OIL & GAS
EXPECTED BUDGET IMPACT: Positive
LONG TERM OUTLOOK: Positive
"In some countries the government runs the oil companies and in many others the oil companies runs the government". This highlights the prominence of government policies related to oil and gas sector.
Finance minister has stated that fiscal prudence will be the key theme for union budget 2013-14, as the government plans to trim its subsidy bill for food, fuel and fertilizers to Rs.1.9 Tn or 2% of GDP from 2.4%.
For the current financial year, finance minister is targeting fiscal deficit max. upto 5.3% of the GDP and for FY14 the fiscal deficit to be max. upto 4.8%. Currently, one the biggest bloat in the fiscal deficit is subsidy burden. We believe government will take all possible steps to control the same.
In this regard, the finance ministry has asked petroleum ministry to price retail auto and kitchen fuels at "export parity". The directive, if accepted, could reduce fuel prices and bring down the government's oil subsidy bill by Rs 180-200 Bn and lower consumers prices. While consumers and the government would benefit from export-parity pricing, refineries would hit badly. The duty component directly adds to the profit margins of refining companies.
Oil minister has allowed OMCs to increase rates by as much as Rs.0.50 every month. We believe this will be fully implemented in FY14.
Upstream and downstream companies will look for a concrete subsidy-sharing formula for sharing under-recoveries. Also, hike in natural gas prices would incentivize oil and gas majors to undertake new exploration to increase domestic gas production.