CRISIL analysis: Oil, gas use to see 10-15% rise in FY24 amid sector growth

Expansion of city gas distribution (CGD), increased activity in refineries and petrochemicals sector, and higher power generation amid moderating gas prices will support a broad-based increase in consumption of natural gas in India through the next financial year.
 

Overall, consumption is estimated to rise 10-15 per cent in the financial year 2023-24 (FY24) and 5-10 per cent in FY25.

Multiple supporting factors are at play here, including deepening penetration, moderating prices and growing segmental consumption. Lower gas prices, both domestically and globally, coupled with enhanced domestic availability, are also expected to support demand growth.
 

The trends indicate a positive trajectory across various segments of natural gas consumption.

CGD is expected to log a 10-15 per cent growth in FY24, with the compressed natural gas (CNG) segment growing 10-15 per cent, domestic piped natural gas (PNG) segment up 5-10 per cent, thanks to pricing reforms, and the industrial PNG segment staging a rebound with 12-17 per cent growth. 
 

Gas prices have witnessed significant volatility over the past two calendar years. In 2022, geopolitical circumstances caused a spike, with global liquefied natural gas (LNG) prices peaking at $30 per MMBtu.
 

Subsequently, high inventory and demand destruction in the European markets led to a sharp fall of 55 per cent to an average of $13-14 per MMBtu in 2023. In 2024, gas prices are expected to remain at a similar level, averaging $10-15 per MMBtu.

The inherent volatility in the LNG market, exemplified by the potential strikes at Australian LNG terminals in 2023, indicates the sector's susceptibility to external events.
 

Credit profiles seen stable for CGD players despite rising capex
 

Healthy volume growth this financial year and the next, coupled with a stable outlook for domestic gas prices, following implementation of the new pricing mechanism since the beginning of this financial year, will drive margin expansion and a significant improvement in cash accruals for CGD players, bolstering their business strength.
 

At the same time, capital outlay for these players is seen rising to nearly Rs 25,000 crore annually, up from Rs 20,000 crore annually over the past three years. This comes as they progress towards the achievement of minimum works programme targets, especially for the geographical areas allotted during the 10th and 11th rounds of bidding.
 

Resultantly, interest coverage and the net debt-to earnings before interest, tax, depreciation and amortisation (Ebitda) ratios will moderate to 16-17x and 1.0x, respectively, during financial years FY24 and FY25, compared with 20.0x and 0.9x, respectively, in FY23.
 

However, improving operating performance of these companies, combined with the modular nature of capex, will keep the overall credit outlook stable for CGD players over the near-to-medium term.
 

Consumption of petroleum products to spurt, crude oil prices ebb in FY23
 

Consumption of petroleum products in India is expected to increase 5 per cent in the current financial year and 3-5 per cent in FY25, to breach pre-Covid-19 levels. The growth, a shade below 9 per cent in FY23, is primarily supported by recovery in consumption of industrial fuels and continued growth in transportation fuels.
 

The transportation fuels (58-60 per cent of consumption) segment is poised to witness a 4-6 per cent growth in FY24, followed by an estimated 3-5 per cent increase in FY25, driven by expansion in personal mobility and per-capita consumption. Industrial fuels (16-18 per cent of consumption) may increase 6-8 per cent in FY24 and 5-7 per cent in FY25, riding on a revival in petrochemical production and improving road construction initiatives.
 

Crude oil prices (dated Brent) are expected to average $82-84 per barrel in 2023, representing a substantial decline of 15-20 per cent from the peak in 2022. The prices are mainly supported by balancing of global crude oil trade, steady production from the US and lower-than-anticipated demand from China and Europe. In 2024, global crude oil prices are expected to remain range bound due to the hawkish OPEC+ initiatives to moderate supply — continuation of this policy will be a key factor impacting prices next year.
 

However, the impact of the West Asia conflict and its spillover into the Red Sea will need to be monitored.
 

Credit profiles to remain stable; operating margins to improve credit metrics

Crude oil prices have moderated in FY24 and are likely to remain range bound in FY25, too. This has boosted the profitability of oil refiners and marketers. While gross refining margins remain healthy, marketing margins have also improved in FY24 as retail fuel prices were stable despite lower crude oil rates.
 

Assuming the retail prices of key fuels such as petrol and diesel remain unchanged in FY25, marketing margins, too, will remain stable.
 

Therefore, key credit metrics such as the interest coverage ratio as well as gearing will improve significantly in FY24 to around 10.0x and 1.4x, respectively. This compares with Rs 3.0x and 7.0x in FY23, and should remain comfortable through FY25 as well. Further, healthy balance sheets of these companies and the expected healthy operating performance will lend stability to the overall debt metrics of the sector over the near-to-medium term despite higher capex intensity. The sector’s ratings factor its criticality to the economy as well as government support. As a result, the credit profiles of oil refiners and oil marketing companies (OMCs) will remain stable over the near-to-medium term.

 

Energy transition gathering pace
 

Over the medium term, on-ground implementation of announced government schemes and private-sector initiatives will shape the direction of energy transition. Initiatives such as the National Green Hydrogen Mission — it has an initial allocation of Rs 19,744 crore and is primarily aimed at increasing domestic electrolyser manufacturing and hydrogen production — and a government equity infusion of Rs 30,000 crore for OMCs in Union Budget 2023-24 will play a key role. Additionally, mandatory blending obligations on compressed biogas, starting from 1% in fiscal 2025 to 5% by fiscal 2029, are set to create a circular economy, curbing import reliance and contributing to India's netzero agenda.

The indicative target for blending 1% of sustainable aviation fuel with aviation turbine fuel on international flights by fiscal 2027 is an initial step towards curbing pollution. Substantial investments in the CGD ecosystem (CNG stations to double by fiscal 2028), scaling up of biofuel capacity, higher electric vehicle or EV adoption (passenger EV penetration to increase to 10-15% by fiscal 2028 from 2% currently), and the strategic transition from conventional refining to an integrated oil-to-chemical model are expected profoundly redefine India’s oil and gas landscape in the long run.