Mixed bag seen for oil and gas sector
New Delhi   24-Jul-2010

The Q1 2011 numbers for the oil and gas pack started trickling in this week.

The prospects of private sector players such as Reliance Industries and Cairn India look good, on the back of increased production compared with the year-ago period.

On the other hand, public sector oil companies, especially the downstream players may get bogged down by higher under-recoveries. Overall, Q1 2011 is likely to be a mixed bag for the oil and gas sector.

Surging flows

The ramp-up in its KG-D6 gas output over the last year (in excess of 60 million metric standard cubic metres a day (mmscmd) currently) is likely to reflect strongly in the Q1 results of Reliance Industries.

Also, increasing differential in light-heavy crude will benefit Reliance with its high complexity refineries. This, even as gross refining margin (GRM) for most other players is likely to be under pressure due to higher utililisation of refineries and lower cracks on most fuels. The positives are expected to more than offset the weakness in Reliance's petrochemicals business.

The increase in gas output also augurs well for players across the sector value-chain. For instance, gas transmission companies such as GSPL and GAIL are likely to benefit from the increase in volume flows in Q1 2011 compared with the corresponding quarter last year.

Also, Indraprastha Gas, the monopoly city gas distributor in Delhi, which has started sourcing KG-D6 gas to meet buoyant demand, is likely to benefit, given its high pricing power.

Similarly, Cairn India is likely to put up a good show on a y-o-y basis with significant growth in crude oil production.

The company commenced production in its Rajasthan fields in August 2009, and currently produces around 1 lakh barrels of oil per day (bopd).

Also, improved crude oil realisations and the commencement to the transportation pipeline in the current quarter bode well.

ONGC, the 30 per cent partner in the Rajasthan fields, will also benefit from these developments.

Subsidy drag

On the other hand, public sector oil and gas majors are likely to be plagued by the subsidy overhang.

High crude oil prices in Q1 2011 (compared with Q1 2010) may see net realisations for the upstream companies (ONGC and Oil India) decline, due to increased discounts provided to downstream companies.

GAIL too is likely to bear the brunt, given that it continues to be a part of the subsidy sharing mechanism, contrary to expectations. These companies together are expected to contribute in excess of Rs 6,000 crore towards subsidies in Q1.

This, combined with the closure of the Numaligarh refinery for most part of the quarter is expected to adversely affect the performance of ONGC and Oil India.

However, the quarter had more than its share of good news for the upstream companies, which is expected to mitigate the effect of the headwinds.

Among these are the more than doubling in price for gas under the administered pricing mechanism (APM) in late May, and provision of marketing margins for GAIL on APM gas.

The beneficial effect of fuel price reforms will, however, be minimal in the Q1 results, given that it came in the fag end of June.

The public sector downstream majors (IndianOil, BPCL and HPCL) are also likely to be dragged down by much higher under-recoveries in Q1 2011 (in excess of Rs 10,000 crore) compared with Q1 2010.

Though they may be compensated to a good extent by the Government, this will come only at an uncertain later date (mostly towards the end of the fiscal).

Pressure on refining margins may further compound the negative effect on the downstream majors.