India's Decision to Delay Gas Price Hike Is Credit Negative

Moody's launches Asia Oil & Gas Quarterly

Moody's Investors Service has announced the launch of its Asia Oil & Gas newsletter, a new quarterly publication focusing on credit themes in Asia's oil and gas industry.

"Moody's Oil & Gas Quarterly offers a focused credit insight into developments within the oil and gas sector in Asia, particularly those affecting Moody's 32 rated corporates," says Vikas Halan, a Moody's Vice President and Senior Credit Officer.

Moody's Oil & Gas Quarterly incorporates three feature articles on current market trends and credit topics along with a selection of Moody's rating and research activities in the past quarter.

The inaugural edition featured an article on the Indian government's decision to delay the increase in natural gas prices.

"The delay in gas price hike which was scheduled to take effect from 1 April 2014 is credit negative for Indian upstream companies, as these firms will continue to see revenues negatively impacted by the controlled prices," says Halan.

"We estimate the upstream companies will lose about $10-12 million of revenue for every billion cubic meters of gas produced each month the price hike is delayed," adds Halan.

India's Decision to Delay Gas Price Hike Is Credit Negative

The Indian government's decision to delay the increase in natural gas prices until after the elections in May is credit negative for the country's upstream companies as their revenues and EBITDA will continue to be negatively impacted by the controlled prices. Furthermore, it is uncertain whether gas prices will ultimately be increased as the decision will be made by the new government.

We had projected combined revenues of the upstream companies to rise by up to $2.8 billion had the price hike been implemented on April 1, as scheduled. We expected Oil and Natural Gas Corporation's (ONGC, LC:Baa1 stable; FC: Baa2 stable) revenues to increase by $1.5-$2.0 billion; Reliance Industries Limited's (RIL, LC: Baa2 positive; FC: Baa2 stable) revenues to increase by $300-$500 million and Oil India Limited's (OIL, LC & FC: Baa2 stable) revenues to increase by $200-250 million in the fiscal year ending 31 March, 2015, based on our estimates of their gas production between April 2014 and March 2015.

We estimate the upstream companies will lose about $10 million -$12 million of revenue for every billion cubic meters of gas produced each month the price hike is delayed.

The delay also highlights regulatory risks faced by companies in India. Even though the gas price hike was announced well before the elections in June 2013, the decision to postpone the price hike was taken only a week before its scheduled implementation. The government had been asked by the country's Election Commission to delay the gas price hike due to the upcoming elections.

Failure to raise gas prices will hurt the operational performance of the upstream sector in India and discourage further investments to explore and develop gas fields. The cost of exploration and production has increased over the past five years, while the price of natural gas in India has remained unchanged.

The government estimates total demand for natural gas in India at about 100 million tons in fiscal 2014, and expects domestic production and imports of LNG of around 25-30 million tons and 10-15 million tons, respectively. This would leave an unmet demand of 55-65 million tons for the fiscal year.

Over the next 10 years, the government expects demand to increase at a compounded annual growth rate of 8%. However, domestic production has been on a declining trend, which would mean a widening gap between production and unmet demand.

In terms of market trends, Moody's says that the Dubai crude oil price in the first quarter of 2014 was largely flat at an average of $104.4/barrel.

"The Asian refining margin remained stable at above $6/barrel throughout the quarter, driven by healthy demand for gasoline and middle distillates ahead of the upcoming heavy refinery maintenance season in the second quarter," says Rachel Chua, a Moody's Associate Analyst.

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