Fitch Ratings says that the Indian budget for the year ending Mar. 31, 2015 (FY15) did not introduce any major new measures for the oil and gas sector and would be neutral for Fitch's rated oil and gas entities - GAIL, Indian Oil Corporation, Bharat Petroleum Corporation, Reliance Industries and Oil India - which are all rated 'BBB-' with stable outlooks.
India will continue to use the current subsidy mechanism for price regulated products, including the gradual price increases for diesel aimed at trimming the state subsidy requirement. The budget did, however, include some measures to encourage production from unconventional hydro-carbon resources.
The government in the budget allocated Rs 634 billion for petroleum subsidies to cover under recoveries, the difference between the market price and government regulated price. Of this amount, Rs 300 billion is for subsidies incurred during FY14, which leaves a balance of Rs 334 billion for the current fiscal year. Fitch estimates that the overall under recoveries are likely to be around Rs 1 trillion for FY15 (down from Rs 1.4 trillion in FY14), as long as the monthly diesel price hikes of Rs 0.50 continue and there are no oil price shocks.
The Rs 335 billion state subsidy allocation for FY15 and the direct subsidies from upstream companies of USD 56 a barrel to the refining companies are broadly adequate to cover the estimated total under recoveries. With the decline in under recoveries and with it the lower state subsidy, a larger share of the under recovery burden would be borne by the upstream players - Oil and Natural Gas Corp and Oil India.
On the upstream front, measures were announced to accelerate development of coal bed methane reserves and use modern technological methods to revive old or closed oil fields. The price of natural gas was set to double as it was to be more market linked from April 2014. The decision was put on hold during the general elections, and the new government had deferred a decision on the measure to September 2014. Further deep-sea oil and gas exploration would be linked to this decision as exploitation of expensive deep-water reserves would be economically viable only if prices for domestically produced gas are raised. The proposed higher gas price remains lower than the cost of imports, which have been increasing to make up for falling domestic gas production over the last few years.
The Indian finance minister also announced plans to double the country's gas pipeline network to 30,000km to complete the national gas grid, mainly through the public-private partnership model. However, given the low utilisation rate of the current gas pipeline network, private interest may be limited. GAIL pipeline network, which accounts for around 70% of India's current network, had a gas pipeline capacity utilisation of only around 50% in FY14. Unless there is a significant increase in domestic gas production, the capacity utilisation of the gas network will continue to remain low.
