 "Fitch Ratings")
The more than doubling of natural gas prices and rise in oil prices will boost the profitability of oil and gas producers like ONGC and Reliance Industries Ltd, Fitch Ratings said on Tuesday.
From April 1, the government has raised the price of gas for old fields of state-owned Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL) to USD 6.1 per million British thermal unit for April-September 2022 from USD 2.9.
The rate for difficult fields of deepsea KG-D6 of Reliance has gone up to USD 9.9 per mmBtu from USD 6.1.
The "increase in natural gas prices by the Indian government, along with a recent revision in our Brent crude oil price assumptions to USD 100 per barrel in 2022, from USD 70 earlier, and USD 80 in 2023, from USD 60 previously, will boost the profitability of rated Indian upstream companies and support their investment spending and shareholder distributions," Fitch said.
The rise in prices "should improve the upstream companies' profitability from gas fields where domestic prices were below the cost of production," it said.
The domestic price is based on the prices of four global liquefied natural gas benchmarks of the last 12 months, implemented with a quarter's lag.
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"We also expect prices to be revised higher in the next reset in October 2022 in light of the high gas prices to date," it said.
Fitch said the natural gas price increase was largely in line with its expectations, driven by the rise in global prices in 2021.
High gas prices add a buffer to OIL's credit metrics for supporting its capex to expand capacity at its subsidiary, Numaligarh Refinery Ltd.
"Reliance Industries Ltd's and ONGC's gas production from the KG basin will benefit from the increase in the price ceiling (for deepwater and other difficult fields), though the impact on their financial profiles is minimal, given the limited contribution to total revenue," it said.
ONGC and RIL continue to have ample headroom under the sensitivities of their standalone credit profiles.
Higher oil and gas prices will raise the input cost for key end-consumer sectors to the extent the price hike is passed on. The increase will also be reflected in the escalation in other costs related to transportation and insurance.
Domestically produced gas is supplied on a priority basis to certain sectors, with power producers consuming 30 per cent, the fertiliser sector around 27 per cent and city-gas distributors 19 per cent in FY21.
"The gas price increase will hit the fertiliser sector's profitability by increasing working-capital requirements, which is also facing higher import costs due to rising crude oil prices.
"Auto gas fuel prices may be increased but should remain competitive against liquid fuels, albeit with a reduced differential as liquid auto fuel prices also rise with increasing crude oil prices. The cost of power generated by gas-based power plants will increase, further affecting their utilisation," Fitch added.
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