Rapidly rising oil prices have changed investors’ outlook on stocks of upstream oil companies in the domestic market. India is an attractive exploration and production (E&P) location with significant yet-to-find reserve potential.
As oil prices rise, big oil companies such as Oil and Natural Gas (ONGC) and Oil India (OIL) will continue to spend on projects that do not make economic sense at lower crude prices. As per a report, ONGC drilled 503 wells in 2017-18 at a cost of approx Rs 14,200 crore, which is 11.5 per cent lower than the budget outlay.
This year, ONGC has set a capex outlay of Rs 17,615 crore with a drilling target of 535 wells, of which 24 are deep-water development wells as part of Cluster-2 development of KG-DWN-98/2 project, off the East Coast of India. While IndianOil plans to raise its refining capacity from the current 80.7 MMTPA (million metric tonnes per annum) to 153.55 MMTPA by 2030, through both brownfield expansion and greenfield capacity creation.
Vedanta, the other giant, plans to invest $ 3 billion over three years to raise the production of its Barmer field to 300,000 bopd from 160,000 bopd in FY17.
Crude oil prices have shown good recovery since the end of 2016. Actually oil prices have found support from supply disruptions and stronger-than-expected demand amid output cuts by both Opec and Non-Opec countries. The prices have also risen due to geopolitics tensions after the US decision to pull out of the Iran nuclear deal.
Most of the projections indicate that there will be a strong demand for fuel as the global economy will continue to grow. The Government of India is tirelessly trying to increase production of domestic oil & gas through initiatives like Hydrocarbon Exploration and Licensing Policy (HELP) and Open Acreage Licensing Policy (OALP), including offering of 46 contract areas comprising 67 oil and gas fields under the Discovered Small Field Policy (DSFP).
The new “Hydrocarbon Exploration Licensing Policy” aims to increase India’s oil production to about 3 million barrels a day by 2022. The government has made a number of changes in its oil and gas exploration and production rules in an attempt to attract more investment from international oil companies, both for new production and joint ventures to enhance production in existing fields.
Clearing the way for its plans for mega-mergers among state-owned oil and gas companies, the government has exempted mergers and acquisitions deals from seeking mandatory approvals from the Competition Commission of India (CCI) for five years. Undoubtedly, the government’s strategic decisions and policy reforms are positive for the upstream sector’s fundamentals for the long term.
Upstream companies like ONGC and Oil India would benefit from this surge in prices while downstream companies like HPCL, IOC and BPCL will feel the heat. Besides companies such as Engineers India, which provides engineering consultancy and engineering-procurement-and-construction (EPC) services to the oil and gas and petrochemical industries, are likely to get benefit from the surge in the oil prices.