OREANDA-NEWS. Fitch Ratings does not expect Oil India Limited's (OIL, BBB-/Stable) rating to change following revisions to how royalties on Indian-produced oil are calculated. However, the resulting additional payments will lower the headroom under OIL's 'BBB-' standalone credit assessment. OIL's ratings are equalised to that of its majority owner, India (BBB-/Stable).

The government has announced that state-owned upstream oil producers must pay state royalties on the gross value of crude oil produced domestically, instead of the previous method of using the net price after discounts to state-run refiners.

The new formula applies retrospectively from February 2014, resulting in a back-payment to cover the period to OIL's financial year end of March 2016 (FY16). Fitch estimates OIL will need to pay a one-time royalty fee of around INR11.5bn; amounting to about a quarter of its projected EBITDA for end-FY17.

This, combined with payments for acquisitions of a share in Taas Yuriakh and Vankor from Russia's national oil company, Rosneft, will weaken OIL's leverage beyond what is comfortable for its standalone credit assessment, which is net debt/EBITDA of 2x in FY17. However, Fitch believes OIL's leverage will improve in FY18 to below 2x in the absence of large M&A, even though the higher royalty payments will reduce the company's netback.

Fitch estimates OIL's royalty charges under the revised formula - and based on the existing subsidy-sharing mechanism between the state and state-owned upstream and downstream companies - to increase by around USD0.2 per barrel (bbl) at a crude price of around USD50 per bbl. This compares with a netback of around USD33-34 per bbl at that level after discounts and existing statutory levies. We also estimate royalty charges to rise by around USD0.5 per bbl and USD0.7 per bbl at higher crude oil prices of USD55 and USD60 per bbl, respectively, compared to the previous formula.

Fitch believes the government's INR0.25 per litre increase in kerosene prices on 1 July 2016, if just a one-time hike, is not likely to substantially change the subsidy burden for petroleum products. However, if prices are hiked regularly, this could reduce under-recoveries, as kerosene accounted for over 40% of total petroleum subsidies in FY16. Nevertheless, it remains uncertain how the Indian government will approach subsidies at higher crude prices, especially prices above USD60 per bbl.