Fitch Ratings on Tuesday said it expects the government to phase out the windfall tax on domestic oil production next year in line with the moderation in the international crude oil prices. The agency also expects oil marketing companies (OMCs) to partly recoup the losses suffered as a result of a freeze on the retail prices of petrol and diesel this year.

“Strong oil prices — despite some moderation from very high levels in 2022, together with higher domestic gas prices (revised every six months with a lag to spot international prices) — should enable robust upstream cash flow. We expect the windfall taxes on domestic crude oil production to be phased out in 2023 with moderating prices,” Fitch said in its APAC oil and gas outlook for 2023.

“We also expect OMCs’ marketing margins to recover and partly recoup 2022’s losses, given our modestly lower crude-price assumptions. However, refining margins may ease to mid-cycle levels from all-time highs though still remaining healthy, which should support improvement in OMCs’ credit metrics,” it added.

Higher capex

Fitch is forecasting that capex will remain high for Indian downstream firms during FY24 as they continue to invest in expanding refining capacity and retail networks. Capex for upstream companies will be driven mainly by their continuing efforts to expand production. HPCL and OIL’s capex intensity is the highest, driven by investment in the greenfield and brownfield refinery expansion of their respective associates/subsidiaries, it added.

“Reliance Industries’ large investment plans for its existing oil-to-chemicals and new energy businesses are likely to be funded largely through internal accruals, supporting its low leverage, We expect HPCL-Mittal Energy capex intensity to decline as its petrochemical plant is mechanically complete,” Fitch said.

Fitch Ratings Senior Director Muralidharan Ramakrishnan said, “Fitch expects oil prices to continue to support strong upstream cash flow while downstream profitability is likely to recover modestly, supported by slightly lower average crude costs alleviating pressure on retail fuel prices. Therefore, headroom should remain adequate for the standalone credit profiles (SCPs) of integrated or upstream companies despite large capex. SCP headroom will remain low for Indian OMCs recovering from losses.”