Lower crude regime likely to dampen capex plan of upstream companies

The drop in international crude prices is seen as a positive for the Indian economy, but cost realisation may badly hit both public and private sector upstream companies. This may also dampen the investments lined up by these companies such as Oil and Natural Gas Corporation (ONGC), Cairn India, and Oil India (OIL). 

“These kind of prices are not sustainable for any company and upstream firms are going to struggle. This will take investments away from oil and gas. For every $1 a barrel decline in prices, our top line will also get affected on the same level,” said a senior official from a state-run upstream major.

A sustained drop in crude oil prices will affect the capital expenditure plans of ONGC and OIL. ONGC had pegged its investment for 2020-21 at Rs 32,502 crore, up 2 per cent, against Rs 31,896 crore for the current financial year. Similarly, the capital outlay for OIL, the second-largest state-owned petroleum explorer, was pegged at Rs 3,877 crore, up 5.4 per cent, compared to the current year. 

Among the private sector majors, Cairn Oil and Gas, part of Vedanta, had also lined up massive investments worth Rs 50,000 crore for its Open Acreage Licensing Policy (OALP) blocks. A lower price regime may also dampen Reliance’s proposed investment in Krishna Godawari basin.

“For the upstream sector, a decrease in crude oil prices is credit negative as their realisations and cash accruals will decline. If the crude prices were to remain in the band of $30-$40 a barrel, most of the Indian upstream companies could report losses, as the cost structure would remain rigid in the short run,” said K. Ravichandran, senior vice-president and group head, corporate ratings, ICRA. 

The ICRA report suggested that the decline in gas prices at various international gas hubs would lead to lower domestic gas prices in the next fiscal year. “Accordingly, the realisations on gas sales would also decrease even as gas production remains either a break even or a loss-making proposition for most fields for the upstream firms, notwithstanding some decline in oilfield services and equipment cost,” Ravichandran said.  

“The decrease in gas prices should result in a decrease in CNG and PNG (domestic) prices by the CGD players and the savings for the end consumers from the conversion economics perspective is expected to remain attractive. However, the PNG commercial and industrial segments that are fed from imported spot LNG would be significant beneficiaries of reduction in spot prices, owing to increasing competitiveness against alternate fuels,” said Prashant Vasisht, vice president and co-head, ICRA.