Are E&P charms returning?

With oil and gas exploration and production flows weakening over the few years, reserves running dry, and discoveries remaining small and insignificant, FY20 was a weak link in for the sector not only due to the pandemic but also extreme volatility in oil prices to a point that they turned negative. them. Overall, oil production declined by 14 percent year-on-year, while gas production which fell by 8 percent year-on-year in FY20. The oil and gas exploration and production sector has also been facing liquidity constraints where companies have been facing the brunt of the circular debt, which has significantly affected exploration and drilling activity in the country. As a result of the circular debt, receivables have continued to grow rapidly. Not to mention that FDI in the sector is also banal.

However, it seems that FY21 and the coming year prospects are turning a tad bit optimistic. This is primarily due to continued growth in international crude oil prices. Higher oil prices along with foreign exchange gains are expected to lift the domestic E&P sector’s profitability in FY21. The sector’s earnings will also benefit from higher oil production during the year. Crude oil production in the country has been higher in FY21 versus FY20 due to lesser lockdowns and restrictions which restricted overall throughput of the fields amid weaker demand. On the other hand, demand uptick and revival of production from the exploration and production companies to their earlier levels have been the key factors behind higher oil production.

The surge in crude oil production has been witnessed recently on a month-on-month basis, which is likely to boost revenues for E&P companies FY21. Better oil prices along with recovery in production flows will also spell optimism in the coming fiscal year FY22. A sustainable recovery in oil prices is in sight due to improvement in Arab light prices amidst the revision in price outlook by the Energy Information Administration (EIA), which will increase investment in the exploration activities and also increase E&P earnings.

However, the downside risks cannot be ruled out with COVID-19 again gripping the economies with its much dangerous Delta variant. At the same time, circular debt as well as week natural gas production along with further downward revision in some gas fields can most definitely keep the earnings growth restricted.