glimmer of hopeHere is another coffee table article
FEATURE: Modi victory in Indian elections seen positive for oil, gas sector
Singapore (Platts)--19May2014/536 am EDT/936 GMT
The Bharatiya Janata Party's decisive win in India's general elections should see key reforms in the oil and gas sector pushed through and could end years of under-investment in the country's exploration sector.
As a first step, analysts expect the new government led by Prime Minister Narendra Modi to swiftly raise natural gas prices -- which would promote offshore investment -- and deregulate diesel prices to cut the government's subsidy burden.
"The oil and gas space in India is ripe for reform, in our view," Credit Suisse said in a recent report. "Many measures have already been implemented, and a strong new government at the center can potentially continue and complete the reform process," the bank said.
Analysts at Bernstein Research echoed a similar sentiment, saying that they expected a Modi election win to be positive for the oil and gas sector.
"After stalling on gas price reform for too long, it seems likely that the Modi government will finally implement gas price reform in India, continue the previous administration's policy of reducing fuel subsidies and pursue a number of policies, which will encourage investment in oil and gas," Bernstein said in a report issued on Friday.
"In addition, we would expect a Modi government to take most necessary steps to make the environment conducive for foreign investment in all sectors of the economy, including oil and gas," Bernstein added.
GAS PRICE HIKE
The Indian cabinet last year approved a new gas pricing formula which was due to be implemented on April 1, 2014, but it was shelved due to the elections.
Under the pricing formula recommended by the Rangarajan Committee, which takes into account the netback price of Indian LNG imports and the international price of gas, the wellhead price was to go up to over $8.00/MMBtu from the current $4.20/MMBtu.
Bernstein said it expected the Modi government to implement the Rangarajan Committee formula.
"Low gas prices have been the barrier to further exploration offshore India while several foreign players have also exited oil and gas fields in India on regulatory hurdles," it said.
"Faced with rising import costs and declining output, we believe India has no option but to raise gas prices, with or without Modi. Nonetheless, anecdotal evidence suggests that Modi is also keen on raising gas prices, which should help to make Indian oil and gas companies increasingly investable."
India's state-owned Oil and Natural Gas Corp. and privately held Reliance Industries have long called for higher gas prices, saying that several of their discoveries are economically unviable at $4.20/MMBtu.
According to Reliance, operator of the deepwater KG-D6 block, lack of clarity on gas prices has held up close to $4 billion worth of upstream investment this year.
Moody's ratings agency in a note issued Monday, said that the three upstream companies -- Reliance, ONGC and Oil India Ltd. -- are losing $300-350 million in revenue every month because of the delay in the gas price hike.
"A timely increase in gas prices would therefore cushion revenues and help revive interest in offshore exploration," the ratings agency said.
DIESEL PRICE DEREGULATION
Separately, Moody's said that it expects further diesel price hikes in the months ahead.
India implemented a partial deregulation of diesel prices in January last year, allowing oil retailers to raise prices by Rupees 0.50/liter ($0.009/liter) every month.
The hike was stalled in March due to the election but resumed on May 12, when voting across the country came to an end.
"India raised diesel prices by [around Rupees 1/liter] immediately after the voting, the first such move since the government halted regular price increases in March, and we expect further price hikes in the months ahead," Moody's said.
This will be credit positive for oil marketing companies -- Indian Oil Corp., Bharat Petroleum Corp. Ltd. and Hindustan Petroleum Corp. Ltd. -- because it will reduce fuel subsidies and lower these companies borrowing requirements, the ratings agency said.
"We estimate that a Rupees 1.00/liter increase in diesel prices results in a Rupees 70-80 billion reduction in the annual fuel subsidy bill and a Rupees 15-20 billion reduction in the total debt of oil marketing companies," the ratings agency added.
With the resumption of monthly diesel price increases post the end of the voting period, it seems the process of diesel deregulation is likely to continue until losses are eliminated, Credit Suisse said.
"Under-recoveries on diesel are currently Rupees 5.70/liter. Twelve months of price increases are required for diesel prices to breakeven. However, any favourable move in crude and currency can accelerate the process," the bank said.
--Mriganka Jaipuriyar, mriganka.jaipuriyar@platts.com
--Edited by Geetha Narayanasamy, geetha.narayanasamy@platts.com
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