Lower crude regime to impact upstream companies, dampen capex plans

Firms fear huge impact on top lines, say investments in oil and gas sector will be affected

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

“These prices are not sustainable for any company and upstream companies 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 at 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 from 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 from the current year. Among the private sector majors, Cairn Oil and Gas, part of Vedanta, had also lined up massive investments worth over 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 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. “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 producers, notwithstanding some decline in oilfield services and equipment cost. Low crude oil prices, if sustained, will also lead to a reduction in capex by the private players,” Ravichandran added.  

“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.