New Delhi: The extraction of large shareholder payouts from national oil companies by the government leaves little cash surplus for them to meaningfully invest in low carbon alternatives, Moody’s Investors Service said on Monday. The government has mandated national oil companies such as Oil and Natural Gas Corp (ONGC) to pay a minimum 30 per cent of their net profit as dividends to shareholders. The government benefits out of such payout as it is the largest shareholder in these firms and also gets tax on such payouts.
In a new report, Moody’s said energy transition poses varying degrees of credit risk to the world’s largest national oil companies (NOCs).
“The Indian government has also been extracting large shareholder payouts from its NOCs leaving little cash surplus for them to meaningfully invest in low carbon alternatives,” Moody’s said.
While there has been a significant increase in investment in renewables in India, this has been done by government-owned and privately-owned utility companies rather than NOCs, it said.
India is the world’s third-largest consumer of oil (about 5 per cent of global consumption) and is heavily dependent on imports to meet these needs.
Moody’s said the nation’s energy strategy aims to reduce its hydrocarbon imports through increased use of renewables and improving energy efficiency.
“However, India’s consumption of fossil fuels, under its stated policies, will continue to increase (including for coal) and so will its imports of oil and gas until at least 2040,” Moody’s said.
While the sales volumes of Indian NOCs remain protected given India’s dependence on imports, the sales price for oil and natural gas in the country is linked to international markets.
India’s NOCs are key players in the country’s oil and gas sector. They dominate the upstream oil and gas exploration as well as fuel marketing. Taxes on fuel accounts for more than 20 per cent of the government’s revenue.
Retail selling prices in India for transportation fuel are high because of these indirect taxes, which somewhat serve as a substitute for a carbon tax in other countries, it said.
“Given that the country expects its consumption of oil and gas to continue to increase, the government is unlikely to authorize a meaningful change in the business model of its NOCs away from their original mandates,” it said. “If the prices of oil and gas decline, following an accelerated or disorderly carbon transition, to such an extent that makes capital structures of these companies unsustainable, we expect the NOCs to rely on support from the government.”
In the report, Moody’s said sovereign linkage provides some competitive advantages for NOCs, but there are also drawbacks.
“NOCs play a critical role in the world’s energy markets, dwarfing their counterparts in the private sector – the international oil companies – in terms of global oil and gas production and reserves,” says Hui Ting Sim, a Moody’s Analyst.
“Against the backdrop of slowing oil and gas consumption over the next few decades, with the potential for a more abrupt disruption to demand, the NOCs’ sovereign sponsors will increasingly impact credit profiles by either providing support or acting as a drag,” adds Sim.
NOCs in oil importing countries where consumption will keep growing are less exposed to carbon transition risk than those in oil exporting countries.
Characteristics such as low production costs, a high proportion of natural gas or liquefied natural gas (LNG) assets, low leverage and social obligations also imply lower risk.
The impact of sovereign support on NOCs’ credit profiles depends on its ability and willingness to provide support even when oil consumption is declining, the degree of its reliance on the NOC for its revenue, and whether it is rated above or below the NOC’s rating.
“And while some NOCs are changing for business reasons or to align with government climate change policies, the ability of others to make the transition to less carbon-intensive models is constrained by fiscal obligations or social objectives,” it added.