| India's crude import dependence to go up — India's dependence on crude importsfor consumption (ex-exports) is set to rise from 75% in FY10E (~US$65bn at US$80 crude) to 80% in FY20E (~US$120bn) driven by a combination of lacklustre growth in ONGC's domestic crude production over the next few years, no major domestic crude supply coming on stream (with the exception of Cairn), and robust demand for petroleum products. Given the healthy demand, even to sustain import dependence at the current level would entail either large domestic E&P investments or acquisition of producing/discovere estimate ~US$35-65bn of incremental capex required over the next 10 years just to bring import dependence down to 60-70% from the present 75%. F&D costs have increased sharply — F&D costs have structurally gone up in thepast few years primarily because drilling costs and related expenses have increased. In India, costs have also risen because exploration has been shifting to deepwater and more difficult terrain, involving expensive technology and drilling equipment. This is exemplified by the estimated development cost of ONGC's incremental reserves/enhanced recovery at ~US$9-10/boe vs. its current F&D cost of ~US$5/boe. Further, CIRA global team estimates that global F&D costs have increased four-fold since 2000 to ~US$17-18/boe at present.
Natural gas a cheaper alternative; usage contingent on infrastructure — RIL's gas production from offshore KG-D6 blocks has added substantially to India's gasproduction, and at the same time reduced dependence on more expensive petroleum products, such as naphtha and fuel oil. At a delivered price of US$6/mmbtu, gas is over 50% cheaper than crude at US$80/bbl, making it an affordable and cleaner option. However, a more widespread use of gas is contingent on development of adequate infrastructure, as well as an increase in gas supplies (from new fields of RIL and ONGC).
Key stock picks — With energy security gaining prominence in a high crude priceenvironment, we highlight our key sector plays. RIL and Cairn are key plays given their superior exploration track record and ability to surprise on reserve upsides. In contrast, ONGC is faced with higher costs for new production as well as a lagging exploration effort, which may be unable to offset struggling crude production from its ageing fields. The need to shore up domestic E&P activities suggests a robust outlook for offshore service providers such as Aban Offshore and Great Offshore.
A shift to natural gas as an alternative fuel and the need to develop infrastructure is positive for transmission companies GAIL and GSPL. This would also involve setting up of city gas networks (gov't target of ~200 cities) and be positive for (1) distributors such as IGL, GGAS, GAIL Gas, etc. and (2) CNG enablers such as EKC. Cairn, GAIL, GSPL, and Aban are our top sector picks. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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