Natural gas price increase positive for upstream producers in India


The 62 percent increase in natural gas prices by the Indian government will boost the profitability of upstream companies in the country and support their investment spending, says Fitch Ratings.

The price for gas from fields that were assigned by the state to oil companies, mainly state-owned Oil and Natural Gas Corporation Limited (ONGC) and Oil India, increased to USD2.90 per million British thermal units (mmBtu) for October 2021-March 2022 from USD1.79 per mmBtu in April 2021-September 2021.

ONGC’s and OIL’s ratings and Standalone Credit Profiles (SCP) remain unchanged as the price increase was largely in line with Fitch’s expectations, driven by the rise in global prices over July 2020-June 2021. However, sustained high gas prices will strengthen ONGC’s ‘bbb+’ SCP and add buffer to OIL’s credit metrics, which will support its capex to expand capacity at subsidiary Numaligarh Refinery Limited.

The government also increased the price ceiling for gas produced from deepwater and other difficult fields to USD6.13 per mmBtu from USD3.62 per mmBtu. Reliance Industries Ltd’s (RIL, BBB/ Negative) gas production from KG basin will benefit from the higher price ceiling, but the impact on RIL’s financial profile is minimal as gas makes a limited contribution to its revenue.

ONGC’s net leverage, measured by net debt/EBITDA (including ONGC Petro Additions Limited (OPAL) on a fully consolidated basis), will improve to around 2.1x in the financial year ending March 2022 (FY22) from 2.7x in FY21 as upstream earnings recover and downstream earnings stay resilient. Natural gas’ share of consolidated revenues is in the mid-single digits for ONGC, given its integrated business model.

OIL’s FY22 leverage to be 1.9x, comfortably within our negative rating threshold, but leverage could come close to our negative sensitivity of 3.0x in FY23, as its capex intensity increases. Natural gas accounted for about 13 percent of OIL’s upstream revenue in FY21.

Higher gas prices will increase the input cost for key end-consumer sectors, to the extent the price hike is passed on. Domestically produced gas is supplied on a priority basis to certain sectors, with 30 percent of it consumed by power producers, around 27 percent by the fertiliser sector and 19 percent by city gas distributors in FY21.

The gas price increase will hit the fertiliser sector’s profitability by increasing working-capital requirements. Auto gas fuel’s price will remain competitive against liquid fuels, albeit with a reduced differential, notwithstanding the gas price increase. This is because liquid auto fuel prices have also been climbing in recent months, given the rise in crude oil prices. The cost of power generated by gas-based power plants will increase, which will further decrease their utilisation.