The oil and gas sector has shown impressive resilience and growth over the past three years. Between October 2021 and October 2024, the Nifty Oil & Gas index delivered a 47% return, against NSE 200’s 46% gain.
The upstream oil and gas sector has benefitted from a series of government measures aimed at boosting production and improving fiscal health. Windfall taxes on oil prices above $75/barrel, the introduction of oil-linked gas pricing with a cap of $6.5/mmBtu and a premium on well interventions (currently 12% of the oil price, or $9/mmBtu) have helped enhance profitability for domestic producers.Indian refiners significantly gained from the uptick in distillate spreads during the Russia-Ukraine war, which sent Singapore GRMs soaring to $21/barrel, well above the mid-cycle range of $5-7/barrel. In addition, Indian refiners have been able to capitalise on discounted Russian crude imports, which accounted for 35-40% of total imports.
However, recent global macroeconomic challenges, particularly the slowdown in China, have put downward pressure on GRMs, which have since fallen to $3-4/barrel. Nevertheless, capacity expansion in the refining sector continues, albeit in a more measured manner, indicating confidence in long-term demand.
OMCs faced a mixed scenario. The freeze on prices for auto fuels and LPG during the peak of the Russia-Ukraine war squeezed margins, as rising commodity prices outpaced the OMCs’ ability to raise prices. However, the market has stabilized, and with lower oil prices, OMCs have seen margins return to healthy levels, particularly in auto fuels. The expectation is for stronger earnings in the second half of FY25, especially with the possibility of subsidy payouts in LPG towards the end of the year, where losses currently exceed Rs 200 per cylinder. Price cuts ahead of national elections, particularly for LPG, have kept the issue of subsidy payouts in the spotlight, adding an element of political uncertainty to the sector’s outlook.
The gas sector, which has been a key area of reform, saw mixed results. The integration of the pipeline network, which now spans nearly 24,600 km, has led to a 40-50% increase in tariffs for some players. However, the lack of fresh capital expenditure has led to equivalent tariff cuts for others. Demand for gas surged during the power crisis, benefiting bulk players and LNG importers, and there has been a steady expansion of the gas grid,
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