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The Indian upstream oil and gas sector will continue to be negatively impacted by low crude oil and natural gas prices even as upstream oil firms benefit from a nil under-recovery burden sharing, ratings agency ICRA said today.
“The Indian upstream and oilfield sector is going through tough times, impacted by the challenging environment due to soft global crude prices. This situation will continue in the near to medium term, despite modest increase in crude prices post-Organization of Petroleum Exporting Countries (OPEC) deal,” ICRA said in a note.
According to the agency, the production cut announced by OPEC in November last year led to a spike in global crude oil prices by 15-20 percent. However, the rise in prices were short-lived due to increased production of shale oil by US and by OPEC members resulting in global crude prices hovering around $47-48 per barrel in July.
“A key sensitivity for the prospects of the upstream sector in the medium term will be sustained recovery in crude oil prices, which appears unlikely in the near term with the market in the midst of rebalancing with competing forces at work. Apart from this, the fall in the domestic gas price in H1 FY2018 would adversely impact profit levels of the upstream players,” ICRA Senior Vice President K Ravichandran said.
He added PSU upstream companies are likely to benefit with a nil under-recovery sharing burden till the crude oil price level of around $60 per barrel as per the existing subsidy-sharing formula.
“As for an upside in crude oil production in the medium term, the same may be driven by Vedanta Ltd ramping up production of its Rajasthan assets, ONGC commercialising its marginal fields, in addition to the enhanced oil recovery or improved oil recovery initiatives of ONGC and OIL. Vedanta plans to invest $3 billion over three years to raise the production of its Barmer field to 300,000 bopd (160,000 bopd in FY2017),” Ravichandran added.
According to ICRA, the increased domestic crude oil production will not be enough to bring down the country’s import dependency on crude oil as there is a large demand-supply gap that exists. India’s domestic crude oil production managed to meet only 17 per cent of the country’s oil demand in 2016-2017.
The research and ratings agency projected gross under-recoveries (GURs) of Oil Marketing Companies to decrease to a range between Rs 15,000 crore and Rs 18,000 crore for 2017-18 with average Indian basket crude price of $50-55 per barrel and an exchange rate of Rs 65.5 a Dollar for 2017-18 following soft crude oil prices, regular increase in retail prices of sensitive products and anticipated fall in sales volumes of subsidised kerosene.
ICRA also predicts domestic gas prices are expected to remain subdued owing to increasing Liquefied Natural Gas (LNG) supply globally, amidst shrinking demand from Japan and South Korea.
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