Ind-Ra maintains a stable outlook on Oil and Gas for FY17

Ind-Ra expects public sector companies to sustain their strong linkages with the government of India or maintain business stability, in case of standalone ratings.

India Ratings and Research (Ind-Ra) has maintained a Stable Outlook on both public and private sector oil and gas companies for FY17. Ind-Ra expects public sector companies to sustain their strong linkages with the government of India or maintain business stability, in case of standalone ratings. The existing ratings of private sector companies have the sufficient headroom to withstand the impact of the decline incrude prices, as the gross refining margins have remained strong and the balance sheets have been dollarised. Moreover, the product demand in India continues to be strong thus ensuring healthy refinery operating metrics even for the upcoming capacity.

Ind-Ra expects the petrol consumption to grow by 8%-10% in FY17 (9MFY16:14.2%) driven by passenger vehicle sales. Diesel consumption is likely to grow by 5%-6% (9MFY16: 6.2%) on improved sales of commercial vehicles, however offset to some extent by lower consumption of diesel for power back-up. Kerosene consumption is likely todecline by 3% on account of lowering of quota allocated by the government. The liquefied petroleum gas consumption growth rate is likely to moderate to 4%-5% in FY17 (9MFY16: 7.5%) driven by a decline inconsumption of non-domestic liquefied petroleum gas as consumers will switch back to natural gas post the decline

in the term Liquefied natural gas (LNG) prices.

For upstream companies in India, the net realisation is an inter-play of two factors, namely the subsidy burden and the price of the Indian crude basket. Ind-Ra notes if crude prices stay below USD45/bbl, the gross and the net realisations for upstream companies would be the same, with no subsidy support required from upstream companies.

The subsidy burden is expected to be contained at Rs. 300bn in both FY17 and FY16, with the crude price expectation at USD47.5/bbl in FY17. Ind-Ra expects 96% of the subsidy burden to be shared by the government during FY17 with absolute amount of upstream subsidy at Rs.12bn. The subsidy sharing by the upstream companies would primarily be on account of the kerosene subsidy.

Ind-Ra expects the domestic gas prices to decline further to USD2.95/mmbtu-USD3.0/mmbtu in H1FY17 from USD3.82/mmbtu during H2FY16 on account of the decline in global benchmark indices. The price decline will be positive for the consumers, particularly city gas distribution (CGD) players, but negative for the producers, namely ONGC Limited and OIL Limited.

Even on the imported LNG price, Ind-Ra expects the price reduction which were earlier at USD13-14/ million British thermal units (mmbtu) are likely to halve to USD5.5-6.5/mmbtu post the renegotiation of the long-term gas sourcing contract of Petronet LNG Limited (PLNL, ‘IND AA+’/Positive) with Rasgas. Ind-Ra believes this price reduction is likely to make imported LNG attractive to a host of end-user industries which would result in LNGvolume increase.