Windfall awaits oil companies as under-recoveries to dip 58%: Report

 Oil companies are poised for a windfall as under-recoveries are set to drop by a massive 58 % to Rs 30,000 crore in 2015-16 from Rs 72,300 crore in the previous fiscal on the back of plummeting crude prices and increased penetration of direct cash transfers, says a report.

Under-recoveries (the gap between retail selling price and the cost of import) of state-run oil marketers will fall by 58% if the average Indian basket crude price remains at US$ 51 a barrel and the rupee trades at 65 to the dollar, rating agency Icra said in a report today. Already, under-recoveries of oil companies have come down 69% in first half of the current fiscal to Rs 15,940 crore from Rs 51,110 crore a year ago following near halving in the average price of Indian basket crude during the period, coupled with direct cash transfer scheme, it said.

During the first half of this fiscal, the Indian basket crude prices fell 47%, while direct cash transfers rose for LPG and kerosene. Also, diesel under-recoveries came to an end. This led to a whopping 69 % fall in under-recoveries to Rs 15,940 crore in the first half of this fiscal from Rs 51,110 crore, Icra said. Government plugging loopholes in LPG subsidies also helped. Now, with the government banning those earning more than Rs 10 lakh per annum from LPG subsidy from next month, the under-recoveries will come down further.

Already, over 20 lakh households have voluntarily given up their cooking gas subsidy and there are over 20 lakh people who earn over Rs 10 lakh annually, it said.
Under-recovery sharing of upstream players like ONGC and OIL too came down drastically to Rs 1,980 crore from Rs 3,190 crore in H1, while for the upstream companies the share was a paltry 12 % on a lower under-recoveries against 62 % in the first half of 2014-15.

Similarly, under-recoveries of upstream companies, in terms of discount, has been significantly lower at around at US $ 3.5 a barrel in H1 as against US $ 56 a barrel a year ago. This was more pronounced in the second quarter at US $ 2-2.5 a barrel from US $ 56 a barrel, the report said.

Also, in line with falling crude prices, gross realisations of upstream companies declined by 45 % in H1. But due to a material fall in subsidy burden, net realisations showed an improvement in H1 on an annual basis.
However, in Q-o-Q terms, gross realisations of upstream companies came down by US $ 13 a barrel in the second quarter, leading to fall in net realisations by US $ 10-11 a barrel, it said. 

In absolute terms, subsidy burden of ONGC came down by a whopping 93.6 % to Rs 1,730 crore in H1, while that of OIL fell by 93.8 % to Rs 250 crore, the Icra report said. It can be noted GAIL is exempted from under-recovery sharing since Q3 of FY15 and this is likely to continue.

In August, the government said it would share under- recovery up to Rs 12/litre on PDS kerosene, while the balance will be borne by the PSU upstream companies. With regards to domestic LPG, it approved a fixed subsidy capped up to Rs 18/kg under the direct benefit transfer scheme, which translates to Rs 255.6 per cylinder. Following this announcement, the under-recovery burden on upstream companies is expected to significantly come down in 2015-16.

Icra estimated the upstream discount going forward in the near to medium term will be low, ranging from nil to US $5 a barrel for gross crude oil realisations of US $35 barrel to US $60 a barrel. But the report warned their profits may still decline if crude oil prices sustain at current low levels. Crude prices are trading at US $35-40 a barrel since the past many weeks and many are betting at US $20 soon - a steep fall from US $55-60 in the beginning of the year and from US $114 from June 2014, when the prices began to nosedive.

Prices are expected to remain at low levels in the near term because of high supplies, modest global demand and the decision of OPEC to defend market share. "Besides, fall in domestic gas prices this April and subsequently again this October will lead to deterioration in the profitability of the upstream players during FY16," Icra warned.

However, the report said it expects a marginal upside to crude oil production in 2016 following the conducive policy environment in the country such as auction of small and marginal fields. Icra believed several of these new measures proposed in the consultation paper are in keeping with the long standing demand of the incumbents and are in line with the global best practices in the E&P sector. The consultation paper on new fiscal and contractual regime for award of hydrocarbon acreages is also a step towards overhaul of the E&P sector, it said.