According to CRISIL, with ongoing price revisions and softer crude prices under-recoveries of state-run oil companies would halve

Ratings agency CRISIL said, as efforts are taken to move towards market-linked diesel prices, there are expectations in the decline in the prices of petroleum products by over 50% from 2013-2014 levels over the next two years. There is also an expectation of decline in crude oil prices. The upstream and downstream PSU oil companies will see a positive growth due to the changes

As expected, interest costs will reduce and they will not have any under-recovery pressures as the profit after tax (PAT) of downstream companies will rise by Rs33-36 billion year-on-year in 2014-2015 and another rise by Rs7-10 billion in 2015-2016.

Further, there will be sharp improvements to the tune of Rs105-120 billion y-o-y, in PAT in 2014-2015, in upstream companies and further increase of Rs70-75 billion in 2015-2016. CRISIL in the report says “the impact of reduced burden of under-recoveries will more than offset the impact of decline in realisations due to lower crude prices. If we include the benefit from the potential hike in gas price to US$8.4 per mmbtu, PAT of upstream companies will further increase by Rs70-75 billion in 2014-15, resulting in an overall increase of Rs215-230 billion”.  

Adding to it, the report points out that the under-recoveries are expected to decline further by 30-35% y-o-y  to  Rs900-1,000  billion  in  2014-15  and  25-30%  y-o-y  to    Rs 600-700  billion  in  2015-16. The reasons stated are that there will be a fall in international petroleum prices products in the next two years.
 
“Over  the  next  2  years,  global  crude  oil  supply  will  outpace  demand  with  growth  in  the  latter  continuing  to remain  sluggish.  Global  demand  growth  is  expected  to  be  impacted  by  weak  crude  oil  demand  in  North America  and  Europe  on  account  of  increase  in  efficiencies  and  a  shift  towards  natural  gas,  as  well  as relatively slower demand from developing countries such as China and India led by declining subsidies”, pointed in the report.

Secondly, the slower growth in diesel consumption has gradually aligned the domestic diesel prices with the international prices. As government’s decision to hike the diesel price by 50 paise every month to reach the aligned international prices takes effect, the under-recovery on diesel which accounted for about 45% of the total burden in 2013-2014 is likely to eliminate by the end of 2014-2015.

The report also suggests that in 2014-2015 the PAT of upstream companies will get a rise because of hike in gas prices. The report stated “The  potential  increase  (as  per  the  Rangarajan  committee  formula)  of  the  natural  gas  price  to  $8.4  per mmbtu from $4.2 per mmbtu will increase the PAT of upstream companies (ONGC, Oil India) by Rs110-115 billion in  2014-15.  The  combined  effect  of lower  under-recoveries  and  the  gas  price  hike is  expected to lift PAT of upstream companies by about Rs215-230 billion in 2014-15”.