Fitch says no major new measures for oil&gas sector in Budget

Tags: News
Fitch Ratings today said the Budget did not introduce any major new measures for the oil and gas sector and would be neutral for its rated oil and gas entities.

"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," it said in a statement here.

The budget, however, included some measures to encourage production from unconventional hydrocarbon resources.

An allocation of Rs 63,400 crore has been made for oil subsidies to cover under-recoveries, the difference between the market price and government regulated price.

"Of this amount, Rs 30,000 crore is for subsidies incurred during FY14, which leaves a balance of Rs 33,400 crore for the current fiscal year.

"Fitch estimates that the overall under-recoveries are likely to be around Rs 100,000 crore for FY15 (down from Rs 140,000 crore in FY14), as long as the monthly diesel price hikes of 50 paisa continue and there are no oil price shocks," it said.

The Rs 33,500 crore subsidy allocation for FY15 and the direct subsidies from upstream companies like ONGC of USD 56 per 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 Ltd and Oil India Ltd," Fitch said.

On the upstream front, measures were announced to accelerate development of coal bed methane (CBM) reserves and use modern technology 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," it said.

The Budget also announced plans to double the country's gas pipeline network to 30,000 km 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's pipeline network, which accounts for around 70 per cent of India's current network, had a gas pipeline capacity utilisation of only around 50 per cent in FY14. Unless there is a significant increase in domestic gas production, the capacity utilisation of the gas network will continue to remain low," Fitch said. P

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