RPT-Fitch: India's natural gas price increase positive for upstream O&G companies

Last Updated: Mon, Jul 01, 2013 09:30 hrs

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July 1 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has said that India's recent upward revision of gas prices will benefit the upstream players and will lead to higher investments in gas production.

The power sector, the largest user of natural gas in India, will be impacted with higher costs immediately, but can benefit from higher gas availability in the long term. Fitch believes that while gas-based electricity generation costs are likely to increase by over 60%, on an overall basis, the average increase in electricity generation costs would be more subdued at 10%-12%.

With effect from April 2014, gas prices will nearly double to USD8.42/mmbtu from USD4.2/mmbtu as the government seeks to move the industry from a fixed-price regime to one which is driven by market prices.

The upstream companies, in particular the larger players, stand to benefit from the price hike while user industries will bear the burden, with some of it likely to be passed on to customers. Oil & Natural Gas Corporation (ONGC), Oil India Ltd (OIL) and Reliance Industries Ltd (RIL, BBB-/Stable/BBB/Positive) which together produce about 85% of domestic natural gas, will be the key beneficiaries.

Fitch estimates that RIL's FY15 net profit is likely to increase INR35bn i.e. 15%-16% as a result of the increase in gas prices. Upstream players will be encouraged to invest in E&P activities which will lead to an increase in gas production over time. Gas production in India has fallen to 40.7bcm in FY13 from 47.6bcm in FY12 due to both production difficulties at major fields as well as under-investment as a result of low regulated domestic gas prices.

The public sector entities - ONGC & OIL - may lose some of the benefits from the gas price hike as they may be expected to shoulder a larger energy subsidy burden.

The power sector is the largest user, with an estimated demand of 153 million metric standard cubic metres per day (mmscmd) for FY14, accounting for almost 50% of the country's natural gas demand. However, due to unavailability of domestic gas, the average plant load factor (PLF) of gas-based electricity plants was only 40% in FY13.

The impact of the increase in gas prices on gas-fired plants is twofold. The immediate impact would be a direct increase in the variable fuel cost, which is currently at around INR3/kwh. The other impact would be an improvement in the PLFs over the medium term as domestic gas production increases, which would reduce fixed costs per unit of electricity produced (around INR1.5 - 2/kwh).

However, the financially weak state-owned distribution companies' ability to off-take more expensive gas-based electricity is doubtful unless end-user tariffs are adjusted accordingly.

Although the doubling of gas prices would lead to an increase of over 60% in the cost of gas-based electricity, the impact will be blunted in the blended overall electricity price. This is because gas-based plants only account for a modest share of the country's electricity generation (FY13: 7.3%); the remainder of electricity is generated largely using coal and hydropower. As a result, the blended overall electricity price increase would likely be around 10%-12% (assuming that gas-based PLF increases to 50%, and accordingly gas based generation increases in the mix). This computation, however, does not take into the account the impact of currency depreciation, which would further increase costs.

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