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Oil & gas sectors seek infrastructure status

February 24, 2015 21:16 IST

The Brent crude oil prices decreased 47% on a YoY basis to USD 58 per barrel in February 2015 but rose 15% on a QoQ basis. For Q3FY’15 Brent crude oil prices were down 30% on a YoY basis and 25% on a QoQ basis to USD 77 per barrel. Oil prices had been on an upward trend since mid-January 2015 amid hopes that the supply glut is coming to an end due to cuts in capital spending by the oil majors and lower activity from US shale drilling. Earlier crude oil prices had plunged since June 2014 due to ample global crude oil supplies.

Falling crude prices have resulted in lower under-recoveries and working capital requirements for oil marketing companies (OMC). However, it has affected the profitability of upstream companies such as ONGC and OIL.

Budget 2015: Complete Coverage

Oil and exploration companies shared almost 68% of the total under recoveries of the PSU Oil marketing companies in Q3FY 2015. Under recovery is a notional loss in revenue to the extent the international price of the fuel is higher.  Currently under recovery for PDS kerosene stands at Rs 13.32 per liter and Rs 139.23 per cylinder for domestic LPG. Diesel prices have been de regulated since 19 October 2014.

India’s refining capacity has more than tripled over the last fifteen years from 69.99 MMT as of 1.4.1999 to 215.066 MMT as of 1.4.2014.  The domestic consumption of petroleum products was 158.2 MMT during 2013-14.  Thus the present refining capacity is more than the demand of petroleum products in the country and the country is now a net exporter of petroleum products. The refining capacity of the country is projected to reach upto 307.366 MMTPA by end of 2016-17 as per the Draft Report of Working Group on Refinery for 12th Plan.

Pipeline network to carry crude oil, petroleum products, LPG and natural gas has seen a substantial increase in the country. At present, there are 35 product pipelines with a length of 11771 km and capacity of 82 MMTPA. There are also 25 crude pipelines measuring 9588 km with capacity of 132 MMTPA. In addition, 2312 km of LPG pipelines with capacity of 4 MMTPA and natural gas pipelines of 15,340 km having capacity of 395 MMSCMD have been commissioned.

About 10,000 km of gas pipelines with a capacity to transport 250 MMSCMD of natural gas are expected to be commissioned by 2016-17. In addition 2000 km of pipeline network is under bidding process of Petroleum & Natural Gas Regulatory Board (PNGRB) which will add further capacity to transport 45 MMSCMD by 2017-18.

In addition to the natural gas pipelines the Natural Gas Infrastructure consists of R-LNG terminals and city Gas Distribution (CGD) networks. During 2013-14, Kochi LNG terminal having 5 MMTPA capacity for regasification has been commissioned. With commissioning of Kochi Terminal, the total re-gasification capacity of four R-LNG terminals has increased to 22 MMTPA (79.2 MMSCMD). The capacity of existing 4 R-LNG terminals is likely to be increased further to 32.5 MMTPA (117 MMSCMD) by 2016-17.

The CGD sector comprises of Compressed Natural Gas (CNG) and Piped Natural Gas (PNG) customers. As on 31.12.2013, there are a total of 936 compressed natural gas (CNG) stations across the country and 24,14,288 households with Piped Natural Gas (PNG) connectivity.

Industry expectations

Oil & Gas exploration & allied services

Budget 2015: Complete Coverage

Petroleum Products

 Natural Gas Storage, Distribution & Supply

Analysts/market expectations

The government could consider re-instatement of 5% custom duty on crude imports to improve its finances which would be positive for Cairn India while mildly negative for PSU OMCs and remain neutral for PSU upstream companies while it may also allow clarifications to extend the tax holiday to natural gas sector to boost natural gas production

It is unlikely that any of the demands of the Natural gas industry would be met.

Stock to watch

Reliance Industries, ONGC, Cairn India, Oil India, Indian oil, BPCL, HPCL, GAIL, Gujarat Gas Company, Indraprastha Gas, Gujarat state Petronet

Outlook

We expect Budget 2015-16 to provide clarity on the subsidy sharing formula for oil companies.

The government could consider re-instatement of 5% custom duty on crude imports to improve its finances which would be positive for Cairn India while mildly negative for PSU OMCs and remain neutral for PSU upstream companies. Currently 7 year tax holiday is applicable only on crude oil production which the government may consider to extend it to natural gas production which will encourage domestic natural gas production.

Diesel deregulation and lower international crude oil prices together are expected to lead to a substantial drop in the under recoveries of the Indian oil sector for this fiscal year. Oil prices are currently low, diesel is de-regulated, and direct transfer for LPG has begun.  Interest costs have fallen sharply due to overall lower debt levels. Earlier refining companies have had to rely on short-term borrowings to meet their working capital requirements while they waited for the government to compensate them for their under-recoveries.

Budget 2015: Complete Coverage

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