India Ratings and Research (Ind-Ra) opines the net zero and sustainability targets given by Indian oil and gas (O&G) companies are aggressive as against those of international O&G players, given the lower proportion of capex presently allocated to the transition and it being limited to addressing process emissions, Consequently, progress against interim milestones and availability of funding (equity and debt) will be key in assessing its success. In the next five years, lower margins due to higher research and development (R&D) spend and incremental capex to transition to green sources could result in lower free cash flows, necessitating an increase in leverage. However, credit profiles are likely to remain resilient, given the cushion in the existing ratings and government support in case of public sector O&G companies. In the long term (beyond five years), the potential risk of a further push on R&D and capex spending, higher cost of borrowings and lower funding availability will necessitate pro-active management of the transition journey.
Rakesh Valecha, Senior Director Core Analytical Group says “Although the net zero targets for Indian O&G players seem aggressive and are largely focused on reducing the carbon footprint of the process (scope 1 and scope 2), an eventual transition through a change in product mix may be inevitable in the longer run to address scope 3 emissions. Furthermore, granularity of spending disclosures on transition capex, in line with the global players, will help to assess the achievement against the stated targets.”
Ind-Ra opines the transitioning to renewable power as an energy source shall be smooth, given the established economics of these projects. On the other hand, the carbon capture utilisation and storage mechanism remains expensive and presently does not provide an optimum adaptation tool for the sector. Notwithstanding, some players have plans to install these and the central government has announced a grant to give it a further push. Product-based transition i.e. shifting to production of alternate fuels such as hydrogen, biofuels and bioethanol has been increasingly stressed by global O&G players, but has shown limited traction with Indian O&G players.
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