep depreciation in the rupee increased the under-recovery estimate for public sector oil marketing companies (Indian Oil, BPCL and HPCL) in FY-2013 to more than Rs 1,80,000 crore. This threatened to throw out of whack the finances of three groups — oil marketing companies, upstream companies (ONGC, Oil India and GAIL which share 33-40 per cent of the burden) and the government. Finally, in September, diesel prices were raised by Rs 5 a litre and the number of subsidised LPG cylinders was capped at six a year for each family. This has reduced by around Rs 20,000 crore the under-recovery estimate which still remains at an all-time high of around Rs 1,60,000 crore. Also, delayed government compensation resulted in the oil marketing companies stepping up their borrowings.
The under-recovery overhang continues to overshadow some significant successes.
BPCL hit pay dirt in the Rovuma offshore block in Mozambique. This field, in which the company has 10 per cent stake, is estimated to hold large gas reserves and should help BPCL in the long-run.
Also, HPCL, in collaboration with Mittal Energy, commissioned its 9 mtpa refinery in Bathinda. This, along with the capacity expansions by companies such as MRPL, strengthened India’s position as a major refining hub and exporter.
DOMESTIC CRUDE
While petroleum product exports have gone up, India’s dependence on imported crude oil and natural gas has increased.
The country imports almost 80 per cent of its crude oil requirement and more than a fourth of its natural gas needs.
Pure-play oil explorer Cairn India, which is not subject to under-recoveries, benefited from rise in production, high crude oil price and a weak rupee.
Vedanta, after months of negotiation, finally acquired control of Cairn India. The latter’s output from its mainstay Rajasthan fields has since increased from 1,25,000 barrels of oil per day (bopd) to 1,75,000 bopd.
The company is optimistic of raising output to 2,00,000 bopd in the near-term and further to 3,00,000 bopd, subject to receiving government approvals.
IMPORTED GAS PLAYS
Meanwhile, with domestic gas supply falling sharply, demand for imported gas picked pace. Petronet LNG, India’s major gas importer, benefited from increased volumes.
The company is expanding capacity in its existing terminal at Dahej and is setting up new terminals at Kochi and Gangavaram. These should boost the company’s volumes and prospects in the medium to long term.
GAS TRANSMISSION & CGD
Gas transmission companies GAIL and GSPL continue to expand their pipeline networks. But lack of adequate domestic supplies raised concerns on capacity utilisation and lower returns on investment. This has contributed to their subdued showing on the bourses.
But over the long term, the increased availability of imported gas should improve prospects of these companies.
Major city gas distributors such as Indraprastha Gas, Gujarat Gas and GAIL could benefit from the significant market potential in the country. But this will be subject to their ability to obtain cost-effective supplies.
NEW REGIME IN PIPELINE
Interpretation of the production sharing contract (PSC) has been among the major points of dispute between RIL and the government.
Also, low participation by big private and foreign players in the recent hydrocarbon block auctions has been attributed in part to inflexibilities in the current PSC-based regime.
This has led the government to consider a more flexible production linked payment (PLP) mechanism for exploration and production.
Also, the government has put out a draft policy on shale gas exploration for public comments.
Shale gas, an unconventional natural gas resource, has increased supply and reduced prices significantly in the US market.
For domestic shale gas exploration to be successful in India, concerns about large-scale land acquisition and water usage will need to be addressed — not an easy task.
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