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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
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
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