High oil and gas prices support upstream profitability of producers: Fitch

A more than doubling of natural gas prices and higher oil prices will boost the profitability of oil and gas producers such as ONGC and Reliance Industries Ltd., Fitch Ratings said on Tuesday.

From April 1, the government raised the gas price for the old fields of the state-owned Oil and Natural Gas Corporation (ONGC) and Indian Oil Corporation Limited (OIL) to US$6.1 per million British thermal units in April-September 2022 from US$2.9. .

Reliance’s KG-D6 Deep Sea Challenging Fields rate increased to $9.9 per million British thermal units from $6.1.

“The increase in natural gas prices by the Indian government, together with the recent revision in our assumptions for Brent crude oil prices to $100 per barrel in 2022, from $70 earlier, and $80 in 2023, will boost the Previously $60. Profitability of Indian classified exploration and production companies, support for their investment spending and shareholder dividends.

She added that the price hike “should improve the profitability of exploration and production companies from gas fields where local prices were lower than the cost of production.”

The domestic price is based on the prices of four global LNG standards over the past twelve months, which were implemented with a quarterly difference.

“We also expect prices to be revised upwards in the next reset in October 2022 in light of higher gas prices so far,” she added.

Fitch said the increase in natural gas prices is largely in line with its expectations, driven by higher global prices in 2021.

Higher gas prices are adding a buffer to OIL’s credit metrics to support capital for its capacity expansion at its subsidiary Numaligarh Refinery Ltd.

“Reliance Industries Ltd and ONGC’s gas production from the KG Basin will benefit from an increase in the price ceiling (in deep water and other challenging fields), although the impact on their financial profiles is minimal, given the limited contribution to total revenue,” he said.

ONGC and RIL still have a lot of room under the sensitivities of their independent credit profiles.

Higher oil and gas prices will increase the cost of inputs to key final consumer sectors to the extent that price increases are passed on. The increase will also be reflected in higher costs related to transportation and insurance.

Locally produced gas is provided on a priority basis to certain sectors, with energy producers consuming 30 percent, the fertilizer sector around 27 percent and urban gas distributors 19 percent in FY21.

“The increase in gas prices will affect the profitability of the fertilizer sector by increasing working capital requirements, which is also facing higher import costs due to higher crude oil prices.

“Car gas fuel prices can be increased but should remain competitive against liquid fuels, albeit with a low margin as liquid car fuel prices will also rise with the increase in crude oil prices. The cost of energy generated from gas-based power plants will increase, affecting More importantly, Fitch added.

(The title and image for this report may have been reformulated only by the Business Standard staff; the rest of the content is automatically generated from a shared feed.)

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