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With crude oil prices falling from $106 a barrel in March 2014 to below $60, 2014-15 could have been a dream year for oil companies in India, which, buried under a subsidy dole, are unable to perform well. But while upstream companies have reached a point where the falling price has started hitting revenue, even as it brought down their subsidy share, inventory losses and not-so-good refinery margins have spoilt the party for oil marketing companies (OMCs).
ICRA projects gross underrecoveries of OMCs to fall to Rs 44,000 crore for 2015-16 from an estimated Rs 75,000 crore this year, at an Indian crude oil basket price of $60 a barrel and an exchange rate of Rs 63 a dollar. This would mean public sector upstream companies - Oil and Natural Gas Corporation, Oil India and GAIL India - might have to provide a discount of $15-25 a barrel on crude oil produced by them, leaving their net crude oil realisations at $35-45, corresponding to gross realisations of $50-70.
The subsidy burden on them would, therefore, decrease to Rs 16,000-28,000 crore in 2015-16. But the gains here would be far offset by falling revenue, since low crude oil prices will have an adverse impact on the profits of upstream oil companies. Crude oil prices have been $50-55 a barrel lately, after being range-bound at $100-115 through the past two to three years. After a 26 per cent year-on-year decline in the second quarter of 2014-15, the profit before tax of Cairn India declined 45 per cent year-on-year and 35 per cent quarter-on-quarter in the third quarter of FY15, primarily due to lower crude realisation.
The profits of ONGC and OIL have also declined about 50 per cent in Q3 FY15 due to soft crude oil prices.
According to K Ravichandran, senior vice-president and co-head (corporate sector ratings), ICRA, "The government is yet to announce the subsidy-sharing formula for upstream companies, following a significant fall in global crude oil prices. In the absence of clarity on the subsidy burden (unlike $56/barrel earlier), the net crude oil realisation and profits of the public sector upstream companies are dependent upon an ad-hoc announcement of subsidy burden by the Centre. The burden on public sector upstream companies might fall to Rs 16,000-28,000 crore by 2015-16 (at 50 per cent of total gross underrecoveries) in a scenario of a yearly average Indian basket crude oil prices at $50-70 a barrel."
Besides the fall in crude oil prices, an expected cut in domestic natural gas prices is also likely to disturb revenue flow of ONGC and OIL. In October 2014, the government had approved the modified Rangarajan committee gas pricing formula, according to which the gas price was $5.05/mbtu (GCV basis) and $ 5.6/mBtu (NCV basis) for November 1, 2014, to March 31, 2015. Since gas prices have witnessed a material fall globally, though less steep than crude oil prices the domestic gas price decreased from $5.05/mbtu to $4.66/mBtu from April 1.
The fall in gas prices would lead to a modest fall in the profits of domestic gas producers such as ONGC, Reliance Industries and Oil India during the first half of 2015-16. ICRA Research said the fall in domestic prices would also adversely impact the sentiment in the domestic upstream sector.
The burden on PSU upstream companies - ONGC and OIL - decreased to $38-40/bbl in Q3 FY15 from around $56 a barrel of crude production till the first half of FY15 (except in Q4 FY14). Overall, ONGC's underrecovery burden in absolute terms decreased 10 per cent annually, primarily due to a material fall in burden in the third quarter of FY15, driven by lower gross underrecoveries resulting from lower crude oil and petroleum product prices in the quarter.
The burden on OIL decreased at a steeper 14 per cent (y-o-y) to Rs 5,500 crore in the first nine months of 2014-15 due to lower crude oil production volumes and lower gross underrecoveries.
However, despite a fall in subsidy-sharing, the net realisations of PSU upstream companies decreased to $35-37 a barrel due to a sharp fall in gross realisations at $75-76 in the third quarter from $101-102 in the second quarter of 2014-15. Thus, the profits of ONGC and OIL decreased materially in the third quarter despite a fall in the absolute burden. The share of GAIL was lower at Rs 1,000 crore in April-December 2014, against Rs 1,400 crore in the corresponding period of 2014-15.
Refining companies' inventory losses stood at Rs 30,000 crore in the third quarter, owing to a decline of about 40 per cent in international crude oil prices during the quarter. Added to this were foreign exchange losses due to a depreciating rupee against the dollar.
Ravichandran says the falling underrecoveries are leading to a decrease in borrowing levels and the interest burden, resulting in an improvement in profitability and liquidity position of OMCs.
