Australia
China
India
Indonesia
Japan
Malaysia
Philippines
Singapore
South Korea
Taiwan
Thailand
Vietnam
Rising oil and gas prices have hit global growth prospects as economies struggle to keep up with the resulting inflation. While the wider economy battles higher input costs, India energy firms are gearing up to rake in hefty profits on the back of higher oil and gas prices.
Back in April, the Indian government increased the gas price paid to producers to a record high of $6.10 per mmBtu (up from $2.90 mmBtu), whereas for difficult gas fields the price rose to $9.92 mmBtU (up from $6.13 mmBtu). On the other hand, high oil prices in the global market are benefitting both upstream and downstream companies, whereas distribution companies and consumers face margin pressures.
Beneficiaries in India’s energy sector
As India battles rising inflation and slowing growth, the sky-high oil prices have turned out to be a boon for state-owned and private companies. ONGC, Oil India, and Reliance Industries are the upstream firms that are likely to see hefty profits.
Last month, state-owned ONGC said it is likely to see revenue growth of $3 bn for the year as natural gas prices more than doubled, whereas Reliance expects $1.5 bn in additional revenue.
“A three-pronged deficit in oil markets (inventory, capex and spare capacity) combined with rising domestic gas production after nearly a decade of declines sets the stage for a super-cycle in profitability,” Morgan Stanley said commenting on Indian energy firms.
India fixes its gas prices based on a formula using prices of the previous 12 months around global gas hubs, with a lag of one quarter. The country is the world’s second-largest importer of gas, and sources over half of its supply from Qatar, Angola, Nigeria, and UAE, among others.
“We do not expect any substantial demand erosion from the transportation sector as CNG (compressed natural gas) will still be competitive compared with petrol and diesel. We also expect domestic PNG to remain competitive vis-a-vis domestic LPG despite any price hike,” Indian government’s research organisation CRISIL Director Hetal Gandhi told a domestic news agency.
While demand is expected to stay on track, higher gas prices will have a negative impact on other industries – such as the fertilizer sector. “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,” said Mohit Soni, Director at Fitch India Services (Fitch Ratings), in a note. The rating firm acknowledged that the higher gas prices would fill the coffers of Indian upstream companies and support their investment spending and shareholder distributions.
Additionally, Fitch sees a positive outlook for natural gas producers for the rest of the year, as it expects India to raise prices again in the following rate revision scheduled in October 2022.
Oil India Ltd, the second-largest oil and gas producer owned by the state (after ONGC), in February had reported a 37% jump in its quarterly profit on the back of rising international oil prices. The total income of the company jumped 88% in the three-month period ended December 31, 2021. It is due to report its fourth-quarter profit soon.
India’s local news publications reported that following the gas price rise, brokerage houses such as Nomura, CLSA and Morgan Stanley see up to 160% upside in oil and gas stocks. Nomura also said it expects a 47% upside for Indraprastha Gas.
What about Indian refineries?
“Recovering domestic demand and good export margins, especially for gasoil, which is the major product of the Indian refineries, will keep Indian refinery runs high in 2022,” said S&P Global’s Shreyans Baid, Platts Analytics’ oil analyst for South Asia. “We expect that Indian refinery runs in 2022 will be better than 2021 by about 8%.”
Indian refiners’ average run rates during April 2021 to March 2022 stood at 97%, higher than the previous year’s 89%, data from India’s oil ministry showed. However, in March 2022, state refineries recorded an average run rate of 114%. “Refining companies are currently enjoying higher gross refining margins which will support higher refinery run rates,” Sumit Pokharna, vice president at Kotak Securities, tells S&P Global.
Additionally, a roundup by local publication The Economic Times showed that downstream players are likely to report significant gains from inventory sales. These companies include Indian Oil, Bharat Petroleum, and Hindustan Petroleum.
“Surging demand in domestic and export markets offers an attractive growth opportunity for Indian refineries to stay competitive and be able to meet ever-tightening emission standards,” Gurmeet Singh, head of the Federation of Indian Petroleum Industry (FIPI) told S&P Global in an interview.
The impact on India energy sector
While the FIPI head acknowledged the gains for Indian oil and gas producers, Singh said that India’s refining sector needs to diversify into petrochemicals and alternate fuels to adapt to the changing energy landscape and emission norms.
“Tapping into the low-cost alternatives and syncing them with the refining and petrochemical industries will be steps toward carbon neutrality,” Singh tells S&P.
India is home to 18% of the world’s population but accounts for a mere 7% of the world’s energy demand, leaving ample room for energy demand growth as the standard of living increases.
From an investment perspective, the majority of the funding required to meet India’s ambitious plan of going net-zero by 2070 will come from bond markets. “By our estimates, 70-75% of the capital needed for renewable generation projects will likely come from debt, with equity investment making up the rest. Overseas bond markets are a crucial source of funds,” asset management firm abrdn said in a note.
Several Indian energy companies are already exploring alternative fuels. Reliance in January announced a $75 bn plan to make India a hydrogen hub.
“The transformation of the fossil fuel-based energy system in India has only just begun. We expect to see increasing innovation and efficiencies as the sector expands,” said abrdn.
