-
OPINION: Oil & Gas sector to post robust volume growth in FY22; Expect more tax incentives in budget
The Covid-19 pandemic and subsequent lockdowns coupled with economic slowdown had severely impacted the demand for petroleum oil products which are now on a firm recovery path. The demand for these products is expected to register robust growth of 8-10% over FY2021 levels. The demand for Aviation Turbine Fuel (ATF) will however, remain a key laggard in view of flight operations and air travel restrictions. Its demand is expected to remain significantly below pre-Covid levels in FY2022. Better days ahead are also expected for refineries and their capacity utilisations will be healthy, though gross refining margins will remain subdued owing to global supply overhang amid demand recovering from the pandemic.
As for the demand for natural gas, the same is expected to expand by ~10% in FY2022 driven by commencement of operations by several fertilizer plants, increase in city gas distribution (CGD) operations as several GAs complete their initil infrastructure building phase and new customers getting connected to the gas grid post the expansion in the trunk pipeline network. More importantly, after years of decline in domestic gas output, production is set to rise significantly owing to commencement of production from the KG basin fields of ONGC and RIL-BP. On the flip side, despite production increases, domestic gas prices as per the modified Rangarajan formula remain extremely low ($1.79/mmbtu for H2 FY2021) and a loss-making proposition for production from even benign geologies. Regarding upstream producers, their margins are estimated to rise significantly in FY2022 over FY2021 due to higher average crude oil prices.
The gas utilities sector too will witness healthy margins in the next fiscal owing to regulatory protection or dominant market position of most entities in the sector. Some of the new pipelines though are expected to be sub-optimally utilised in the initial years owing to lack of adequate volumes. The Unified Tariff regime implemented by the PNGRB while revenue neutral for the natural gas pipeline operators reduces the tariff paid by far off consumers.
Players are expected to cover the lost ground due to restrictions and lockdowns in FY2021 and go for healthy capex and investments in FY2022. However, debt levels are expected to decline in FY2022 to around Rs. 4.9 lakh crore by FY2022 end from Rs 5.8 lakh crore at FY2021 end. The credit metrics (interest coverage – 7.3x and debt/OPBDITA – 2.0x) too are likely to improve in coming year due to a decline in debt levels and improvement in profitability.
Higher crude oil realisations, stable returns from pipelines, healthy demand growth, dominant market position, strong financial flexibility and headroom in key credit metrics will result in stable credit profile of the players’ in the oil and gas sector.
Coming to industry’s budget wish list, given the weak outlook for international gas prices, players expect a provision of a floor for domestic gas prices. Additionally, they want 20% ad-valorem cess on crude oil production to be reduced as it curtails realisations and cash accruals of upstream companies in a high crude oil price regime. Also, to promote the use of natural gas as fuel, the incumbents want Liquified Natural Gas imports be exempted from customs duty as crude attracts nil duty while LNG demands 2.5% duty. Further, due to crude oil, natural gas, HSD, MS and ATF being out of the ambit of GST, the oil industry is faced with stranded taxes and burden of compliance with a dual taxation regime. Accordingly, they expect crude oil, natural gas and petroleum products to be brought under GST to enable free flow of credits and avoid stranded taxes.
Share This
