Budget 2018: Expect natural gas to come under the purview of GST

In 2017, crude oil prices spurted ~24% on-year to $54.4/barrel. The first quarter of the year saw a particularly sharp spurt due to positive sentiment instilled by OPEC production cuts and expectation of an acceleration in the rebalancing process. The final quarter saw prices spike beyond $60 per barrel, touching a high of $68 per barrel in December, due to several reasons – supply disruptions in the US due to hurricanes Harvey, Nate and Irma; disruptions in supply in the North Sea due to closure of the Forties pipeline; and OPEC’s decision to extend its output cuts till the end of 2018. Additionally, geopolitical tensions in the Middle East (Iran and Iraq), coupled with the arrest of ministers in Saudi Arabia in the last quarter of the year, contributed to the rise in crude oil prices.


    • In 2018, crude oil prices are expected to range between $60 and $65 per barrel, aided by OPEC-led supply cuts and strong demand from the US and non-OECD nations such as India. However, crude prices are not expected to sustain at the current highs of $68-69 perbarrel as factors such as temporary supply disruptions in the North Sea and Libya, and political unrest in Iran could end in the near term. Also, restarting of operations by pipelines in North Sea and Libya and a rise in oil production in the US are likely to restrict rise in oil prices. However, adherence to the OPEC pact, especially by non-members such as Russia (which is currently producing at record levels), will remain a key risk factor in driving oil prices.


    • In fiscal 2019, under-recoveries on petroleum products are expected to rise to Rs 290-340 billion owing to increase in crude oil prices and healthy growth in LPG consumption. The government is expected to share a major portion of the subsidy burden.


    • Core gross refining margin (i.e. GRM excluding inventory gains or losses, the main indicator of profitability of Indian refineries) are expected to be driven by product spreads of refined products such as motor spirit and high-speed diesel that ranged between $8 and $10 per barrel in FY18. We expect spreads for these products and other refined products to remain stable in FY19. Apart from product spreads, increasing efficiency of operations in IOCL’s recently commissioned Paradip refinery and BPCL’s Kochi refinery will support the GRMs of PSUs. GRMs of private players, too, are expected to remain strong aide by Reliance Industries’ recently commissioned petcoke gasifier. Overall, core GRMs for Indian refiners (public and private) are likely to be  between $6.5 and $7.5 per barrel in fiscal 2019.


    • Domestic gas prices are expected to remain stable around $2.5-3/MMBTU due to similar movements in prices in the global natural gas hubs, which form the basis of domestic pricing. Gas demand is expected to increase in the city gas distribution (CGD) sector, driven by the CNG segment, which will offset falling demand in the refining sector due to commissioning of RIL’s petcoke gasification project and also lift overall gas demand. Additionally, steady demand from the power segment is expected to drive overall demand for gas.


Budget expectation


  • CRISIL Research expects natural gas to come under the purview of GST. This is already being discussed for petrol and diesel, though approval from state governments remains a challenge.


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