The year 2011 was forgettable for most of India's oil and gas players. Will 2012 be better? Here's a crystal ball view on what could be in store for the sector in the year ahead.

Coast clear for Cairn India

For most of the last year and half, Cairn India has been under the overhang of the Vedanta deal. Despite scope to increase output in the Rajasthan fields, the company was not been able to do so, due to lack of approvals from ONGC, its joint venture partner.

With ONGC now placated and Vedanta taking over the reins of Cairn India, 2012 may likely see change in the fortunes of the company. Crude oil output in the Rajasthan fields is currently around 125,000 barrels of oil per day, and Vedanta has expressed optimism that production could be doubled.

In addition to ramp-up in output, buoyant crude oil price, and a weak rupee should work in Cairn India's favour in the year ahead. Whether the new owners steer the ship as well as the old masters will be crucial.

RIL on backfoot

Reliance Industries' feud with the Comptroller and Auditor General (CAG) and the Oil Ministry regarding cost-recovery in the KG-D6 fields has spilled over into 2012. This could escalate into a legal wrangle and cause irritants in the company's oil and gas exploration business.

Despite the big-ticket deal with BP, an increase in gas output from the KG-D6 fields seems unlikely before 2014. So, like in 2011, the company's performance in 2012 may lean heavily on the refining and petrochemicals segments. What could complicate matters is the weakening in the refining market environment over the past few months. The company's petrochemicals business may also be impacted, if the global economic situation worsens.

On the positive side, the company's shale gas business in the US, which started yielding dividends last year, could improve further. Also, the company's deal with TV18 suggests stepping up the momentum on its fledgling telecom business. Cash is no constraint, but results may take time to show.

Downstream clings to hope

With crude oil continuing to hover well above $100 a barrel and the government holding the under-recovery sharing cards close to its chest, Indian Oil, BPCL, and HPCL can only wait, watch and pray for a salvage operation. The rescue team will likely make an appearance, like in FY11, in the last quarter of FY12.

But with the under-recovery bill reaching scary proportions, the split between downstream, upstream and the government will need to be seen. Once FY12 is done with, the rest of the calendar may be an encore of the year gone by, with under-recoveries continuing to chip away at the financials of the downstream companies. Unless, of course, there is an encore of a different kind — that of 2008 when crude oil prices come crashing down due to global economic weakness.

Downstream oil companies may hope fervently for diesel price deregulation which will solve most of their problems. But this may be asking for too much from a government which is fighting with its back against the wall on a plethora of fronts.

Adding to the woes of the downstream companies will be the ongoing weakness in refining margins. This will also cause trouble for the standalone refiners CPCL, MRPL and Essar Oil. With many downstream players expanding capacities, India's refined product output should increase in 2012.

Caution in Upstream

ONGC and Oil India will also have to watch closely how the last quarter of FY12 pans out. They will be hoping that the government does not burden them with a higher than expected bill, like it did in the last fiscal. If their share of the subsidy remains restricted to the usual one-third, the upstream companies can expect to end FY12 on a good note, with buoyant crude oil prices translating into good realisations.

Meanwhile, with the government always on the look-out for disinvestment candidates to finance its deficit, ONGC and Oil India may again become candidates for follow-on public offers (FPO). Provided the market situation improves. But for the FPO to do well, the government will have to come clean on the subsidy sharing formula, once and for all.

Again, this may be a tall ask. Meantime, ONGC and Oil India may continue on their output expansion initiatives, at home and abroad. This will be crucial for the country's energy security.

Going GOOd for Gas

With demand outstripping supply, gas importer Petronet LNG should be able to continue functioning above capacity levels. But with capacity being a constraint, growth this year may be driven mostly by price hikes, which also has its limits. The company, though, should be able to supply more gas by the end of the year, when the Kochi terminal is commissioned. City gas distributors Indraprastha Gas and Gujarat Gas may have to rely more on costly liquefied natural gas (LNG) to meet requirements. But as long as the imported gas works out cheaper than many alternative fuels, passing on cost hikes should be possible.

Gujarat Gas is likely to see a change in ownership in the early part of the calendar with promoter BG all set to exit the company. Gas transmitters GAIL and GSPL will expand their networks, but capacity utilisation may be a problem until supplies pick up. GAIL will also have to continue contending with the under-recovery vagaries, similar to ONGC and Oil India.

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