Soft crude prices to keep outlook for Indian upstream sector negative: Icra

OPEC had agreed to cut total crude oil production of its member countries by 1.2 mn a day

Outlook for the Indian upstream sector remains negative for the near to medium term due to soft crude prices, rating agency ICRA said in a note on Monday.

“The Indian upstream and oilfield sector is going through tough times, impacted by the challenging environment due to the soft global crude prices. This situation will continue in the near to medium term, despite a modest increase in crude prices post-Organisation of the Petroleum Exporting Countries (OPEC) deal,” ICRA said in its statement. The rating agency expects the profitability of domestic upstream companies, to be subdued in the near to medium term.

OPEC had in November agreed to cut total crude oil production of its member countries by 1.2 million barrels per day (mbpd) from January 2017 which had led to a spike in global crude oil prices by Rs 15-20 per cent to levels of $55-57/barrel. “However this rise in prices has largely been reversed due to increased production of shale oil by the US and by OPEC members — Iran, Libya and Nigeria who were exempt from the deal. Currently, crude oil prices are hovering around $47-48/bbl (beginning July) as a result of oversupply in the global crude oil market,” ICRA further added.

“A key sensitivity for the prospects of the upstream sector in the medium term will be sustained recovery in crude oil prices, which appear unlikely in the near term with the market in the midst of rebalancing with competing forces at work,” said K. Ravichandran, Senior Vice President, Group-Head, Corporate Sector Ratings, ICRA.

In addition, the rating agency does not see any tailwinds for the gas segment in India. “The fall in the domestic gas price in the first half of FY18 would adversely impact profit levels of the upstream players. However, PSU upstream companies are likely to benefit with a nil under-recovery sharing burden (till crude oil prices of US$ 60/bbl) as per the existing subsidy-sharing formula,” Ravichandran said.

On any upside in crude oil production in India in the medium term, ICRA said, “ The same may be driven by Vedanta Limited ramping up production of its Rajasthan assets, ONGC commercialising its marginal fields, in addition to the enhanced oil recovery/improved oil recovery initiatives of ONGC and OIL. Vedanta plans to invest $3 billion over three years to raise the production of its Barmer field to 300,000 bopd from 160,000 bopd in FY17.”

Weak crude prices, however, is expected to lead to a further decline in gross under recoveries for oil marketing companies (OMC)s. “ICRA projects gross under-recoveries (GUR)s of OMCs to decrease to Rs 15,000-18,000 crore for FY18 (with average Indian basket crude oil price of US$50-55/bbl and INR/US$ of 65.5 for FY18) following soft crude oil prices, regular increase in retail prices of sensitive products and anticipated fall in sales volumes of subsidised kerosene,” the note said.