Moody's: Delay in Indian gas price hikes halves the expected increase revenues of upstream producers

Moody's Investors Services says it estimates that the Indian government's (Baa3 stable) decision to delay, by a further three months, the increases in domestic natural gas prices will halve the increase in revenues for fiscal year ending 31 March 2015 that upstream producers would have achieved if the price hikes were implemented from 1 April 2014.

"The government's decision to implement the gas price increases only at the end of September 2014 is credit negative for the country's upstream gas producers," says Vikas Halan, a Moody's Vice President and Senior Credit Officer.

"Oil and Natural Gas Corporation, Oil India Limited, and Reliance Industries Limited will be adversely affected because increases in their revenues and EBITDA that would have resulted from the revised prices are further delayed," adds Halan.

"If prices had risen from 1 April 2014, Oil and Natural Gas Corporation's revenues for the fiscal year ending 31 March 2015 would have increased by about $3.3-$3.7 billion. Similarly, Reliance Industries' revenues would have grown $400-$450 million over the same period, and Oil India's by $280-$310 million."

Under India's new pricing formula, if the rises had gone ahead on 1 April 2014, then domestic natural gas prices would have nearly doubled by now to $8.0-$8.4 per million British thermal units (MMBTU) from the current $4.20/mmbtu.

"Increases in revenues for all three companies could be even higher over the next few years, as the production of domestic gas increases with new discoveries, and assuming the government's new formula for reviewing gas prices is implemented," says Halan.

"We expect that every billion cubic meters of gas produced will result in incremental revenue of $135-$150 million," adds Halan.

"The new government in India has also announced that it would review the gas pricing formula which had been approved by the previous administration. For our rated issuers, this means concerns that the resulting prices could be even lower than those calculated under the existing formula. Already, the current formula puts domestic prices well below current import prices of $15-17 per mmbtu."

Moody's points out that the ongoing delay in price hikes and the uncertainty around the likely resultant prices will discourage upstream producers from further investments in exploration and production in India. At risk are large planned investments in offshore oil and gas fields, which are not commercially viable at current prices.

Moody's further points out that the government's decision to delay increases in domestic natural gas prices until end-September 2014 is the second such delay. The original implementation date of 1 April 2014 was pushed back because of parliamentary elections in April and May.

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