INDIAN OIL AND GAS SECTOR- UPSTREAM

Rangarajan Committee Recommendations set the stage for regulatory and policy changes to be made in the Indian E&P sector; implementation remains to be seen
ICRA RESEARCH SERVICES Corporate Ratings
Contacts: ICRA RATING FEATURE K. Ravichandran +91 44 45964 301 ravichandran@icraindia.com Anoop Bhatia +91 124 4545 315 anoopb@icraindia.com Neha Joshi +91 124 4545 309 nehaj@icraindia.com

February 2013

Summary Highlights Further dip in domestic production in Q3 FY 13 owing to continued fall in gas output: In Q3 FY 13, Indias oil and gas production was at 19.54 million tonnes of oil equivalent (MMTOE), about 2% lower vis--vis Q2 FY 13 mainly due to the 4% dip in gas output following further decline in production at Reliance Industries Limiteds (RIL) KG D-6 block (24 MMSCMD in Q3 FY 13 from 29 MMSCMD in Q2 FY 13 and 42 MMSCMD in Q3 FY 12). Overall for the 9M period Apr-Dec 2012, Indias total hydrocarbon production aggregated 59.98 MMTOE, an 8% drop over 9M FY 12, primarily due to the 13% yoy decline in gas output due to factors mentioned above. Upside in crude oil production limited; import dependence to remain high: Over the near term upside in crude oil production is expected mainly from Cairn India Limited as it commissions its Aishwarya field in the Rajasthan block by end FY 2013 (expected ramp up of production to 200-215,000 barrels per day from current 175,000 bpd) and further to 300,000 bpd over the longer term as full development of the Rajasthan block is undertaken. ONGC and OIL are at best expected to maintain their current production rates by way of EOR/IOR initiatives and commercialization of small discoveries setting off the natural decline in their mature properties. Import dependence for crude accordingly is expected to remain high (~75-76% of total) in view of the growing requirements of new/expanded refineries and growth in consumption of petroleum products. R-LNG imports plugging in domestic gas shortfalls: In gas as well, owing to the significant fall in domestic output, reliance on regasified liquefied natural gas (R-LNG) has been growing with 8.09 million metric tonnes of imports taking place over Apr-Dec 2012 compared to 7.64 million metric tonnes in same period last year. Over the near term, limited new sources of gas supply are expected in the domestic market and accordingly demand for RLNG should remain firm. Further over the medium to longer term, even as domestic gas supplies increase b y way of commercialization of new discoveries and revival in RILs production, demand for RLNG is expected to continue deriving support from the expected narrowing of differential between domestic gas and RLNG prices in light of the recent policy recommendations; growth in demand from sectors like CGD and industrial which have capacity to absorb higher cost gas; improved affordability in sectors like fertilizers due to policy changes; increase in global RLNG supplies and easing of prices and increase in capacity to import by way of new RLNG terminals being set up in India.
0.50 1.00 1.50 2.00 2.50 3.00 Q1 Q2 2.45
2.78 FY 12 (RLNG Imports) FY 13 (RLNG imports) Q3 2.52 2.73
Crude Oil in MMT Natural Gas in BCM Total O+OEG in MMTOE

64.90 59.98

36.20 31.38

YTD Dec 2011 YTD Dec 2012

28.70 28.60
10 20 30 40 50 60 70

2.67
2.58

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Summary Highlights Under-recovery burden to subdue Q4 financial performance of public sector upstream 40% 600 50% companies; while intent for deregulation of diesel prices has been expressed, 500 36% 40% 40% 38% implementation shall be the key: Gross under-recoveries of public sector Oil Marketing 400 32% 30% Companies (OMCs) have been at Rs. 1249 billion in 9M FY 13 compared to Rs. 974 billion in 9M 300 FY 12 on the back of firm crude oil prices; weaker INR-USD parity and limited revision in 20% 200 product prices due to policy issues. Upstream companies have shared 36% of the GUR burden 10% 100 in 9M FY 13 compared to a share of 38% in 9M FY 12 and 40% in 12M FY 12. The recent policy 0% measures like upward revision in prices of bulk and retail diesel w.e.f January 18, 2013 are Q1 FY 13 Q2 FY 13 Q3 FY 13 9M FY 13 FY 12 expected to have some moderating impact on the under-recovery burden in Q4 FY 13 and ICRA Under-recov burden of upstream companies % of total undre-recov borne expects OMCs gross under-recoveries to be around Rs. 1600 billion for FY 2013 (marginally lower than earlier estimates of around Rs. 1700 billion). The share of upstream companies in GURs is likely to be upscaled closer to the 40% mark like last year translating to an additional liability of Rs. 227 billion in the last quarter which would have an adverse bearing on the Q4 FY 13 financial performance of these public sector upstream companies. While a policy intent has been expressed in terms of moving to deregulation of diesel prices over the longer term, the actual implementation of this remains to be seen and could bring a major upside to PSU upstream companies if implemented. Rangarajan Committee recommendations out; suggestions include moving to market based gas pricing and limiting regulatory intervention in E&P activities: In December 2012, the Rangarajan Committee submitted its recommendations on various policy matters related to the Indian E&P sector. Chief amongst its suggestions are moving to a market based gas pricing mechanism with linkage to international natural gas and LNG prices; extending incentives for ultra deepwater blocks; moving to a product sharing model from the current cost recovery and investment multiple based fiscal model; reducing regulatory intervention in E&P activities etc. The recommendations are currently with the PMO for consideration.
Rs. Billion

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1.

Industry Update 1.1 1.2 1.3 1.4 1.5 Domestic Oil & Gas Production- Monthly and 9M trends and Share of Main Players Crude Oil Imports- Volumes & Price Trend and Import Burden R-LNG Import Trend Under-recovery- Trends & Impact Regulatory Developments Rangarajan Committee Recommendations

2.

9M FY 13- Operational and Financial Analysis of following companies: 2.1 2.2 2.3 2.4 2.5 Oil and Natural Gas Corporation Limited (ONGC) Oil India Limited (OIL) Cairn India Limited (CIL) Reliance Industries Limited (RIL) Hindustan Oil Exploration Company Limited (HOEC)

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