• OUTLOOK ARENA
  • VIEWS ON NEWS
  • JANUARY 14, 2008

Outlook on the Indian energy sector

Upstream
India is a highly under-explored country in terms of hydrocarbons and the recent huge discoveries in the KG, Mahanadi and Cauvery basins are just a tip of the iceberg. They add to the mounting evidence of the success of the NELP rounds. Upstream majors ONGC and RIL are more aggressive than earlier in moving ahead with their exploration activities and joint ventures. With NELP VII underway, more acreage will come under exploration and the participation of global majors enhances the chances of discovery. The deployment of deepwater and ultra deepwater technologies along with development of marginal fields has become viable as the crude oil (Brent) price records new highs at around US$ 98 per barrel. Efforts in commercialising alternative sources, such as coal bed methane (CBM), also present a potential upside.

However, the ad-hoc subsidy sharing agreement makes it difficult to gauge the impact of the same for state owned upstream players like ONGC. Although realisation per barrel for the company has increased indicating the company's participation in the upward movement of crude, the subsidy-sharing formula caps the topline growth.

Midstream
There exists immense demand for the bulk natural gas in the country, especially from the fertiliser and power sectors. Enhanced supplies of the same will lead to significant growth in volumes transmitted. GAIL, by virtue of being the largest player in the segment is set to benefit from the same. However, we expect the government regulated transmission tariffs to remain sluggish because the wellhead price for KG basin gas is already higher than what the fertiliser industry can absorb.

As far as imported LNG is concerned, its economic rationale will get weaker as and when further domestic discoveries of natural gas are made and come on stream.

Expansion of the user base (from conversion of private cars) in the city gas distribution (CNG segment) is expected to propel existing players like IGL and the upcoming joint ventures in the space. The companies will also stand to gain from the benefits of scale on the back of higher CNG volumes expected to accrue in the future. The PNG segment is also likely to grow, at least in the major urban centers, due to the greater convenience over LPG delivered in cylinders.

Downstream
The crack spread (the spread between the price of crude oil and final products extracted) will remain the key variable for refining companies. Refinery complexity and a superior product mix will help achieve better gross refining margins. Economies of scale will also play a decisive role. Towards these ends, state refiners are increasing the complexity and capacity of their units. However, RIL and RPL have head starts in these parameters.

PSU oil marketers will continue to be sandwiched between high input costs and government intervention in selling prices in the form price cap and subsidies. The regulated prices provide consumers with little incentive to drive less even as the oil price surges and as a result, artificially inflate the demand for fuel. Although positive noises are being made about a price hike; it's likely to be a case of too little too late with the general elections approaching. Companies will look towards exporting petroleum products to escape the situation.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407